Federal Budget: Opportunities for Oversight and Improved Use of  
Taxpayer Funds (18-JUN-03, GAO-03-922T).			 
                                                                 
No government should waste its taxpayers' money, whether we are  
operating during a period of budget surpluses or deficits.	 
Further, it is important for everyone to recognize that waste,	 
fraud, abuse, and mismanagement are not victimless activities.	 
Resources are not unlimited, and when they are diverted for	 
inappropriate, illegal, inefficient, or ineffective purposes,	 
both taxpayers and legitimate program beneficiaries are cheated. 
Both the Administration and the Congress have an obligation to	 
safeguard benefits for those that deserve them and avoid abuse of
taxpayer funds by preventing such diversions. Beyond preventing  
obvious abuse, government also has an obligation to modernize its
priorities, practices, and processes so that it can meet the	 
demands and needs of today's changing world. More broadly, the	 
federal government must reexamine the entire range of policies	 
and programs--entitlements, discretionary, and tax incentives--in
the context of the 21st century. Periodic reexamination and	 
revaluation of government activities has never been more	 
important than it is today. Our nation faces long-term fiscal	 
challenges. Increased pressure also comes from world events: both
from the recognition that we cannot consider ourselves "safe"	 
between two oceans--which has increased demands for spending on  
homeland security--and from the U.S. role in an increasingly	 
interdependent world. And government faces increased demands from
the American public for modern organizations and workforces that 
are responsive, agile, accountable and responsible.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-922T					        
    ACCNO:   A07256						        
  TITLE:     Federal Budget: Opportunities for Oversight and Improved 
Use of Taxpayer Funds						 
     DATE:   06/18/2003 
  SUBJECT:   Cost control					 
	     Cost effectiveness analysis			 
	     Federal aid programs				 
	     Federal funds					 
	     Financial management				 
	     Funds management					 
	     Program management 				 
	     Earned Income Credit				 
	     Food Stamp Program 				 
	     Medicaid Program					 
	     Medicare Program					 
	     National School Lunch Program			 
	     USDA Child and Adult Care Food Program		 

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GAO-03-922T

FEDERAL BUDGET Opportunities for Oversight and Improved Use of Taxpayer
Funds

Statement of David M. Walker, Comptroller General of the United States

United States General Accounting Office

GAO Testimony Before the Committee on the Budget

U. S. House of Representatives For Release on Delivery Expected at 10: 00
a. m. EDT Wednesday, June 18, 2003

GAO- 03- 922T

We revised this document on 7/ 15/ 03 to correct the spacing and a
typographical error in a number on page 7 (under The Medicare Program--
Reducing Improper Payments). The amount of improperly paid claims was
$13.3 billion in fiscal year 2002.

This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

GAO- 03- 922T 1 Mr. Chairman, Mr. Spratt, members of the Committee

It is a pleasure to be here today as you deal with one of your important
obligations* to exercise prudence and due care in connection with taxpayer
funds. No government should waste its taxpayers* money, whether we are
operating during a period of budget surpluses or deficits. Further, it is
important for everyone to recognize that waste, fraud, abuse, and
mismanagement are not victimless activities. Resources are not unlimited,
and when they are diverted for inappropriate, illegal, inefficient, or
ineffective purposes, both taxpayers and legitimate program beneficiaries
are cheated. Both the Administration and the Congress have an obligation
to safeguard benefits for those that deserve them and avoid abuse of
taxpayer funds by preventing such diversions. Beyond preventing obvious
abuse, government also has an obligation to modernize its priorities,
practices, and processes so that it can meet the demands and needs of
today*s changing world. More broadly, the federal government must
reexamine the entire range of policies and programs* entitlements,
discretionary, and tax incentives* in the context of the 21 st century.

Periodic reexamination and revaluation of government activities has never
been more important than it is today. Our nation faces long- term fiscal
challenges. Increased pressure also comes from world events: both from the
recognition that we cannot consider ourselves *safe* between two oceans--
which has increased demands for spending on homeland security-- and from
the U. S. role in an increasingly interdependent world. And government
faces increased demands from the American public for modern organizations
and workforces that are responsive, agile, accountable and responsible.

GAO- 03- 922T 2 As everyone on this committee knows well, only about 39%
of the federal budget* and

even less if you look only at programmatic spending-- is discretionary.
The rest is direct or mandatory spending. 1 In addition, we can*t forget
about tax incentives. I make this point to reinforce the fact

that efforts to assure prudent use of taxpayer funds, efforts to guard
against fraud, waste, abuse and mismanagement, and efforts to improve
economy, efficiency and effectiveness cannot focus solely on discretionary
appropriations but must also encompass mandatory programs and tax policy,
including tax incentives.

Direct, or mandatory, spending programs are by definition assumed in the
baseline and not automatically subject to annual congressional review as
are appropriated discretionary programs. Nonetheless, a periodic
reassessment of these programs, as well as tax incentives, is critical to
achieving fiscal discipline in the budget as a whole. 1 While Social
Security and Medicare are the largest direct spending or mandatory
programs, this category also includes such others as farm price supports,
insurance programs, food stamps, TANF block grants to the states, federal
civilian and military pension and health.

2003 54%

39% 7%

Discretionary Mandatory Net interest Composition of Federal Spending

Note: Includes $41 billion in discretionary spending and about $1 billion
in mandatory spending for the Iraq war supplemental. Includes $11 billion
in mandatory spending for the 2003 tax cut package. Source: GAO analysis
of data from the Congressional Budget Office.

GAO- 03- 922T 3 Moreover, such a review can help ascertain whether these
programs are protected from the risk of fraud, waste and abuse and are
designed to be as cost effective and efficient as

possible. As you know, the Budget Resolution directs GAO to prepare a
report identifying *instances in which the committees of jurisdiction may
make legislative changes to improve the economy, efficiency, and
effectiveness of programs within their jurisdiction.* My testimony draws
in part on some of the items that will be included in that report.

Today I want to talk about program reviews, oversight, and stewardship of
taxpayer funds on several levels:

First, it is important to deal with areas vulnerable to fraud, waste,
abuse and mismanagement. Payments to ineligibles drain resources that
could otherwise go to the intended beneficiaries of a program. Everyone
should be concerned about the diversion of resources and subsequent
undermining of program integrity.

Second, and more broadly, policymakers and managers need to look at ways
to improve the economy, efficiency and effectiveness of federal programs
and specific tax expenditures. Even where we agree on the goals of
programs, numerous opportunities exist to streamline, target and
consolidate to improve their delivery. This means looking at program
consolidation, at overlap and at fragmentation. For example, it means
tackling excess federal real property* whether at home or abroad. It means
improved targeting in both spending programs and tax incentives* in some
cases, spreading limited funds over a wide population or beneficiary group
may not be the best approach.

Finally, a fundamental reassessment of government programs, policies, and
activities can help weed out programs that are outdated ineffective
unsustainable, or simply a lower priority than they used to be. In most
federal mission areas*

GAO- 03- 922T 4 from low- income housing to food safety to higher
education assistance* national

goals are achieved through the use of a variety of tools and,
increasingly, through the participation of many organizations, such as
state and local governments and international organizations, that are
beyond the direct control of the federal government. Government cannot
accept as *givens* all of its existing major programs, policies, and
operations. A fundamental review of what the federal government does, how
it does it, and in some cases, who does the government*s business will be
required, particularly given the demographic tidal wave that is starting
to show on our fiscal horizon.

Addressing Vulnerabilities to Fraud, Waste, Abuse and Mismanagement
Programs and functions central to national goals and objectives have been
hampered by daunting financial and program management problems, exposing
these activities to fraud, waste and abuse. These weaknesses have real
consequences with large stakes that are important and visible to many
Americans. Some of the problems involve the waste of scarce federal
resources. Other problems compromise the ability of the federal government
to deliver critically needed services, such as ensuring airline safety and
efficiently collecting taxes. Still others may undermine government*s
ability to safeguard critical assets from theft and misuse.

In 1990, GAO began a program to report on government operations we
identified as *high risk.* This label has helped draw attention to
chronic, systemic performance and management shortfalls threatening
taxpayer dollars and the integrity of government operations. Over the
years GAO has made many recommendations to improve these high- risk
operations. We discovered that the label often inspired corrective action*
indeed 13 areas have come off the list since its inception. For each of
these areas, we focus on (1) why the area is high- risk; (2) the actions
that have been taken and that are under way to address the problem since
our last update report and the issues that are yet to be resolved; and (3)
what remains to be done to address the risk.

GAO- 03- 922T 5 In January of this year we provided an update for the 108
th Congress, giving the status of

high- risk areas included in our last report [January 2001] and
identifying new high- risk areas warranting attention by the Congress and
the administration. 2 GAO*s 2003 highrisk list is shown in Attachment I.
Lasting solutions to high- risk problems offer the potential to save
billions of dollars, dramatically improve service to the American public,
strengthen public confidence and trust in the performance and
accountability of our national government, and ensure the ability of
government to deliver on its promises.

In addition to perseverance by the administration in implementing needed
solutions, we have noted that continued congressional interest and
oversight, such as that exemplified by this hearing today are of crucial
importance. The administration has looked to our recommendations in
shaping government- wide initiatives such as the President*s Management
Agenda, which has at its base many of the areas we have previously
designated as high risk.

