Budget and Financial Management: Progress and Agenda for the Future
(Testimony, 04/23/96, GAO/T-AIMD-96-80).

GAO discussed how the federal government could improve its financial
management and budgets. GAO noted that: (1) over the last 6 years, the
government has established a solid framework for improving its financial
management through legislative mandates, an accounting standards
advisory board, and budget process improvements; (2) the budget process
should provide a long-term perspective and link fiscal policy to the
long-term economic outlook; (3) the Administration and Congress need to
make explicit decisions about investment and consumption spending and
identify them within the budget; (4) budget enforcement, accountability,
and transparency need to be enhanced, possibly through a look-back
procedure and particularly in the areas of deficit and mandatory
spending; (5) to enhance budget decisionmaking, agency and
governmentwide financial statements audits should provide accurate and
reliable financial data on actual spending and program performance; (6)
the advisory board has approved eight government accounting standards
addressing such areas as budget integrity, operating performance, and
systems and control and will complete a stewardship standard by the
spring of 1996; (7) the Office of Management and Budget is designing new
financial reports to increase information on actual performance and
long-term financial prospects; and (8) realigning account structures and
selective use of accrual concepts in the budget would link accounting
and budgeting and improve budget and management decisionmaking by
disclosing the full cost of programs and operations.

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

 REPORTNUM:  T-AIMD-96-80
     TITLE:  Budget and Financial Management: Progress and Agenda for 
             the Future
      DATE:  04/23/96
   SUBJECT:  Financial statement audits
             Accountability
             Accrual basis accounting
             Accounting procedures
             Future budget projections
             Cost-based budgeting
             Fiscal policies
             Economic analysis
             Financial management
             Data integrity

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


Before the Subcommittee on Government Management, Information and
Technology, Committee on Government Reform and Oversight, House of
Representatives

For Release on Delivery
Expected at
9:30 a.m.
Tuesday,
April 23, 1996

BUDGET AND FINANCIAL MANAGEMENT -
PROGRESS AND AGENDA FOR THE FUTURE

Statement of Charles A.  Bowsher
Comptroller General of the United States

GAO/T-AIMD-96-80

GAO/AIMD-96-80T


(935202)


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


BUDGET AND FINANCIAL MANAGEMENT: 
PROGRESS AND AGENDA FOR THE FUTURE
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss improvements that should be
made in how the federal government budgets and manages its finances. 
Throughout my tenure, I have stressed the need for fundamental
reforms to ensure that more timely, reliable, and useful information
is available for managing and assessing the government's financial
condition and operating performance.  Such reforms are critical if
our federal government is ever to attain proper accountability over
hundreds of billions of taxpayer dollars and these reforms are
essential prerequisites to achieving broader management reforms. 

I am pleased to say that in the last 6 years a solid framework for
improving financial management finally has been established.  This
base has been laid by (1) the original Chief Financial Officers (CFO)
Act of 1990 and its subsequent expansion through the Government
Management Reform Act of 1994, (2) the creation of the Federal
Accounting Standards Advisory Board (FASAB) in 1990, and (3) efforts
made to improve the budget process through such actions as enactment
of credit reform.  During this period, many professionals involved in
budgeting, accounting, and management reporting have devoted a great
deal of thought and effort to developing a vision for more effective
and understandable financial management reporting for the federal
government. 

Today I will discuss the need to build upon this foundation as well
as outline additional areas for further reforms.  I will begin with
some changes we have suggested to improve the budget process even
within its current basic design; most of these go to the need to
increase the recognition of the long-term implications of budget
decisions and to strengthen accountability.  Then I will turn to the
important set of reforms underway, which would further enhance budget
decision-making as well as broader accountability for the
government's use of and care for taxpayer funds.  Moreover, as the
quality of financial data and of federal reports on costs and
performance improves through implementation of the CFO Act and the
Government Performance and Results Act (GPRA) as well as the
introduction of new accounting concepts and standards, these
enhancements must be more fully integrated into the budget
decision-making process to permit better-informed budget decisions. 

This is not a simple agenda.  Nor will it be accomplished in a year. 
But we have laid a good foundation, and there is reason to expect
continued progress. 