Clearly progress has been made in addressing most of the areas on our
current high risk list, both through executive actions and congressional
initiatives. However, many of these problems and risks are chronic and
long standing in nature and their ultimate solution will require
persistent and dedicated efforts on many fronts by many actors. Some will
require changes in laws to simplify or change rules for eligibility,
provide improved incentives or to give federal agencies additional tools
to track and correct improper payments. Continued progress in improving
agencies* financial systems, information technology resources and human
capital will be vital in attacking and mitigating risks to federal program
integrity. Some areas may indeed require additional investments in people
and technology to provide effective information, oversight and enforcement
to protect programs from abuse. Ultimately, a transformation will be
needed in the cultures and operations of many agencies to permit them to
manage risks and foster the kind of sustained improvements in program
operations called for. Continued persistence and

2 U. S. General Accounting Office, High- Risk Series: An Update, GAO- 03-
119 (Washington, D. C.: January 2003).

GAO- 03- 922T 6 perseverance in addressing the high risk areas will
ultimately yield significant benefits for

the taxpayers over time. Finding lasting solutions offers the potential to
achieve savings, improved service and strengthened public trust in
government.

I will now address some specific areas and examples from both our high
risk work and other program reviews that illustrate both the problems
facing us and the opportunities for congressional and executive actions to
better safeguard taxpayer funds. 3 Improper Payments Improper payments
include inadvertent errors, such as duplicate payments and

miscalculations; payments for unsupported or inadequate supported claims;
payments for services not rendered; payments to ineligible beneficiaries;
and payments resulting from outright fraud and abuse by program
participants and/ or federal employees. Recently, agencies' financial
statements also have begun to identify and measure the wide range of

improper payments involved in many activities throughout government.
Agency financial statements for both fiscal years 2002 and 2001 identified
improper payment estimates of approximately $20 billion. OMB recently
testified that the amount of improper payments was closer to $35 billion
annually for major benefit programs. This range may be indicative of the
fact that it is hard to get a handle on the precise total. Furthermore, as
significant as these amounts are, they do not represent a true picture of
the magnitude of the problem governmentwide because they do not consider
other significant but smaller programs and other types of agency
activities that could result in improper payments. In reviewing fiscal
year 2002, agency financial statements of the 24 CFO Act agencies, we
found references to improper payments in 17 agencies and 27 programs.
Unfortunately, not all of them provided information on the amount of such
payments. In the federal government, improper payments occur in a variety
of program activities, including those related to contractors and contract
management, such as defense; healthcare programs, such as Medicare and
Medicaid; financial assistance benefits, such as Food Stamps and housing
subsidies; and tax refunds. 3 Attached to this testimony is a list of
selected GAO reports related to the specific examples cited.

GAO- 03- 922T 7 The Medicare Program The sheer size and complexity of the
Medicare program makes it highly vulnerable to

fraud, waste and abuse. In fiscal year 2002, Medicare paid about $257
billion for a wide variety of inpatient and outpatient health care
services for over 40 million elderly and disabled Americans. To help
administer claims the Centers for Medicare & Medicaid Services (CMS)
contracts with 38 health insurance companies to process about 900 million
claims submitted each year by over 1 million hospitals, physicians, and
other health care providers. Although CMS has made strides, much remains
to be done. We have recommended actions in a number of specific areas,
including:

Reducing Improper Payments-- Since 1996, annual audits by the Department
of Health and Human Services* Office of the Inspector General have found
that Medicare contractors have improperly paid claims worth billions of
dollars* $13.3 billion in fiscal year 2002 alone. CMS has been working to
better hold individual contractors accountable for claims payment
performance and help them target remedial actions to address problematic
billing practices. Program safeguard activities have historically produced
savings* in the past CMS has

estimated a return of over $10 for every dollar spent in this area

Monitoring managed care plans: In 2001 auditors found that 59 of 80 health
plans had misreported key financial data or had accounting records too
unreliable to support their data, but CMS did not have a plan in place to
resolve these issues.

Improving financial management processes: Despite a *clean* opinion on its
financial statements, CMS financial systems and processes do not routinely
generate information that is timely or reliable and do not ensure
confidentiality of sensitive information.

GAO- 03- 922T 8

Collecting debt: At the end of fiscal year 1999, over $7 billion of debt
had accumulated on contractors* books as accounts receivable that were
neither collected nor written off. While Medicare contractors have
referred eligible delinquent debt to the Treasury for collection, CMS
continues to face challenges in ensuring that contractors consistently
make these referrals and is working to address this. Reducing excessive
payments for services and products. These hurt not only the

taxpayers but also the program*s beneficiaries who are generally liable
for copayments equal to 20 percent of Medicare*s approved fee. Excessive
payments have been found for

o Home health care or skilled nursing facility care: Medicare pays as much
as 35 percent more than providers* costs for home health care and 19
percent more for skilled nursing facility care. Unfortunately, CMS has not
adopted our recommendation that would minimize excessive payments to some
home health agencies. 4 o Medical products* Medicare*s payment approaches
lack the flexibility to

keep pace with market changes. Payments for medical equipment and supplies
are through fee schedules that remain tied to suppliers* historical
charges to the program. Evidence from two competitive bidding projects
suggests that competition might provide a tool that facilitates setting
more appropriate payment rates that result in program savings

o Outpatient drugs* Medicare pays list prices set by drug manufacturers,
not prices providers actually pay. In September 2001, we reported that in
2000 Medicare paid over $1 billion more than other purchasers for

4 U. S. General Accounting Office, Medicare Home Health: Prospective
Payment System Will Need Refinement as Data Become Available, GAO- HEHS-
00- 9 (Washington, D. C.: April 7, 2000); and

Medicare Home Health: Prospective Payment System Could Reverse Recent
Declines in Spending, GAOHEHS- 00- 176 (Washington, D. C.: Sept. 8, 2000).

GAO- 03- 922T 9 outpatient drugs that the program covers. CMS has not
acted upon our

recommendations in this area. 5 Medicare Excessive Payments: Outpatient
Drugs

In some cases, Medicare*s payments were so high that the beneficiaries*
co- payments alone exceeded the purchase price available to the provider.
In 2001,

o Medicare paid $3.34 per unit for Ipratropium bromide although it is
widely available for $0.77 per unit;

o Medicare paid $588 for leuprolide acetate although it was widely
available at a cost of $510.

The Medicaid Program Medicaid, which pays for both acute health care and
long- term care services for over 44 million low- income Americans, has
been subject to waste and exploitation. In fiscal year 2001, federal and
state Medicaid expenditures totaled $228 billion. The federal share was
about 57 percent, representing 7 percent of all federal outlays. Medicaid
is the third largest social program in the federal budget (after Social
Security and Medicare) and the second largest budget item for most states
(after education).

CMS, in the Department of Health and Human Services (HHS) is responsible
for administering the program at the federal level, while the states
administer their respective program*s day- to- day operations. The
challenges inherent in overseeing a program of Medicaid*s size, growth,
and diversity, combined with the open- ended nature of the program*s
federal funding, puts the program at high risk. Inadequate fiscal
oversight has led to increased and unnecessary federal spending. GAO has
made recommendations in a number of areas, such as:

5 Medicare: Payments for Covered Outpatient Drugs Exceed Providers* Cost,
GAO- 01- 1118 (Washington, D. C.: Sept. 21, 2001).

GAO- 03- 922T 10

Curb state financing schemes. Such schemes inappropriately increase the
federal share of Medicaid expenditures. For example, some states have
created the illusion that they made large Medicaid payments to providers
while in reality they only made temporary electronic funds transfers that
the providers were required to return to them. In some cases, states have
used federal payments for purposes other than Medicaid. Although Congress
and CMS have repeatedly acted to curtail abusive financing schemes, states
have developed new variations. Each has the same result: some of the
state*s share of program expenditures is shifted to the federal
government. Curbing abusive state practices is of increasing importance
today since states are under budgetary pressures. Experience shows that
some states are likely to look for other creative means to supplant state
financing, making a compelling case for the Congress and CMS to sustain
vigilance over federal Medicaid payments.

Curbing states* exploitative practices can yield substantial savings. CMS*
2001 regulation to close one significant loophole that was being
increasingly used by states to generate excessive federal Medicaid
payments, referred to as the upper payment limit, is estimated to save the
federal government $55 billion over 10 years, and a related 2002 CMS
regulation is estimated to yield an additional $9 billion over 5 years. To
reduce these and other exploitative schemes and to better ensure that
federal funds were used to reimburse providers only for Medicaidcovered
services actually provided to eligible beneficiaries, we recommended in
1994 that the Congress enact legislation to prohibit making Medicaid
payments to a government- owned facility in excess of the facility*s
costs. To date, no action has been taken.

GAO- 03- 922T 11 The figure below shows one state*s arrangement to
increase federal Medicaid

payments inappropriately.

Address inappropriate provider claims.

o The improper payments that states have identified suggest that* with
augmented and consistent effort* states have the potential to save
Medicaid millions of dollars. An estimate of savings from cost recoveries
for the state of Washington alone, for example, was over $9 million in

Medicaid funds during fiscal year 2002 through its hospital and physician
audits.

o Our review of certain Medicaid services provided to children through
their schools also demonstrates the importance of heightened scrutiny over
Medicaid expenditures. In one state alone, there were $324 million in
disallowed claims involving school- based services for a 3  1/2 year
period ending in fiscal year 2001. Some claims were for service not
covered by Medicaid or for services provided to non- Medicaid- eligible
children.