   BUDGET PROCESS:  IDEAS FOR
   IMPROVEMENT
---------------------------------------------------------- Chapter 0:1

Today there is widespread frustration with the budget process.  It is
attacked as confusing, time-consuming, burdensome, and repetitive. 
In addition, the results are often disappointing to both participants
and observers.  Although frustration is nearly universal, there is
less agreement on what specific changes would be appropriate.  This
is not surprising.  It is in the budget debate that the government
determines in which areas it will be involved and how it will
exercise that involvement.  Disagreement about the best process to
reach such important decisions and how to allocate precious resources
is to be expected. 

We have made several proposals based on a good deal of GAO work on
the budget, including the structure of the budget and the budget
process.\1 These proposals emphasize the need to improve the
recognition of the long-term impact of today's budget decisions and
advance steps to strengthen or better ensure accountability. 


--------------------
\1 See Budget Process:  History and Future Directions
(GAO/T-AIMD-95-214, July 13, 1995); Budget Process:  Some Reforms
Offer Promise (GAO/T-AIMD-94-86, March 2, 1994); and Budget Issues: 
Incorporating an Investment Component in the Federal Budget
(GAO/AIMD-94-40, November 9, 1993). 


      FOCUS ON THE LONG TERM
-------------------------------------------------------- Chapter 0:1.1

In previous reports and testimonies, we have said that the nation's
economic future depends in large part upon today's budget and
investment decisions.\2 Therefore, it is important for the budget to
provide a long-term framework and be grounded in a linkage of fiscal
policy with the long-term economic outlook.  This would require a
focus both on overall fiscal policy and on the composition of federal
activity. 

In previous reports, we have cautioned that the objective of
enhancing long-term economic growth through overall fiscal policy is
not well served by a budget process which focuses on the short-term
implications of various spending decisions.  It is important to pay
attention to the long-term overall fiscal policy path, to the
longer-term implications of individual programmatic decisions, and to
the composition of federal spending. 

We have suggested that budget decisions be made within the context of
a chosen long-term fiscal policy path and multiyear enforceable
budget agreements.  Although the multiyear focus of the Budget
Enforcement Act of 1990 (BEA) represents a significant step away from
focusing only on the very short term, planning for longer-range
economic goals requires exploring the implications of budget
decisions well into the future.  By this, we do not mean detailed
budget projections could be made over a 30-year time horizon, but it
is important to recognize that for some programs a long-term
perspective is critical to understanding the fiscal and spending
implications of a decision.  The current 5-year time horizon may work
well for some programs, but for retirement programs, pension
guarantees, and mortgage-related commitments--for example--a
longer-time horizon is necessary. 

Although the surest way of increasing national savings and investment
would be to reduce federal dissaving by eliminating the deficit, the
composition of federal spending also matters.  We have noted that
federal spending can be divided into two broad categories based on
the economic impact of that spending--consumption spending having a
short-term economic impact and investment spending intended to have a
positive effect on long-term private sector economic growth.  We have
argued that the allocation of federal spending between investment and
consumption is important and deserves explicit consideration. 
However, the current budget process does not prompt the executive
branch or the Congress to make explicit decisions about how much
spending should be for long-term investment.  The budget functions
along which the resolution is structured represent one categorization
by "mission," but they are not subdivided into consumption and
investment.  Appropriations subcommittees provide funding by
department and agency in appropriations accounts that do not
distinguish between investment and consumption spending.  In short,
the investment/consumption decision is not one of the organizing
themes for the budget debate. 

We have suggested\3 that an appropriate and practical approach to
supplement the budget's focus on macroeconomic issues would be to
incorporate an investment component within the discretionary caps set
by BEA.  Such an investment component would direct attention to the
trade-offs between consumption and investment but within the overall
fiscal discipline established by the caps.  It would provide
policymakers with a new tool for setting priorities between the long
term and the short term.  Within the declining unified budget deficit
path, a target for investment spending could be established for the
appropriate level of investment to ensure that it is considered
formally in the budget process. 


--------------------
\2 See The Deficit and the Economy:  An Update of Long-term
Simulations (GAO/AIMD/OCE-95- 119, April 26, 1995); Budget Policy: 
Prompt Action Necessary To Avert Long-Term Damage to the Economy
(GAO/OCG-92-2, June 5, 1992); and Budget Policy:  Long-term
Implications of the Deficit (GAO/T-OCG-93-6, March 25, 1993). 