Improve federal and state agency controls over payments. CMS does not have
a sound method for states to identify areas at high risk for improper
Medicaid payments. Also, in our June 2001 review, we noted that no state
requested the full amount of federal funds available for antifraud efforts
due to a reluctance to put up state matching funds.

GAO- 03- 922T 12 Improper Payments at DOD Ensuring prompt, proper, and
accurate payments continues to be a challenge for the

Department of Defense (DOD). DOD managers do not have the important
information needed for effective financial management, leading DOD to
overpay contractors by billions of dollars over the past eight years. In
our past reports, we have noted that (1) contractors were refunding
hundreds of millions of dollars to DOD each year for a total of about $6.7
billion between fiscal year 1994 and 2001; (2) DOD made overpayments due
to duplicate invoices and paid invoices without properly and accurately
recovering progress payments; (3) contract administration actions had
resulted in significant contractor debt or overpayment; (4) DOD and
contractors were not aggressively pursuing the timely resolution of
overpayments or underpayments when they were identified; and (5) DOD did
not have statistical information on the results of contract
reconciliation. In May 2002, we reported that DOD has various short- term
corrective actions underway that appear to be having positive results.
However, cost increases, performance issues, or schedule delays have beset
two of DOD*s key long- term initiatives: the Defense Procurement Payment
System, which is intended to be DOD*s standard contract payment system,
and the Standard Procurement System, which is intended to be DOD*s single,
standard system to support contracting functions and interface with
financial management functions. GAO has recommended that DoD take a number
of steps including developing controls over contractor debt and
overpayments Earned Income Credit (EIC) Noncompliance For tax year 2001,
about $31 billion was paid to about 19 million EIC claimants.

Although researchers have reported that the EIC has generally been a
successful incentive- based antipoverty program, IRS has reported high
levels of EIC overpayments

GAO- 03- 922T 13 going back to 1985. IRS*s most recent study, released in
2002, estimated that between

$8.5 and $9.9 billion should not have been paid out to EIC claimants for
tax year 1999. Administering the EIC is not an easy task* IRS has to
balance its efforts to help ensure that all qualified persons claim the
credit with its efforts to protect the integrity of the tax system and
guard against fraud and other forms of noncompliance associated with the
credit. Further, the complexity of the EIC may contribute to
noncompliance. The EIC is among the more complex provisions of the tax
code, which can contribute to unintentional errors by taxpayers. In
addition, unlike other income transfer programs, the EIC relies more on
self- reported qualifications of individuals than on program staff
reviewing documents and other evidence before judging claimants to be
qualified for assistance.

Early in 2002, the Assistant Secretary of the Treasury and the IRS
commissioner established a joint task force to seek new approaches to
reduce EIC noncompliance. The task force sought to develop an approach to
validate EIC claimants* eligibility before refunds are made, while
minimizing claimants* burden and any impact on the EIC*s relatively high
participation rate. Through this initiative, administration of the EIC
program would become more like that of a social service program for which
proof of eligibility is required prior to receipt of any benefit.

According to IRS, three areas* qualifying child eligibility, improper
filing status, and income misreporting (i. e., underreporting)* account
for nearly 70 percent of all EIC refund errors. Although the task force
initiative is designed to address each of these sources of EIC
noncompliance, many of the details about its implementation are still to
be settled. A significant change to the initiative was announced just this
past Friday, June 13, when IRS said that its pilot effort to precertify
the eligibility of qualifying children for the EIC would not include
requesting claimants to show their relationship to the qualifying child.
Because planning and implementation for the EIC initiative will proceed
simultaneously, its success will depend on careful planning and close
management attention.

GAO- 03- 922T 14 Congress has already focused oversight attention on the
EIC initiative and continued

oversight can help ensure that the initiative balances efforts to reduce
EIC overpayments with continued efforts to maintain or increase the
portion of the EIC eligible population that receives the credit. Further,
Congress can consider making the several definitions of children in the
tax code more uniform. The differing definitions contribute to the
complexity taxpayers face and complexity is widely believed to contribute
to errors taxpayers make in claiming the EIC. As early as 1993 we had
suggested that Congress consider changes that would have made the
definitions for children more similar for several tax purposes. More
recently, IRS*s Taxpayer Advocate, the Joint Committee on Taxation, and
the Department of the Treasury have made proposals as well.

EIC Problems

IRS estimated in 2002 that of the $31.3 billion in earned income credits
claimed by taxpayers in tax year 1999, about $8.5 billion to $9.9 billion,
should not have been paid .

This level of noncompliance has remained relatively unchanged even after a
5- year effort to reduce it.

Collection of Unpaid Taxes Collecting taxes due the government has always
been a challenge for IRS, but in recent years the challenge has grown. In
testimonies and reports we have highlighted large and pervasive declines
in IRS* compliance and collections programs. For example, between 1996 and
2001 the programs generally experienced larger workloads, less staffing,
and fewer number of cases closed per employee For the last several years,
Congress and others have been concerned that the declines in IRS*s
enforcement programs are eroding taxpayers* confidence in the fairness of
our tax system putting at risk their willingness to voluntarily comply
with the tax laws. Because of the potential revenue losses and the threat
to voluntary compliance, the collection of unpaid taxes is a high risk
area.

GAO- 03- 922T 15 A key to reversing these trends and ensuring compliance
with the tax laws is continuing to modernize IRS*s management and systems.
Such change is required across IRS. IRS

needs to acquire and analyze data on noncompliance by continuing to
implement the National Research Program as planned. IRS needs to
reengineer it compliance and collection programs. Reengineering depends,
in turn, on successfully modernizing business information systems by
implementing recommended management controls. IRS needs to implement its
planned centralized cost accounting system in order to strengthen controls
over unpaid tax assessments. Because of their magnitude, these efforts are
a major management challenge. IRS has tried to increase enforcement
staffing. However, the hiring of additional staff has been delayed by
factors such as unbudgeted cost increases.

Uncollected Taxes By the end of fiscal year 2002, IRS had deferred
collection action on about one out of three collection cases and had an
inventory of $112 billion of known unpaid taxes with some collection
potential.

Student Financial Assistance The Department of Education*s student
financial assistance programs disburse about $65 billion annually.
Education also manages a $267 billion loan portfolio. Millions of dollars
in loans and grants have been disbursed to ineligible students because of
internal control weaknesses. While the default rate on student loans has
come down substantially, the dollars in default remain high.

Education has made progress on improving its financial management; however
it needs to implement corrective actions to ensure that relevant, reliable
accounting information is

GAO- 03- 922T 16 available. Over the years, Education has spent millions
to integrate and modernize its

many financial aid systems in an effort to provide more information and
better service to customers* students, parents, institutions, and lenders.
However Education did not have an enterprise architecture 6 and it lacked
the ability to track students across programs. Education also faces
challenges in maintaining program integrity, specifically ensuring that
information reported on student aid applications is correct and that
adequate internal

controls exist to prevent erroneous and improper payments of grants and
loans. To improve the integrity of the financial aid programs, Education
should (1) continue to coordinate with the Internal Revenue Service to
verify income information reported on student aid applications, (2)
provide clear policy and guidance on the effect of using tax provisions on
student aid awards, and (3) implement controls to limit improper
disbursements of grants and loans.

Fraud in Student Aid Programs The owner, registrar, director of education,
and other employees at The Training Center, a computer and travel school
in Michigan, were indicted for falsifying documents to illegally obtain
student financial aid. The indictment included an $875,000 forfeiture to
recover the funds these individuals illegally received.

An investigation at Beacon Career Institute in Florida (BCI) in Florida
revealed a major Pell Grant case that defrauded Education of over
$720,000. The former BCI administrator and other BCI officials created
false documents to justify the disbursement of these grants. They were
ordered to pay restitution totaling $1,778,472 and sentenced to prison.

A former instructor at Piedmont College of Hair Design in South Carolina
pled guilty and was ordered to pay restitution of $27,000 for Pell Grant
fraud. Her actions caused over $300,000 in Pell Grants to be given to
ineligible students.

One individual in Los Angeles, who was convicted of student aid fraud,
conducted weekly seminars for parents and students, charging $300 for the
programs at which he advised and assisted them in preparing student aid
applications that deliberately misstated their income or dependency
status. The potential loss to the government from his actions was about
$800,000.

6 Enterprise architecture is an institutional blueprint that defines in
both business and technology terms the organizations current and target
operating environments and provides a transition roadmap.

GAO- 03- 922T 17 For example, in 2001, $21.8 billion remained in default.
Education*s Office of Federal

Student Aid (FSA) draft fiscal year 2002 performance plan specified the
goals it had for default management; however, it included only limited
information about the strategies to achieve those goals. Without giving
additional details on its strategies for default recovery and prevention,
it is not clear how FSA will determine whether it has achieved its default
management goals. Finally, while Education has set up voluntary flexible
agreements with four of its guaranty agencies, it is in the process of
assessing whether they have been successful in lowering default and
delinquency rates.