\3 See Budget Structure:  Providing an Investment Focus in the
Federal Budget (GAO/T-AIMD-95-178, June 29, 1995) and Budget Issues: 
Incorporating an Investment Component in the Federal Budget
(GAO/AIMD-94-40, November 9, 1993). 


      ENFORCEMENT, ACCOUNTABILITY,
      AND TRANSPARENCY
-------------------------------------------------------- Chapter 0:1.2

In addition to changes aimed at improving the focus on the long term,
we have continued to emphasize the importance of enforceability,
accountability, and transparency.  We describe these three elements
together because it is difficult to have accountability without an
enforcement mechanism and without transparency to make the process
understandable to those outside it.  Accountability in this context
has several dimensions:  accountability for the full costs of
commitments that are to be made and accountability for actions
taken--which requires targeting enforcement to actions.  In addition,
it may encompass the broader issue of taking responsibility for
responding to unexpected events.  Transparency is important not only
because in a democracy the budget debate should be accessible to the
citizenry but also because without it, there can be little ultimate
accountability to the public. 

In this area, as in others I discuss today, there has been progress. 
For example, enforcement provisions in BEA have worked within their
scope:  the discretionary caps and controls on expanding entitlements
have held.  The design of the law has provided accountability for the
costs of actions taken and for compliance with rules.  However,
accountability for the worse-than-expected deficits in the past has
been diffuse.  For credibility and for success, we need to consider
bringing more responsibility for the results of unforeseen actions
into the system. 

We have previously suggested\4 that Congress might want to consider
introducing a "lookback" into its system of budgetary controls. 
Under such a process, the current Congressional Budget Office (CBO)
deficit projections would be compared to those projected at the time
of a prior deficit reduction agreement and/or the most recent
reconciliation legislation.  For a difference exceeding a
predetermined amount, the Congress would decide explicitly--through a
vote--whether to accept the slippage or to act to bring the deficit
path closer to the original goal by mandating actions to narrow this
gap. 

A similar--but more narrowly focused--process could be used to look
at the path of mandatory spending.\5 Under such a procedure, direct
spending targets for several fiscal years could be specified.  If the
President's budget showed that these targets were exceeded in the
prior year or would likely be exceeded in the current or budget
years, the President would be required to recommend whether none,
some, or all of the overage should be recouped.  The Congress could
be required to vote either on the President's proposal or an
alternative one. 

Neither of these "lookback" processes determine an outcome; both seek
to increase accountability for decisions about the path of federal
spending.  Taken together, the changes we have suggested, which could
be made within the current budget process, would move us toward
increased focus on important decisions and increased accountability
for those decisions.  Also, as discussed below, additional financial
reporting and management reforms underway hold tremendous potential
for helping to improve greatly the quality of information available
to further enhance budget decision-making. 


--------------------
\4 See Budget Process:  Issues Concerning the 1990 Reconciliation Act
(GAO/AIMD-95-3, October 7, 1994) and Budget Process:  History and
Future Directions (GAO/T-AIMD-95-214, July 13, 1995). 

\5 See Budget Policy:  Issues in Capping Mandatory Spending
(GAO/AIMD-94-155 July 18, 1994) and Budget Process:  History and
Future Directions (GAO/T-AIMD-95-214, July 13, 1995). 


   FINANCIAL REPORTING AND
   MANAGEMENT:  THE BASIS FOR
   FUTURE PROGRESS
---------------------------------------------------------- Chapter 0:2

The budget should be formulated using accurate and reliable financial
data on actual spending and program performance.  Audited financial
statements and reports ought to be the source of these data. 
Ideally, we should expect such reports to address (1) the full costs
of achieving program results, (2) the value of what the government
owns and what it owes to others, (3) the government's ability to
satisfy future commitments if current policies were continued, and
(4) the government's ability to detect and correct problems in its
financial systems and controls. 

Unfortunately, financial accounting information to date has not
always been reliable enough to use in federal decision-making or to
provide the requisite public accountability for the use of taxpayers'
money.  Good information on the full costs of federal operations is
frequently absent or extremely difficult to reconstruct and reliable
information on federal assets and liabilities is all too often
lacking.  While GAO has been actively urging improvements in this
area for over 20 years, complete, useful financial reporting is not
yet in place. 

The good news is that tools are now being put in place that promise
to get the federal government's financial house in order.  First,
beginning for fiscal year 1996, all major agencies, covering about 99
percent of the government's outlays, are required to prepare annually
financial statements and have them audited.  Second, an audited
governmentwide financial statement is required to be produced every
year starting with fiscal year 1997.  Third, FASAB is recommending
new federal accounting standards that will yield more useful and
relevant financial statements and information. 

The basis for much of this progress is the CFO Act's requirements for
annual financial statement audits.  Audits for a select group of
agencies under the Act's original pilot program highlighted problems
of uncollected revenues and billions of dollars of unrecognized
liabilities and potential losses from such programs as housing loans,
veterans compensation and pension benefits, and hazardous waste
cleanup.  Such audits are bringing important discipline to agencies'
financial management and control systems.  Thanks to the benefits
achieved from these pilot audits, the Congress extended this
requirement, in the 1994 Government Management Reform Act, to the
government's 24 major departments and agencies. 

That act also mandated an annual consolidated set of governmentwide
financial statements--to be audited by GAO--starting for fiscal year
1997.  These statements will provide an overview of the government's
overall costs of operations, a balance sheet showing the government's
assets and liabilities, and information on its contribution to
long-term economic growth and the potential future costs of current
policies.  These reports will provide policymakers and the public
valuable information to assess the sustainability of federal
commitments. 

The CFO Act also went beyond these auditing and reporting
requirements to spell out an agenda of other long overdue reforms. 
It established a CFO structure in 24 major agencies and the Office of
Management and Budget (OMB) to provide the necessary leadership and
focus.  It also set expectations for

  -- the deployment of modern systems to replace existing antiquated,
     often manual, processes;

  -- the development of better performance and cost measures; and

  -- the design of results-oriented reports on the government's
     financial condition and operating performance by integrating
     budget, accounting, and program information. 

I have testified before the Congress many times about the benefits
being achieved as the CFO Act reforms are implemented.\6 Moreover,
agency efforts to implement GPRA and the new accounting standards
recommended by FASAB will further enhance the usefulness of
accountability reporting to decisionmakers by integrating performance
measures into the reports and developing reports more specifically
tailored to the government's needs. 


--------------------
\6 For additional discussion of the benefits being derived from the
CFO Act and the challenges remaining to be addressed, see Financial
Management:  Continued Momentum Essential to Achieve CFO Act Goals
(GAO/T-AIMD-96-10, December 14, 1995) and Managing for Results: 
Strengthening Financial and Budgetary Reporting (GAO/T-AIMD-95-181,
July 11, 1995). 


      FASAB EFFORTS
-------------------------------------------------------- Chapter 0:2.1

The creation of FASAB was the culmination of many years of effort to
achieve a cooperative working relationship between the three
principal agencies responsible for overall federal financial
management--OMB, Treasury, and GAO.  Its establishment represents a
major stride forward because financial management can only improve if
these principal agencies involved in setting standards, reporting,
and auditing work together.  As you know, FASAB was established in
October 1990 by the Secretary of the Treasury, the Director of OMB,
and me to consider and recommend accounting principles for the
federal government.  The 9-member board is comprised of
representatives from the three principals, CBO, the Department of
Defense, one civilian agency (presently Energy), and three
representatives from the private sector, including the Chairman,
former Comptroller General Elmer B.  Staats.  FASAB recommends
accounting standards after considering the financial and budgetary
information needs of the Congress, executive agencies, other users of
federal financial information and comments from the public.  OMB,
Treasury, and GAO then decide whether to adopt the recommended
standards; if they do, the standards are published by GAO and OMB and
become effective. 

FASAB will soon complete the federal government's first set of
comprehensive accounting standards developed under this consensus
approach.  Key to the FASAB approach for developing these standards
was extensive consultation with users of financial statements early
in its deliberations to ensure that the standards will result in
statements that are relevant to both the budget process as well as
agencies' accountability for resources.  Users were interested in
getting answers to questions on such topics as: 

  -- Budgetary integrity--What legal authority was provided to
     finance government activities and was it used correctly? 