Food Assistance Programs Each day 1 in every 6 Americans receives
nutrition assistance through 1 or more of the 15 programs administered by
the U. S. Department of Agriculture (USDA) In FY 2002 Congress
appropriated about $38.8 billion* nearly half of USDA*s budget-- to
provide children and low- income adults with access to food, a healthful
diet, and nutrition education through programs such as Food Stamps,
school- breakfast and school- lunch programs.) USDA continues to face
serious challenges in ensuring that eligible individuals receive the
proper benefits from the food assistance programs administered by its Food
and Nutrition Service.

In FY 2001 The Food Stamp program alone provided 17.3 million individuals
with more than $15.5 billion in aid. About 149,000 authorized retail
outfits accept food stamps. A program this large and this decentralized is
vulnerable to problems and we have made recommendations in a number of
areas, including:

Erroneous payments: USDA estimated that for FY 2001 erroneous payments
totaled about $1.4 billion *about $1 billion in overpayments and just
under $400 million in underpayments. This is an error rate of about 9
percent.

o To deal with the complexity of the Food Stamp Program and the high error
rate, the Farm Security and Rural Investment Act of 2002 contained a
number of administrative and simplification reforms, such as allowing
states to use greater flexibility in considering the income of recipients
for

GAO- 03- 922T 18 eligibility purposes and to extend simplified reporting
procedures for all

program recipients.

Misuse of benefits: individuals sometimes illegally sell their benefits
for cash* a practice known as trafficking. In its most recent report on
trafficking [March 2000] USDA estimated that about 3.5 cents of every
dollar of food stamp benefits issued each year from 1996 through 1998 was
trafficked by stores* about $660 million.

o Storeowners generally do not pay the financial penalties assessed for
trafficking. For example, we reported in May 1999 that USDA and the courts
collected only $11. 5 million, or about 13 percent, of the $78 million in
total penalties assessed against storeowners for violating food stamp
regulations from 1993 through 1998. 7 Better use of information technology
has the potential to help USDA minimize fraud, waste, and abuse in the
Food Stamp Program. The Food and Nutrition Service has taken some actions
to implement our recommendations, such as assisting states in the use of
EBT data to identify traffickers and has other actions under way.

Other nutrition programs also suffer from fraud and abuse.

For example in FY 2001 the Child and Adult Care Food Program (CACFP)
provided subsidized meals for a daily average of 2.6 million participants
in the care of about 215,000 day care providers and received $1.8 billion
in FY 2002. . In response to our November 1999 recommendation 8 and
reports by the USDA OIG, legislation was enacted in June 2000 to
strengthen CACFP management

7 U. S. General Accounting Office, Food Stamp Program: Storeowners Seldom
Pay Financial Penalties Owed for Program Violations, GAO/ RCED- 99- 91.
(Washington, D. C.: May 11, 1999). 8 U. S. General Accounting Office, Food
Assistance: Efforts to Control Fraud and Abuse

in the Child and Adult Care Food Program Should Be Strengthened, GAO/
RCED- 00- 12. (Washington, D. C.: Nov. 29, 1999).

GAO- 03- 922T 19 controls and to reduce its vulnerability to fraud and
abuse. As a result, the Food

and Nutrition Service has intensified its management evaluations at the
state and local levels and has trained its regional and state agency staff
on revised management procedures. Child & Adult Care Food Program To
identify potentially fraudulent or abusive claims, reimbursement claims
are

reviewed, but the reviews are not foolproof. For example, one state we
visited used several methods to evaluate the soundness of claims, but a
state reviewer found that the reviews did not catch a $5,000 overpayment
to a day care home sponsor. In this case, the claim for reimbursement had
jumped in one month to

$7,000, from an average monthly claim of $2,000.

FNS has not effectively directed states* efforts to control fraud and
abuse. In fiscal years 1997 and 1998, only 23 of FNS* 47 management
evaluations directly evaluated the states* implementation of required
controls over reimbursements to sponsors and providers. Almost half of
these reviews found serious problems, including the failure of some states
to conduct any administrative reviews of sponsors or providers. National
School Lunch Program provided nutritionally balanced, low- cost or free
lunches

for over 27 million children each school day in more than 98,000 public
and nonprofit private schools and residential child care institutions.
Past reports have disclosed that the number of children certified as
eligible to receive free lunches in this program was 18 percent greater
than the estimated number of children eligible for this benefit.
Furthermore, in its strategic plan for fiscal years 2000 through 2005,
USDA specifically identified the challenge it faces in ensuring that only
eligible participants are provided benefits in the National School Lunch
Program. USDA has taken some initial steps to

develop a cost- effective strategy to address this integrity issue, such
as pilot testing potential policy changes to improve the certification
process.

GAO- 03- 922T 20 Credit Card Abuse We and a number of Inspectors General
have identified improper and fraudulent use of

purchase cards as well as control weaknesses in numerous agencies such as
the Departments of Agriculture, Defense, Education, Housing and Urban
Development, Interior, and the Federal Aviation Administration. Identified
problems include weaknesses in the review and approval processes, lack of
training for cardholders and approving officials, and ineffective
monitoring. These weaknesses created a lax control environment that
allowed cardholders to make fraudulent, improper, abusive, and
questionable purchases. Similarly, we have found that a weak control
environment contributed to significant abuse and potential fraud in the
use of travel cards in the Department of Defense.

For instance, in March 2003, we reported that weaknesses in FAA*s purchase
card controls resulted in instances of improper, wasteful, and
questionable purchases, as well as missing and stolen assets. These
weaknesses contributed to $5.4 million of improper purchases. This
included 997 transactions totaling $5.1 million associated with purchases
that were split into two or more segments to circumvent single purchase
limits. In addition, over half of the asset purchases* such as computers
and other equipment* that we examined had not been recorded in FAA*s
property system, increasing the risk of loss or theft. As a result, FAA
could not locate or document the location of over a third of the items.
These missing items totaled almost $300,000. In separate internal reviews,
one FAA location identified over 800 items, totaling almost $2 million,
that were lost or stolen in fiscal years 2001 through 2002. Given systemic
weaknesses in FAA*s property controls, the actual amount of missing or
stolen equipment FAA- wide could be much higher. We made a total of 27
recommendations to strengthen FAA*s internal controls and compliance in
its purchase card program, decrease wasteful purchases, and improve the
accountability of assets in order to reduce vulnerability to improper and
wasteful purchases. These included requiring centralized receiving of
accountable assets and sensitive property items, improving physical
security over the storage of computerrelated equipment, and following up
on missing property items.

GAO- 03- 922T 21 Purchase Card Abuses At Education, a purchase cardholder
made several fraudulent purchases from two Internet sites for pornographic
services. The name of one of the sites* Slave Labor Productions. com*
should have caused suspicion when it appeared on the employees* monthly
statement. At HUD, we found improper purchases totaling about $1 million
where HUD employees either split, or appeared to have split, purchases
into multiple transactions to circumvent cardholder limits. At the two
Navy units we reviewed, we identified over $11,000 of fraudulent purchases
including clothing from Nordstrom, as well as improper, questionable, and
abusive purchases, such as rentals of luxury cars and purchases of
designer and high- cost leather goods such as leather purses costing up to
$195 each. Poor oversight and management of travel card programs led to
high delinquency rates costing millions in lost rebates and increased ATM
fees. For example, as of March 31, 2002, we found that over 8,000 Navy
cardholders had $6 million in delinquent debt. During the period of our
reviews, over 400 Air Force, 250 Navy, and 200 Army personnel committed
potential bank fraud by writing three or more nonsufficient (NSF) fund
checks to the Bank of America. Also, many cardholders used their cards for
inappropriate purchases, such as cruises and event tickets. Our review of
Air Force travel cards, for example, found documented evidence of
disciplinary actions in less than half of the cases reviewed where
cardholders wrote NSF checks, or their accounts were charged off or placed
in salary offset. We made several recommendations to DOD and the Air
Force, including providing sufficient training to agency program
coordinators to promote proper oversight of the travel card program,
including effective monitoring for inappropriate transactions; reviewing
the security clearances of cardholders with financial problems; and
strengthening procedures for canceling cards of employees leaving the
service. DOD and the Air Force concurred and said that they had actions
under way to address many of them.

GAO- 03- 922T 22 Examples of Abusive Air Force Travel Card Activity
Category Examples of vendors Number of

transactions Approximate dollar amount

Cruises Carnival, Celebrity, Norwegian, and Princess 70 $ 31,000 Gambling
Global Cash Access 79 14,000 Sports, concerts, and other events Dallas
Cowboys, Backstreet

Boys, and other Ticketmaster purchases 223 31,000 Gentlemen*s clubs
Cheetah*s Lounge, Dej`a vu

Showgirls 187 32,000 HUD Single- Family Mortgage Insurance and Rental
Assistance Programs HUD manages about $550 billion in insurance and $19
billion per year in rental assistance. The department relies on a complex
network of thousands of third parties to manage their risk. We have made
recommendations in a number of areas:

Reducing rental subsidy overpayments: HUD estimates that rental subsidy
overpayments in fiscal year 2000 were $2 billion* over 10 percent of total
program expenditures. A significant portion of this overpayment is
attributable to tenants* underreporting of income. We have recommended
steps to improve data sharing between HUD and the Department of Health and
Human Services to help identify unreported income before rental subsidies
are provided. 9 HUD needs to ensure that its rental housing assistance
programs operate effectively and efficiently, specifically that assistance
payments are accurate, recipients are eligible, assisted housing meets
quality standards, and contractors perform as expected.