  -- Operating performance--How much do programs cost and how were
     they financed?  What was achieved?  What are the government's
     assets and are they well managed?  What are its liabilities and
     how will they be paid for? 

  -- Stewardship--Has the government's overall financial capacity to
     satisfy current and future needs and costs improved or
     deteriorated?  What are its future commitments and are they
     being provided for?  How will the government's programs affect
     the future growth potential of the economy? 

  -- Systems and control--Does the government have sufficient
     controls over its programs so that it can detect and correct
     problems? 

The FASAB principals have approved eight basic standards and
statements, which I will refer to as FASAB standards in my testimony
today, and approval of the final one for revenue accounting is
expected this spring.  This will complete the body of basic
accounting and cost accounting standards for all federal agencies to
use in preparing financial reports and developing meaningful cost
information.  The basic standards and statements are: 

  -- Objectives of Federal Financial Reporting--A statement of
     general concepts on the objectives of financial reporting by the
     U.S.  government providing the basic framework for the Board's
     work. 

  -- Entity and Display--A statement of general concepts on how to
     define federal financial reporting entities and what kinds of
     financial statements those entities should prepare. 

  -- Managerial Cost Accounting Concepts and Standards--A statement
     of general concepts combined with a statement of specific
     standards emphasizing the need to relate cost information with
     budget and financial information to provide better information
     for resource allocation and performance measurement. 

  -- Accounting for Selected Assets and Liabilities--A statement of
     specific standards for accounting for basic items such as cash,
     accounts receivable, and accounts payable. 

  -- Accounting for Direct Loans and Loan Guarantees--A statement of
     accounting standards responding to the Credit Reform Act of
     1990. 

  -- Accounting for Inventory and Related Property--A statement of
     standards for accounting for inventories, stockpiled materials,
     seized and forfeited assets, foreclosed property, and goods held
     under price support programs. 

  -- Accounting for Liabilities of the Federal Government--A
     statement of standards for federal insurance and guarantee
     programs, pensions and post-retirement health care for federal
     workers, and other liabilities, including contingent
     liabilities. 

  -- Accounting for Property, Plant and Equipment--A statement of
     standards for accounting for the various types of property
     (including heritage assets), plant and equipment held by the
     government. 

  -- Accounting for Revenue and Other Financing Sources--A statement
     of standards for accounting for inflows of resources (whether
     earned, demanded, or donated) and other financing sources. 

A standard for stewardship reporting is also scheduled for completion
this spring.  While not part of the package of basic standards, it
will help inform decisionmakers about the magnitude of federal
resources and financial responsibilities and the federal stewardship
role over them. 

The standards and new reports are being phased in over time.  Some
are effective now; all that have been issued will be effective for
fiscal year 1998.  OMB defines the form and content of agency
financial statements in periodic bulletins to agency heads.  The most
recent guidance incorporates FASAB standards for selected assets and
liabilities, credit programs, and inventory.  In the fall, OMB will
be issuing new guidance reflecting the rest of the FASAB standards. 

Since the enactment of the CFO Act, OMB's form and content guidance
has stressed the use of narrative "Overview" sections preceding the
basic financial statements as the best way for agencies to relate
mission goals and program performance measures to financial
resources.  Each financial statement includes an Overview describing
the agency, its mission, activities, accomplishments, and overall
financial results and condition.  It also should discuss what, if
anything, needs to be done to improve either program or financial
performance, including an identification of programs or activities
that may need significant future funding.  OMB also requires that
agency financial statements include a balance sheet, a statement of
operations, and a statement reconciling expenses reported on the
statement of operations to related amounts presented in budget
execution reports. 

Based on FASAB's standards, OMB is making efforts to design new
financial reports that contain performance measures and budget data
to provide a much needed, additional perspective on the government's
actual performance and its long-term financial prospects.  Financial
reports based on FASAB's standards will provide valuable information
to help sort out various kinds of long-term claims.  The standards
envision new reports on a broad range of liabilities and
liability-like commitments and assets and asset-like spending. 
Liabilities, such as the federal debt, would be reported on a balance
sheet, along with assets owned by federal agencies, like buildings. 

Stewardship reporting in the financial statements, a new concept
developed by FASAB, will report on potential future claims that
represent commitments of the government that are not sufficiently
firm to warrant recognition as liabilities on the balance sheet. 
FASAB is still considering what types of estimates would be most
useful if stewardship reporting is applied to social insurance.  To
give a picture of the government's capacity to sustain current public
services, stewardship reporting will also include 6-year projections
of receipt and outlay data for all programs based on data submitted
for the President's budget. 

Stewardship reports based on FASAB standards would also provide
information on federal investments intended to have future benefits
for the nation, thus providing actual data on the budget's investment
component that GAO has recommended and which I discussed earlier. 
Stewardship reporting would cover federal investments and some
performance information for programs intended to improve the nation's
infrastructure, research and development, and human capital due to
their potential contribution to the long-term productive capacity of
the economy.  These kinds of activities would not be reflected on the
balance sheet because they are not assets owned by the federal
government but rather programs and subsidies provided to state and
local governments and the private sector for broader public purposes. 
Stewardship reporting recognizes that, although these investments
lack the traditional attributes of assets, such programs warrant
special analysis due to their potential impact on the nation's
long-term future. 

Linking costs to the reported performance levels is the next
challenge.  FASAB's cost accounting standards--the first set of
standards to account for costs of federal government programs--will
require agencies to develop measures of the full costs of carrying
out a mission or producing products or services.  Thus, when
implemented, decisionmakers would have information on the costs of
all resources used and the cost of support services provided by
others to support activities or programs--and could compare these
costs to various levels of program performance. 

Perseverance will be required to sustain the current momentum in
improving financial management and to successfully overcome decades
of serious neglect in fundamental financial management operations and
reporting methods.  Implementing FASAB standards will not be easy. 
FASAB has allowed lead time for implementing the standards so that
they can be incorporated into agencies' systems.  Nevertheless, even
with this lead time, agencies may have difficulty in meeting the
schedule.  It is critical that the Congress and the executive branch
work together to make implementation successful. 

As the federal government continues to improve its accountability and
reporting of costs and performance, the more useful and reliable data
need to be used to influence decisions.  That brings me to the task
of better integrating financial data and reports into the budget
decision-making process. 


   MAKING BETTER INFORMED BUDGET
   DECISIONS BASED ON IMPROVED
   FINANCIAL DATA AND REPORTS
---------------------------------------------------------- Chapter 0:3

The ultimate goal of more reliable and relevant financial data is to
promote more informed decision-making.  For this to happen, the
financial data must be understood and used by program managers and
budget decisionmakers.  The changes underway to financial reporting
have been undertaken with a goal of making financial data more
accessible to these decisionmakers.  The budget community's
involvement in the FASAB standard-setting process has contributed to
this.  Still, the future challenge remains to further integrate
financial reports with the budget to enhance the quality and richness
of the data considered in budget deliberations.  Improving the
linkages between accounting and budgeting also calls for considering
certain changes in budgeting such as realigned account structures and
the selective use of accrual concepts. 

The chief benefit of improving this linkage will be the increased
reliability of the data on which we base our management and budgetary
decisions.  The new financial reports will improve the reliability of
the budget numbers undergirding decisions.  Budgeting is a
forward-looking enterprise, but it can clearly benefit from better
information on actual expenditures and revenue collection.  Under
FASAB standards, numbers from the budget will be included in basic
financial statements and thus will be audited for the first time. 
Having these numbers audited was one of the foremost desires of
budget decisionmakers consulted in FASAB's user needs study and stems
from their suspicion that the unaudited numbers may not always be
correct. 

The new financial reports will also offer new perspectives and data
on the full costs of program outputs and agency operations that are
currently not reported in the cash-based budget.  Information on full
costs generated pursuant to the new FASAB standards would provide
decisionmakers a more complete picture of actual past program costs
and performance when they are considering the appropriate level of
future funding.  For example, the costs of providing Medicare are
spread among at least three budget accounts.  Financial reports would
pull all the relevant costs together. 