9 U. S. General Accounting Office, Benefit and Loan Programs: Improved
Data Sharing Could Enhance Program Integrity, GAO/ HEHS- 00- 19,
(Washington, D. C., Sept. 13, 2000).

GAO- 03- 922T 23

Reduce risk of losses in the single- family housing program: HUD also
needs to reduce the risk of losses in its single- family housing program
due to fraud, loan defaults, and poor management of foreclosed properties.
Ineligible buyers sometimes fraudulently obtain loans, or loans are made
on properties actually worth less than the loan amount, increasing the
risk of default and losses. In addition, foreclosed properties are not
always secured and maintained in a timely fashion and their condition can
deteriorate, resulting in lower sales prices and limiting FHA*s ability to
recover its costs. HUD*s IG has reported that fraud in the origination of
mortgages of single- family properties continues to be the most pervasive
problem uncovered by its investigations. We have reported on weaknesses in
HUD*s oversight of mortgage lenders and have made recommendations aimed at
strengthening HUD*s processes for approving and monitoring lenders and
holding them accountable for poor performance. 10 We have also recommended
that HUD adopt a foreclosure process more like that used by other entities
to better ensure that properties do not deteriorate and that it recoups
more of its losses when the houses are sold. 11 HUD needs to improve the
management and oversight of its single- family housing programs to reduce
its risk of financial losses.

Fraud in FHA Program A joint investigation between HUD*s Inspector General
and the Federal Bureau of Investigation uncovered a 20- person property-
flipping scheme in Chicago, Illinois, that resulted in 21 indictments and
convictions and 12 jail sentences.

The use of fraudulent documentation to qualify borrowers for FHA- insured
mortgages had led to criminal indictments and convictions in several other
communities.

10 U. S. General Accounting Office, Single- Family Housing: Stronger
Oversight of FHA Lenders Could Reduce HUD*s Insurance Risk, GAO/ RCED- 00-
112 (Washington, D. C.: April 28, 2000). 11 U. S. General Accounting
Office, Single- Family Housing: Opportunities to Improve Federal
Foreclosure

and Property Sales Processes, GAO- 02- 305 (Washington, D. C.: Apr. 17,
2002).

GAO- 03- 922T 24

Improve acquisition management and monitoring of contractor performance.

Contractors are responsible for managing and disposing of HUD*s inventory
of single- family and multifamily properties* properties that had a
combined value of about $3 billion as of September 30, 2001. Our review of
HUD*s files and

disbursements indicates that its oversight processes have not identified
instances in which contractors were not performing as expected. Weaknesses
in HUD*s acquisition management limit its ability to readily prevent,
identify, and address contractor performance problems. Without a
systematic approach to oversight and adequate on- site monitoring, the
department*s ability to identify and correct contractor performance
problems and hold contractors accountable is reduced. The resulting
vulnerability limits HUD*s ability to assure that it is receiving the
services for which it pays.

HUD Contractor Performance Oversight In one case, HUD paid $227,500 to
have 15,000 square feet of concrete replaced; however, we determined that
only about one- third of the work HUD paid for was actually performed. 12
Improving Economy, Efficiency, Effectiveness Important as safeguarding
funds from fraud, waste, abuse and mismanagement is, I

believe that for long- lasting improvements in government performance the
federal government needs to move to the next step: to widespread
opportunities to improve the economy, efficiency and effectiveness of
existing federal goals and program commitments. The basic goals of many
federal programs* both mandatory and discretionary* enjoy widespread
support. That support only makes it more important for us to pay attention
to the substantial opportunities to improve their cost effectiveness and

12 U. S. General Accounting Office, Financial Management: Strategies to
Address Improper Payments at HUD, Education and Other Federal Agencies,
GAO- 03- 167T (Washington, D. C.: Oct. 3, 2002).

GAO- 03- 922T 25 the delivery of services and activities. No activity
should be exempt from some key

questions about its design and management. Key Questions for Program
Oversight

Is the program targeted appropriately? Does the program duplicate or even
work at cross purposes with related programs and tools?

Is the program financially sustainable and are there opportunities for
instituting appropriate cost sharing and recovery from nonfederal parties
including private entities that benefit from federal activities?

Can the program be made more efficient through reengineering or
streamlining processes or restructuring organizational roles and
responsibilities? Are there clear goals, measures and data with which to
track progress, benefits

and costs? GAO*s work illustrates numerous examples where programs can and
should be changed to improve their impact and efficiency. Today I want to
touch on some of these areas and highlight some significant opportunities
for program changes that promise to improve their cost effectiveness. I
recognize that many of these will prompt debate* but that debate is both
necessary and healthy. Targeting Our work has shown that scarce federal
funds could have a greater impact on program

goals by improving their targeting to places or people most in need of
assistance. Poorly targeted funding can result in providing assistance to
recipients who have the resources and interest to undertake the subsidized
activity on their own without federal financing. Moreover, lax eligibility
rules and controls can permit scarce funds to be diverted to clients with
marginal needs for program funds.

GAO- 03- 922T 26

Grant programs: Many federal grant programs with formula distributions to
state and local governments are not well targeted to places with high
needs but low fiscal capacity. As a result, recipients in wealthier areas
may enjoy higher levels of federal funds than harder pressed areas. Better
targeting of grants offers a strategy to reduce federal outlays by
concentrating reductions in wealthier communities with comparatively fewer
needs and greater capacity to finance services from their own resources.
For such mandatory programs as Medicaid, Foster Care and Adoption
Assistance, reimbursement formulas can be changed to better reflect
relative need, geographic differences in the cost of services and state
bases.

Flood insurance losses: Repetitive flood losses are one of the major
factors contributing to the financial difficulties facing the National
Flood Insurance Program. Approximately 45,000 buildings currently insured
under the National Flood Insurance Program have been flooded on more than
one occasion and have received flood insurance claims payments of $1,000
or more for each loss. These repetitive losses account for about 38
percent of all program claims historically (currently about $200 million
annually) even though repetitive- loss structures make up a very small
portion of the total number of insured properties* at any one time, from 1
to 2 percent. The cost of these multiple- loss properties over the years
to the program has been $3.8 billion. One option that would increase
savings would be for FEMA to consider eliminating flood insurance for
certain repeatedly flooded properties.

Medicare Incentive Payment Program: The Medicare Incentive Payment program
was established in 1987 to provide a bonus payment for physicians to
provide primary care in underserved areas. However, specialists receive
most of the program dollars, even though primary care physicians have been
identified as being in short supply. Shortages of specialists, if any,
have not been determined. Moreover, since 1987 the Congress generally
increased reimbursement rates for primary care services and reduced the
geographic variation in physician reimbursement rates. HHS has
acknowledged that structural changes to this

GAO- 03- 922T 27 program are necessary to better target incentive payments
to rural areas with the

highest degree of shortage. For example, if the program*s intent is to
improve access to primary care services in underserved rural areas, the
bonus payments should be targeted and limited to physicians providing
primary care services to underserved populations in rural areas with the
greatest need.

Social Security Government Pension Offset Provision: The Social Security
Administration (SSA) administers the Government Pension Offset (GPO)
provision requiring benefits to be reduced for persons whose social
security entitlement is based on another person*s social security coverage
(usually a spouse*s). The GPO prevents workers from receiving a full
Social Security spousal benefit in addition to a pension from government
employment not covered by Social Security. However, the law provides an
exemption from the GPO if an individual's last day of state/ local
employment is in a position that is covered by both Social Security and
the state/ local government's pension system. In a recent study, we found
instances where individuals performed work in Social Security covered
positions for short periods to qualify for the GPO last- day exemption.
The practices we identified in Texas and Georgia alone could increase
long- term benefit payments from the Social Security Trust Fund by $450
million. 13 In our report and testimony on this topic we presented a
matter for congressional consideration that the last- day GPO exemption be
revised to provide for a longer minimum time period, and the House has
passed necessary legislation that is pending in the Senate.

13 We calculated this figure by multiplying the number of last- day cases
reported in Texas and Georgia (4, 819) by SSA data on the average annual
offset amount ($ 4, 800) and the average retirees life expectancy upon
receipt of spousal benefits (19.4 years). This estimate may over/ under
estimate costs due to the use of averages, the exclusion of inflation/
cost- of- living/ net present value adjustments, lost investment earnings
by the Trust Funds, and other factors that may affect the receipt of
spousal benefits.

GAO- 03- 922T 28 Consolidation GAO*s work over the years has shown that
numerous program areas are characterized by

significant program overlap and duplication. In program area after program
area, we have found that unfocused and uncoordinated programs cutting
across federal agency boundaries waste scarce resources, confuse and
frustrate taxpayers and beneficiaries and limit program effectiveness.

Food Safety: The federal system to ensure the safety and quality of the
nations food is inefficient and outdated. The Food Safety and Inspection
Service within USDA is responsible for the safety of meat, poultry and
eggs and some egg products, while the Food and Drug Administration under
HHS is responsible for the safety of most other foods. USDA, FDA and ten
other federal agencies administer over 35 different laws for food safety.
The current system suffers from overlapping and duplicative inspections,
poor coordination and inefficient allocation of resources. The Congress
may wish to consider consolidating federal food safety agencies under a
single riskbased food safety inspection agency with a uniform set of food
safety laws.

Grants for Homeland Security: GAO identified at least 16 different grant
programs that can be used by the nation*s first responders to address
homeland security needs. These grants are currently provided through two
different directorates within the Department of Homeland Security, the
Department of Justice, and the Department of Health and Human Services and
serve state governments, cities and localities, counties, and others.
Multiple fragmented grant programs create a confusing and administratively
burdensome process for state and local officials and complicate their
efforts to better coordinate preparedness and response to potential
terrorist attacks across the wide range of specialized agencies and
programs. In addressing the fragmentation prompted by the current homeland
security grant system, Congress should consider consolidating separate
categorical grants into a broader purpose grant with national performance
goals defining results expected for the state and local partnership.

GAO- 03- 922T 29

Rural housing assistance: USDA and HUD both provide assistance for rural
housing, targeting some of the same kinds of households in the same
markets. The programs of both agencies could be merged, using the same
network of lenders. A consolidation of these programs building off the
best practices of both programs would improve the efficiency with which
the federal government delivers rural housing programs.

Cost Recovery The allocation of costs that once made sense when programs
were created needs to be periodically reexamined to keep up with the
evolution of markets. In some cases, private markets and program
beneficiaries can play greater roles in financing and delivery of program
services.

Public Power: The federal government began to market electricity following
the construction of dams and major water projects primarily from the
1930*s to the 1960*s. However, the restructured and increasingly
competitive electricity industry suggests that a reassessment of the roles
and missions of federal subsidies is needed. Although the Power Marketing
Administrations (PMAs) are generally required to recover all costs, in
fact in some cases rates do not recover full costs incurred by the federal
government in producing, transmitting and marketing federal power. The
Congress has the option of requiring the PMAs to sell their power at
market rates to better ensure the full recovery of these costs.

Child Support Enforcement: The Child Support Enforcement Program is to
strengthen state and local efforts to obtain child support for both
families eligible for Temporary Assistance for Needy Families (TANF) and
non- TANF families. From fiscal year 1984 through 1998, non- TANF
caseloads and costs rose about 500 percent

and 1200 percent, respectively. While states have the authority to fully
recover the costs of their services, states have charged only minimal
application and service fees for non- TANF clients, doing little to
recover the federal government*s 66 percent

GAO- 03- 922T 30 share of program costs. In fiscal year 1998, for example,
state fee practices returned

about $49 million of the estimated $2.1 billion spent to provide non- TANF
services. To defray some of the costs of child support programs, Congress
could require that mandatory application fees should be dropped and
replaced with a minimum percentage service fee on successful collections
for non- TANF families.

Beyond program design: operational economy, efficiency and effectiveness
Beyond program management, there are governmentwide areas where major
savings could come from improving economy, efficiency and effectiveness.
Today I would like to highlight one GAO thinks is so important that we
added it to the high- risk list* the management of federal real property.
Excess and underused property and deteriorating facilities present a real
challenge* but

also an opportunity to reap great rewards in terms of improved structure
and savings for the federal government*s operations. In the U. S.
government*s fiscal year 2002 financial statements show an acquisition
cost of more than $335 billion for the federal government*s real property.
This includes military bases, office buildings, embassies, prisons,
courthouses, border stations, labs, and park facilities. Available
governmentwide data suggest that the federal government owns roughly one-
fourth of the total acreage of the nation* about 636 million acres.

Underutilized or excess property is costly to maintain. DoD alone
estimates that it spends about $3 to $4 billion per year maintaining
unneeded facilities. Excess DoE facilities cost more than $70 million per
year, primarily for security and maintenance. There are opportunity costs
*these buildings and land could be put to more costbeneficial uses,
exchanged for needed property, or sold to generate revenue for the
government. Table 1 below highlights excess and underutilized property
challenges faced by some of the major real property- holding agencies.

GAO- 03- 922T 31 Table 1: Excess Property Challenges at Some of the Major
Real Property- Holding

Agencies Agency Excess and underutilized property challenge DOD Even with
four rounds of base realignment and closures that reduced its holdings by

21 percent, DOD recognized that it still had some excess and obsolete
facilities. Accordingly, Congress gave DOD the authority for another round
of base realignment and closure in the fiscal year 2002 defense
authorization act, scheduled for fiscal year 2005.

VA VA recognizes that it has excess capacity and has an effort underway
known as the Capital Asset Realignment for Enhanced Services (CARES) that
is intended to address this issue. VA recently completed its initial CARES
study involving consolidation of services among medical facilities in its
Great Lakes Network

(including Chicago) as well as expansion of services in other locations.
VA identified 31 buildings that are no longer needed to meet veterans'
health care needs in this network, including 30 that are currently vacant.
GSA GSA recognizes that it has many buildings that are not financially
self- sustaining

and/ or for which there is not a substantial, long- term federal purpose.
GSA is developing a strategy to address this problem. The L. Mendel Rivers
Federal Building in Charleston, S. C. is a prime example of a highly
visible, vacant federal building held by GSA.

DOE After shifting away from weapons production, DOE had 1,200 excess
facilities totaling 16 million square feet, and the performance of its
disposal program had not been fully satisfactory, according to DOE*s
Inspector General. Facility disposal activities have not been prioritized
to balance mission requirements, reduce risks, and minimize life- cycle
costs. In some cases, disposal plans were in conflict with new facility
requirements.

USPS The issue of excess and underutilized property will need to be part
of USPS*s efforts to operate more efficiently. Facility consolidations and
closures are likely to be needed to align USPS*s portfolio more closely
with its changing business model.

State Although State has taken steps to improve its disposal efforts and
substantially reduce its inventory of unneeded properties, it reported
that 92 properties were potentially available for sale as of September 30,
2001, with an estimated value of more than $180 million. State has begun
the disposal process for some of these properties. State will also need to
dispose of additional facilities over the next several years as it
replaces more than 180 vulnerable embassies and consulates for security
reasons. Security also has become a primary factor in considering the
retention and sale of excess property.

GAO- 03- 922T 32 If the federal government is to more effectively respond
to the challenges associated with

strategically managing its multi- billion dollar real property portfolio,
a major departure from the traditional way of doing business is needed.
Better managing these assets in the current environment calls for a
significant paradigm shift to find solutions. Solutions should not only
correct the long- standing problems we have identified but also be
responsive to and supportive of agencies* changing missions, security
concerns, and technological needs in the 21 st century. Solving the
problems in this area will undeniably require a reconsideration of funding
priorities at a time when budget constraints will be pervasive.

Because of the breadth and complexity of the issues involved, the long-
standing nature of the problems, and the intense debate about potential
solutions that will likely ensue, current structures and processes may not
be adequate to address the problems. Thus, as discussed in our high- risk
report, there is a need for a comprehensive and integrated transformation
strategy for federal real property. This strategy could address challenges
associated with having adequate capacity (people and resources) to resolve
the problems. The development of a transformation strategy would
demonstrate a strong commitment and top leadership support to address the
risk. An independent commission or governmentwide task force may be needed
to develop the strategy. We believe that OMB is uniquely positioned to be
the catalyst for identifying and bringing together the stakeholders that
would develop the transformation strategy, drawing on resources and
expertise from the General Services Administration, the Federal Real
Property Council, and other real property- holding agencies. For example,
OMB could assess agency real property activities as part of the executive
branch management scorecard effort. Congress will need to play a key role
in implementing the transformation strategy*s roadmap for realigning and
rationalizing the government*s real property assets so that the portfolio
is more directly tied to agencies* missions. Without measurable progress
and a comprehensive strategy to guide improvements, real property will
most likely remain on the high risk list.

GAO- 03- 922T 33

Reassessing What Government Does I have talked about the need to protect
taxpayer dollars from fraud, waste, abuse and mismanagement and about the
need to take actions improving the economy, efficiency and effectiveness
of government programs, policies, and activities. However, to meet the
challenges of today and the future, we must move beyond this to a more
fundamental reassessment of what government does and how it does it.

In part this requires looking at current federal programs* both spending
and tax* in terms of their goals and results. Why does the program/
activity exist? Is the activity achieving its intended objective? If not,
can it be fixed? If so, how? If not, what other approaches might succeed
in achieving the goal/ objective? More fundamentally, even if a program/
activity is achieving its stated mission* or can be *fixed* so that it
does so* where does it fit in competition for federal resources? Is its
priority today higher or lower than before given the nation*s evolving
challenges and fiscal constraints? It also requires asking whether an
existing program, policy, or activity *fits* the world we

face today and in the future. It is important not to fall into the trap of
accepting all existing activities as *givens* and subjecting new proposals
to greater scrutiny than existing ones undergo. Think about how much the
world has changed in the past few decades and how much it will change in
future years.

One example of a disconnect between program design and today*s world is
the area of federal disability programs* a disconnect great enough to
warrant designation as a *high risk* area this year. Already growing,
disability programs are poised to surge as babyboomers age, yet the
programs remain mired in outdated economic, workforce, and medical
concepts and are not well positioned to provide meaningful and timely
support to disabled Americans. Disability criteria have not been updated
to reflect the current state of science, medicine, technology and labor
market conditions. Using outdated information, agencies* primarily SSA and
VA-- risk overcompensating some individuals while under- compensating or
denying compensation entirely to others. Although federal

GAO- 03- 922T 34 disability programs present serious management challenges
and can be vulnerable to

fraud or abuse, the overarching and longer- term challenge is to design a
disability system for the modern world. We should be striving to maintain
a government that is effective and relevant to a changing society* a
government that is as free as possible of outmoded commitments and
operations that can inappropriately encumber the future. The difference
between *wants,* *needs,* and overall *affordability* and long- term
*sustainability* is an important consideration when setting overall
priorities and allocating limited resources.