      REALIGNING ACCOUNT
      STRUCTURES
-------------------------------------------------------- Chapter 0:3.1

The different account structures that are used for budget and
financial reporting are a continuing obstacle to using these reports
together and may prevent decisionmakers from fully benefiting from
the information in financial statements.  Unlike financial reporting,
which is striving to apply the full cost concept when reporting
costs, the budget account structure is not based on a single unifying
theme or concept.  The current budget account structure evolved over
time in response to specific needs.\7

The budget contains over 1,300 accounts.  They are not equal in size;
nearly 80 percent of the government's resources are clustered in less
than 5 percent of the accounts.  Some accounts are organized by the
type of spending (such as personnel compensation or equipment) while
others are organized by programs.  Accounts also vary in their
coverage of cost, with some including both program and operating
spending while others separate salaries and expenses from program
subsidies.  Or, a given account may include multiple programs and
activities. 

When budget account structures are not aligned with the structures
used in financial reporting, additional analyses or crosswalks would
be needed so that the financial data could be considered in making
budget decisions.  If the Congress and the executive branch reexamine
the budget account structure, the question of trying to achieve a
better congruence between budget accounts and the accounting system
structure, which is tied to performance results, should be
considered. 


--------------------
\7 For further discussion, see Budget Account Structure:  A
Descriptive Overview (GAO/AIMD-95-179, September 18, 1995). 


      THE SELECTIVE USE OF ACCRUAL
      CONCEPTS IN THE BUDGET
-------------------------------------------------------- Chapter 0:3.2

In addition to providing a new, full cost perspective for programs
and activities, financial reporting has prompted improved ways of
thinking about costs in the budget.  For the most part, the budget
uses the cash basis, which recognizes transactions when cash is paid
or received.  Financial reporting uses the accrual basis, which
recognizes transactions when commitments are made, regardless of when
the cash flows. 

Cash-based budgeting is generally the best measure to reflect the
short-term economic impact of fiscal policy as well as the current
borrowing needs of the federal government.  And for many
transactions, such as salaries, costs recorded on a cash basis do not
differ appreciably from accrual. 

However, for a select number of programs, cash-based budgeting does
not adequately reflect the future costs of the government's
commitments or provide appropriate signals on emerging problems.  For
these programs, accrual-based reporting may improve budgetary
decision-making.  The accrual approach records the full cost to the
government of a decision--whether to be paid now or in the future. 
As a result, it prompts decisionmakers to recognize the cost
consequences of commitments made today. 

Accrual budgeting is being done under the Credit Reform Act for
credit programs such as the federal family education loan program and
the rural electrification and telephone direct loan program.  It may
be appropriate to extend its use to other programs such as federal
insurance programs--an issue we are currently studying at the request
of the Chairman, House Budget Committee.  Our work to date has
revealed shortcomings with cash-based budgeting for insurance
programs, but also highlighted difficulties in estimating future
costs for some of them due to the lack of adequate data or to
sensitivity to the assumptions used to model future costs.  The
potential distortions arising from the cash-based approach must be
weighed against the risks and uncertainties involved in estimating
longer-term accrued costs for some programs.  Our upcoming report on
budgeting for insurance will address these issues. 

Small changes in the right direction are important, but to make the
kind of difference we are all seeking will require pulling all this
together for budget and oversight. 


   PUTTING IT ALL TOGETHER AND
   MAKING IT WORK
---------------------------------------------------------- Chapter 0:4

Thanks in large part to the legislative impetus of the CFO Act and
GPRA, decisionmakers will ultimately have available unprecedented,
reliable information on both the financial condition of programs and
operations as well as the performance and costs of these activities. 
While these initiatives carry great potential, they require continued
support by the agencies and the Congress. 

GPRA set forth the major steps federal agencies need to take towards
a results-oriented management approach.  They are to (1) develop a
strategic plan, (2) establish performance measures focused on
"outcomes" or results expressed in terms of the real difference
federal programs make in people's lives and use them to monitor
progress in meeting strategic goals, and (3) link performance
information to resource requirements through annual performance
plans. 