Finally, any reassessment of federal missions and strategies should
include the entire set of tools the federal government can use to address
national objectives. These tools include discretionary and mandatory
spending, loans and loan guarantees, tax provisions, and regulations. If
we are evaluating federal support for higher education, we need to look
not only at spending but also at tax preferences. The same thing is true
for health care. The figure below shows federal activity in health care
and Medicare budget functions in FY 2000: $37 billion in discretionary BA,
$319 billion in entitlement outlays, $5 million in loan guarantees, and
$91 billion in tax expenditures.

GAO- 03- 922T 35 Government must operate in the context of broader trends
shaping the United States and

its place in the world. These include:

National and global response to terrorism and other threats to personal
and national security

Increasing interdependence of enterprises, economies, civil society, and
national governments* a/ k/ a globalization.

The shift to market- oriented, knowledge- based economies;

An aging and more diverse U. S. population;

Advances in science & technology and the opportunities & challenges
created by these changes

Challenges and opportunities to maintain & improve the quality of life for
the nation, communities, families & individuals; and

The increasingly diverse nature of governance structures and tools.

Relative Reliance on Policy Tools in the Health Care Budget Functions
(FY2000)

20% 8% 72%

Tax Expenditures Discretionary budget authority Mandatory outlays

Note: Loan Guarantees account for about $5 million, or about .001 percent,
of the approximately $447 billion in total federal health care resources.
Source: Budget of the United states Government, FY 2002, Office of
Management and Budget.

GAO- 03- 922T 36 In addition to the above trends, growing fiscal
challenges at the federal, state, and local

levels are of great concern. Furthermore, rising health care costs and
other health care related challenges (e. g., access, quality) are of
growing concern crossing all sectors of the economy and all geopolitical
boundaries.

Government leaders are responsible and accountable for making needed
changes to position the federal government to take advantage of emerging
opportunities and to meet future challenges. Focusing on accountable,
results- oriented management can help the federal government operate
effectively within a broad network that includes other governmental
organizations, nongovernmental organizations, and the private sector.

Concluding Remarks There is a Chinese curse that goes *May you live in
interesting times.* We clearly do. I would prefer to see this not as a
curse* but as a challenge and an opportunity. Tackling areas at risk for
fraud, waste, abuse & mismanagement will require determination,
persistence and sustained attention by both agency managers and
Congressional committees. Large and complex federal agencies must
effectively use a mixture of critical resources and improved processes to
improve their economy, efficiency, and effectiveness, Congressional
oversight will be key.

In view of the broad trends and long- term fiscal challenges facing the
nation, there is a need to fundamentally review, reassess, and
reprioritize the proper role of the federal government, how the government
should do business in the future, and* in some instances* who should do
the government*s business in the 21 st century. It is also

increasingly important that federal programs use properly designed and
aligned tools to manage effectively across boundaries work with individual
citizens, other levels of government, and other sectors. Evaluating the
role of government and the programs it delivers is key in considering how
best to address the nation*s most pressing priorities.

GAO- 03- 922T 37 Periodic reviews of programs in the budget, on the
mandatory and discretionary sides of

the budget as well as tax preferences, can prompt a healthy reassessment
of our priorities and of the changes needed in program design, resources
and management needed to get the results we collectively decide we want
from government.

Needless to say, we at GAO are pleased to help Congress in this very
important work.

GAO- 03- 922T 38 Attachment I:

GAO*s 2003 High- Risk List 2003 High- Risk Areas Year

Designated High Risk Addressing Challenges In Broad- based Transformations
Strategic Human Capital Management* 2001

U. S. Postal Service Transformation Efforts and Long- Term Outlook* 2001

Protecting Information Systems Supporting the Federal Government and the
Nation*s Critical Infrastructures 1997

Implementing and Transforming the New Department of Homeland Security 2003

Modernizing Federal Disability Programs* 2003

Federal Real Property* 2003 Ensuring Major Technology Investments Improve
Services FAA Air Traffic Control Modernization 1995

IRS Business Systems Modernization 1995

DOD Systems Modernization 1995 Providing Basic Financial Accountability
DOD Financial Management 1995

Forest Service Financial Management 1999

FAA Financial Management 1999

IRS Financial Management 1995 Reducing Inordinate Program Management Risks
Medicare Program* 1990

Medicaid Program* 2003

Earned Income Credit Noncompliance 1995

Collection of Unpaid Taxes 1990

DOD Support Infrastructure Management 1997

DOD Inventory Management 1990

HUD Single- Family Mortgage Insurance and Rental Assistance Programs 1994

Student Financial Aid Programs 1990 Managing Large Procurement Operations
More Efficiently DOD Weapon Systems Acquisition 1990

DOD Contract Management 1992

Department of Energy Contract Management 1990

NASA Contract Management 1990 *Additional authorizing legislation is
likely to be required as one element of addressing this high- risk area.
Source: GAO

GAO- 03- 922T 39 Attachment II:

Selected Reports Regarding Specific Examples Cited in Testimony

Erroneous payments, Misuse of benefits, Child and Adult Care Food Program
(CACFP), National School Lunch Program:

Food Assistance: WIC Faces Challenges in Providing Nutrition Services.
GAO- 02- 142. Washington, D. C.: December 7, 2001.

Food Stamp Program: Better Use of Electronic Data Could Result in
Disqualifying More Recipients Who Traffic Benefits. GAO/ RCED- 00- 61.
Washington, D. C.: March 7, 2000.

Food Assistance: Efforts to Control Fraud and Abuse in the Child and Adult
Care Food Program Should Be Strengthened. GAO/ RCED- 00- 12. Washington,
D. C.: November 29, 1999.

Food Stamp Program: Storeowners Seldom Pay Financial Penalties Owed for
Program Violations. GAO/ RCED- 99- 91. Washington, D. C.: May 11, 1999.

Credit Card Abuse:

Purchase Cards: Control Weaknesses Leave the Air Force Vulnerable to
Fraud, Waste, and Abuse. GAO- 03- 292. Washington, D. C.: December 20,
2002.

Government Purchase Cards: Control Weaknesses Expose Agencies to Fraud and
Abuse. GAO- 02- 676T. Washington, D. C.: May 1, 2002. FAA Purchase Cards:
Weak Controls Resulted in Instances of Improper and Wasteful

Purchases and Missing Assets. GAO- 03- 405. Washington, D. C.: March 21,
2003.

HUD Single- Family Mortgage Insurance and Rental Assistance Programs:

U. S. General Accounting Office, Financial Management: Strategies to
Address Improper Payments at HUD, Education and Other Federal Agencies,
GAO- 03- 167T (Washington, D. C.: Oct 3, 2002).

U. S. General Accounting Office, Strategies to Manage Improper Payments:
Learning from Public and Private Sector Organizations, GAO- 02- 69G
(Washington, D. C.: October 2001). U. S. General Accounting Office, Major
Management Challenges and Program Risks,

Department of Housing and Urban Development, GAO- 01- 248 (Washington, D.
C.: January 2001).

GAO- 03- 922T 40 U. S. General Accounting Office, HUD Management: HUD*s
High- Risk Program Areas

and Management Challenges, GAO- 02- 869T (Washington, D. C.: July 24,
2002). U. S. General Accounting Office, Financial Management: Coordinated
Approach Needed to Address the Government*s Improper Payments Problems,
GAO- 02- 749 (Washington, D. C.: Aug 9, 2002).

DoD Improper Payments:

U. S. General Accounting Office, Financial Management: Coordinated
Approach Needed to Address the Government*s Improper Payments Problems,
GAO- 02- 749 (Washington, D. C.: Aug 9, 2002).

U. S. General Accounting Office, Department of Defense: Status of
Achieving Key Outcomes and Addressing Major Management Challenges, GAO-
01- 783 (Washington, D. C.: June 25, 2001).

Grant Programs:

Formula Grants: Effects of Adjusted Population Counts on Federal Funding
to States.

GAO/ HEHS- 99- 69. Washington, D. C.: February 26, 1999.

Medicaid Formula: Effects of Proposed Formula on Federal Shares of State
Spending.

GAO/ HEHS- 99- 29R. Washington, D. C.: February 19, 1999.

Welfare Reform: Early Fiscal Effect of the TANF Block Grant. GAO/ AIMD-
98- 137. Washington, D. C.: August 22, 1998.

Public Housing Subsidies: Revisions to HUD*s Performance Funding System
Could Improve Adequacy of Funding. GAO/ RCED- 98- 174. Washington, D. C.:
June 19, 1998.

School Finance: State Efforts to Equalize Funding Between Wealthy and Poor
School Districts. GAO/ HEHS- 98- 92. Washington, D. C.: June 16, 1998.

School Finance: State and Federal Efforts to Target Poor Students. GAO/
HEHS- 98- 36. Washington, D. C.: January 28, 1998.

School Finance: State Efforts to Reduce Funding Gaps Between Poor and
Wealthy Districts. GAO/ HEHS- 97- 31. Washington, D. C.: February 5, 1997.

Federal Grants: Design Improvements Could Help Federal Resources Go
Further.

GAO/ AIMD- 97- 7. Washington, D. C.: December 18, 1996.

Public Health: A Health Status Indicator for Targeting Federal Aid to
States.

GAO/ HEHS- 97- 13. Washington, D. C.: November 13, 1996.

GAO- 03- 922T 41

School Finance: Options for Improving Measures of Effort and Equity in
Title I.

GAO/ HEHS- 96- 142. Washington, D. C.: August 30, 1996.

Highway Funding: Alternatives for Distributing Federal Funds. GAO/ RCED-
96- 6. Washington, D. C.: November 28, 1995.

Ryan White Care Act of 1990: Opportunities to Enhance Funding Equity. GAO/
HEHS96- 26. Washington, D. C.: November 13, 1995.

Department of Labor: Senior Community Service Employment Program Delivery
Could Be Improved Through Legislative and Administrative Action. GAO/
HEHS- 96- 4. Washington, D. C.: November 2, 1995.

Flood Insurance Losses:

Flood Insurance: Information on Financial Aspects of the National Flood
Insurance Program. GAO/ T- RCED- 00- 23. Washington, D. C.: October 27,
1999.

Flood Insurance: Information on Financial Aspects of the National Flood
Insurance Program. GAO/ T- RCED- 99- 280. Washington, D. C.: August 25,
1999.

Flood Insurance: Financial Resources May Not Be Sufficient to Meet Future
Expected Losses. GAO/ RCED- 94- 80. Washington, D. C.: March 21, 1994.

Medicare Incentive Payment Programs:

Physician Shortage Areas: Medicare Incentive Payments Not an Effective
Approach to Improve Access. GAO/ HEHS- 99- 36. Washington, D. C.: February
26, 1999.

Health Care Shortage Areas: Designations Not a Useful Tool for Directing
Resources to the Underserved. GAO/ HEHS- 95- 200. Washington, D. C.:
September 8, 1995.

Social Security Pension Offset Provision:

Social Security Administration: Revision to the Government Pension Offset
Exemption Should Be Considered. GAO- 02- 950. Washington, D. C.: August
15, 2002.

Social Security: Congress Should Consider Revising the Government Pension
Offset *Loophole*. GAO- 03- 498T. Washington, D. C.: February 27, 2002.

GAO- 03- 922T 42

Food Safety:

Food Safety: CDC Is Working to Address Limitations in Several of Its
Foodborne Surveillance Systems. GAO- 01- 973. Washington, D. C.: September
7, 2001.

Food Safety: Federal Oversight of Shellfish Safety Needs Improvement. GAO-
01- 702. Washington, D. C.: July 9, 2001.

Food Safety: Overview of Federal and State Expenditures. GAO- 01- 177.
Washington, D. C.: February 20, 2001.

Food Safety: Federal Oversight of Seafood Does Not Sufficiently Protect
Consumers.

GAO- 01- 204. Washington, D. C.: January 31, 2001.

Food Safety: Actions Needed by USDA and FDA to Ensure That Companies
Promptly Carry Out Recalls. GAO/ RCED- 00- 195. Washington, D. C.: August
17, 2000.

Food Safety: Improvements Needed in Overseeing the Safety of Dietary
Supplements and *Functional Foods*. GAO/ RCED- 00- 156. Washington, D. C.:
July 11, 2000.

Meat and Poultry: Improved Oversight and Training Will Strengthen New Food
Safety System. GAO/ RCED- 00- 16. Washington, D. C.: December 8, 1999.

Food Safety: Agencies Should Further Test Plans for Responding to
Deliberate Contamination. GAO/ RCED- 00- 3. Washington, D. C.: October 27,
1999.

Food Safety: U. S. Needs a Single Agency to Administer a Unified, Risk-
Based Inspection System. GAO/ T- RCED- 99- 256. Washington, D. C.: August
4, 1999.

Food Safety: Opportunities to Redirect Federal Resources and Funds Can
Enhance Effectiveness. GAO/ RCED- 98- 224. Washington, D. C.: August 6,
1998.

Food Safety: Federal Efforts to Ensure the Safety of Imported Foods Are
Inconsistent and Unreliable. GAO/ RCED- 98- 103. Washington, D. C.: April
30, 1998.

Food Safety: Changes Needed to Minimize Unsafe Chemicals in Food. GAO/
RCED- 94- 192. Washington, D. C.: September 26, 1994.

Food Safety and Quality: Uniform Risk- based Inspection System Needed to
Ensure Safe Food Supply. GAO/ RCED- 92- 152. Washington, D. C.: June 26,
1992.

Grants for Homeland Security:

Federal Assistance: Grant System Continues to Be Highly Fragmented. GAO-
03- 718T. Washington, D. C.: April 29, 2003.

Multiple Employment and Training Programs: Funding and Performance
Measures for Major Programs. GAO- 03- 589. Washington, D. C.: April 18,
2003.

GAO- 03- 922T 43

Managing for Results: Continuing Challenges to Effective GPRA
Implementation.

GAO/ T- GGD- 00- 178. Washington, D. C.: July 20, 2000.

Workforce Investment Act: States and Localities Increasingly Coordinate
Services for TANF Clients, but Better Information Needed on Effective
Approaches. GAO- 02- 696. Washington, D. C.: July 3, 2002.

Fundamental Changes are Needed in Federal Assistance to State and Local
Governments. GAO/ GGD- 75- 75. Washington, D. C.: August 19, 1975.

Rural Housing Assistance: Rural Housing Programs: Opportunities Exist for
Cost Savings and Management Improvement. GAO/ RCED- 96- 11. Washington, D.
C.: November 16, 1995.

Public Power:

Congressional Oversight: Opportunities to Address Risks, Reduce Costs, and
Improve Performance. GAO/ T- AIMD- 00- 96. Washington, D. C.: February 17,
2000.

Federal Power: The Role of the Power Marketing Administrations in a
Restructured Electricity Industry. GAO/ T- RCED/ AIMD- 99- 229.
Washington, D. C.: June 24, 1999.

Federal Power: PMA Rate Impacts, by Service Area. GAO/ RCED- 99- 55.
Washington, D. C.: January 28, 1999.

Federal Power: Regional Effects of Changes in PMAs* Rates. GAO/ RCED- 99-
15. Washington, D. C.: November 16, 1998.

Power Marketing Administrations: Repayment of Power Costs Needs Closer
Monitoring.

GAO/ AIMD- 98- 164. Washington, D. C.: June 30, 1998.

Federal Power: Options for Selected Power Marketing Administrations* Role
in a Changing Electricity Industry. GAO/ RCED- 98- 43. Washington, D. C.:
March 6, 1998.

Federal Electricity Activities: The Federal Government*s Net Cost and
Potential for Future Losses. GAO/ AIMD- 97- 110 and 110A. Washington, D.
C.: September 19, 1997.

Federal Power: Issues Related to the Divestiture of Federal Hydropower
Resources.

GAO/ RCED- 97- 48. Washington, D. C.: March 31, 1997.

Power Marketing Administrations: Cost Recovery, Financing, and Comparison
to Nonfederal Utilities. GAO/ AIMD- 96- 145. Washington, D. C.: September
19, 1996.

Federal Power: Outages Reduce the Reliability of Hydroelectric Power
Plants in the Southeast. GAO/ T- RCED- 96- 180. Washington, D. C.: July
25, 1996.

GAO- 03- 922T 44

Federal Power: Recovery of Federal Investment in Hydropower Facilities in
the PickSloan Program. GAO/ T- RCED- 96- 142. Washington, D. C.: May 2,
1996.

Federal Electric Power: Operating and Financial Status of DOE*s Power
Marketing Administrations. GAO/ RCED/ AIMD- 96- 9FS. Washington, D. C.:
October 13, 1995.

Child Support Enforcement:

Child Support Enforcement: Clear Guidance Would Help Ensure Proper Access
to Information and Use of Wage Withholding by Private Firms. GAO- 02- 349,
March 26, 2002.

Child Support Enforcement: Effects of Declining Welfare Caseloads Are
Beginning to Emerge. GAO/ HEHS- 99- 105. Washington, D. C.: June 30, 1999.

Welfare Reform: Child Support an Uncertain Income Supplement for Families
Leaving Welfare. GAO/ HEHS- 98- 168. Washington, D. C.: August 3, 1998.

Child Support Enforcement: Early Results on Comparability of Privatized
and Public Offices. GAO/ HEHS- 97- 4. Washington, D. C.: December 16,
1996.

Child Support Enforcement: Reorienting Management Toward Achieving Better
Program Results. GAO/ HEHS/ GGD- 97- 14. Washington, D. C.: October 25,
1996.

Child Support Enforcement: States* Experience with Private Agencies*
Collection of Support Payments. GAO/ HEHS- 97- 11. Washington, D. C.:
October 23, 1996.

Child Support Enforcement: States and Localities Move to Privatized
Services.

GAO/ HEHS- 96- 43FS. Washington, D. C.: November 20, 1995.

Child Support Enforcement: Opportunity to Reduce Federal and State Costs.
GAO/ THEHS- 95- 181. Washington, D. C.: June 13, 1995.

(450194)

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