I have supported the intent of GPRA and believe that it offers great
potential for enhancing decision-making and improving the management
of federal programs.  A growing number of federal agencies is
beginning to see that a focus on outcomes can lead to dramatic
improvements in effectiveness.  However, our work also has shown that
a fundamental shift in focus to include outcomes does not come
quickly or easily.\8 The early experiences of many GPRA pilots show
that outcomes can be very difficult to define and measure.  They also
found that a focus on outcomes can require major changes in the
services that agencies provide and processes they use to provide
those services. 

Given that the changes envisioned by GPRA do not come quickly or
easily, strong and sustained congressional attention to GPRA
implementation is critical.  Without it, congressional and executive
branch decisionmakers may not obtain the information they need as
they seek to create a government that is more effective, efficient,
and streamlined.  Authorization, appropriation, budget, and oversight
committees all have key interests in ensuring that GPRA is successful
because, once fully implemented, it should provide valuable data to
help inform the decisions that each committee must make. 

OMB has attempted to prompt progress by giving special emphasis in
its budget submission guidance to increasing the use of information
on program performance in budget justifications.  In preparation for
the fiscal year 1997 budget cycle, OMB held performance reviews last
May with agencies on performance measures and in September 1995
issued guidance on preparing and submitting strategic plans.  Further
progress in implementing GPRA will occur as performance measures
become more widespread and agencies begin to use audited financial
information in the budget process to validate and assess agency
performance. 

GAO, OMB, and the CFO Council have also given thought as to how to
best report data and information to decisionmakers.  While there are
a myriad of legislatively mandated reporting requirements under
separate laws, such as GPRA, the Federal Managers' Financial
Integrity Act, the CFO Act, and the Prompt Pay Act, decisionmakers
need a single report relating performance measures, costs, and the
budget.  This reporting approach is consistent with the CFO Council's
proposal for an Accountability Report, which OMB is pursuing. 

On a pilot basis, OMB is having six agencies\9 produce Accountability
Reports providing a comprehensive picture of each agency's
performance pursuant to its stated goals and objectives.  The
ultimate usefulness of the Accountability Report will hinge on its
specific content and the reliability of information presented.  We
will work with OMB and agencies throughout the pilot program.  We
agree with the overall streamlined reporting concept and believe
that, to be most useful, the Accountability Report must include an
agency's financial statements and related audit reports. 

Accountability reports could then be used as the basis for annual
oversight hearings, something I have long advocated.  Such serious
scrutiny of programs and activities is especially important as we
seek to reduce the deficit.  Oversight hearings based on complete
sets of reports could be the basis for considering changes in federal
roles and in program design as well as reviewing the adequacy of
agencies' accountability and performance. 

Finding the most effective reporting and analytical approaches will
require a great deal of collaboration and communication. 
Appropriations, budget, and authorizing committees need to be full
partners in supporting the implementation of these initiatives.  The
new financial reports based on FASAB's recommended standards will
provide much-needed additional perspective on the long-term prospects
for government programs and finances.  It can be used with other
kinds of actuarial and economic analyses already available in making
budget decisions. 


--------------------
\8 Managing For Results:  Achieving GPRA's Objectives Requires Strong
Congressional Role (GAO/T-GGD-96-79, March 6, 1996). 

\9 The six pilot agencies are the Departments of the Treasury and
Veterans Affairs; the General Services, Social Security, and National
Aeronautics and Space Administrations; and the Nuclear Regulatory
Commission. 


   CONCLUSION
---------------------------------------------------------- Chapter 0:5

In conclusion, reforms are needed on three fronts--in the budget
process, in accountability and reporting for costs and performance,
and in using the improved reports to better inform policy and budget
decisions.  Improved financial management and reports are essential
to improving the government's ability to provide accountability for
public resources.  Continuing fiscal pressures will place a premium
on the proper stewardship of increasingly scarce public resources. 
Recent efforts to improve federal financial reporting will, if
properly implemented, provide the tools needed to redress
long-standing weaknesses. 

Improved financial reports and data should also better help
policymakers sort out competing claims in the budget process. 
Improved financial data on the current and future stakes involved in
our decisions may help policymakers make decisions focused more on
the long-term consequences.  The public also stands to gain from
these initiatives, both from improved accountability for public
resources and more informed decisions. 


-------------------------------------------------------- Chapter 0:5.1

Mr.  Chairman, this concludes my statement.  I would be happy to
respond to questions. 

*** End of document. ***