59

* have developed a shared, government-wide vision for
financial management, and goals and strategies for achieving

this vision.

The CFO Council's Human Resources Committee published a
document entitled The CFos Role in strengthening Financial
Management at the Component Organizational Level, It identifies
ways that CFOs can strengthen the relationships between

headquarters and financial and program personnel in the field.

The strength of a CFO organization can be measured by the
quality of the personnel it employs. In order to strengthen the
quality of financial management personnel, a variety of training
and continuing professional development programs have been

established by the CFOs community.

In May 1995, the CFO Council established priorities for the
upcoming year consistent with their vision statement goals, and
strategies. The 1995 Financial Management Status Report and Five
Year Plan, required by the CFOs Act, will address the status and

plans for each of these priorities.

18


123

Now, they seem to think that was very rapid. I think this under-
lines my point about their timeframe and mine are very different.
I think we need to move very quickly in developing the information
and so forth.

Also, one final comment. The use of accrual methods in account-
ing are very important. And they’re recommending—the previous
panel recommended selected use of accrual throughout the report.
This has been recommended many, many times, as you are well
aware of, through the last 25 or 30 years, by various commissions
and boards and so forth.

Mr. Horn. I think the Hoover Commission did it in 1949.

Mr. Fox. Exactly, exactly. And it’s been recommended—almost
every major commission has recommended that we move in that di-
rection. We are moving in that direction with Title V of the Con-
gressional Budget Act, which requires credit transactions, loans, be
accrued for. We need to use this on a broad array of transactions.

And if you look at my annual report, you'll notice that there are
a number of categories on page 44 and 45—liabilities and potential
liabilities. We need to use accrual accounting for all of these. And
the fact that the General Accounting Office has recommended it be
used for loans, and now beginning to consider their use for a couple
other areas, I would strongly recommend that we look at these
other areas, for instance, in terms of pensions, also means tested
benefits, insurance programs.

Mr. Horn. For the reader of this transcript, who is not likely to
understand the concepts of accrual accounting——

Mr. Fox. Yes.

Mr. Horn [continuing]. Explain how either accrual or regular ac-
counting can be misleading in terms of the figures that are used.
Give us some examples.

Mr. Fox. OK. Regular cash accounting, you're just keeping track
of the dollars as they come in and out. In accrual accounting, you're
basically saying—when I ran my own business, my accountant
said, you should be accruing for sick leave for your employees be-
cause eventually, you're going to have to pay for that. So he made
me set aside each month dollars in an account for the sick leave,
as my employees began to accumulate it.

And I think that’s important. You need to plan for the future,
and show that you actually recognize an expenditure that you may
have to make in the future. And that’s what accrual accounting is
all about, is saying, well, someday we're going to have to write a
check for a certain amount to an individual, and we should plan
for that.

Mr. Horn. Let’s take the small firm example you started with.
Could you use accrual accounting on such obvious monthly pay-
ments as the rent?

Mr. Fox. Exactly.

Mr. Horn. OK. So everything that you can anticipate, you should
have some way to fund it.

Mr. Fox. Exactly, exactly. And my argument is, you can antici-
pate almost everything. I mean, ma: be Tf take an extreme position
there, but it seems like in most all these categories that have been
identified—and I'd like to point out that in our annual report, we’re
using data that’s been provided by the Federal Government or up-


25

examples of claims or costs that will encumber future budgets for
years to come. Decisionmakers need to consider these potential
future costs in their current decisions but also need a framework
to sort out the claims based on the strength of the underlying

commitment and the reliability of the accompanying estimates.

Although cash may be a misleading indicator of the long-term
costs for some of these programs, the long-term costs are
typically too uncertain to be booked directly into the budget.
Accrual-based cost estimates for them are sensitive to yearly
changes in economic and demographic assumptions which can lead to
large differences in the present value number used to book future
costs. Moreover, the nature of the federal commitment for these
kinds of payments generally represents an expectation for the
continuation of current programs or benefits. The Congress is
not legally bound to continue such commitments. As we have seen

this year, government commitments can change.

Policymakers, nevertheless, need to be aware of these costs
through understandable supplemental financial data that projects
future costs under a range of different assumptions or scenarios.
Such information enables early action to be taken to contain or

reduce these costs before problems reach crisis proportions.

For example, some programs, such as Social Security and Medicare,

Pose very large potential future claims on resources. Because of

14


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
WILLIAM F, CLINGER, JR., Pennaylvania, Chairman

BENJAMIN A. GILMAN, New York CARDISS COLLINS, Illinois

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. DENNIS HASTERT, Ilinois TOM LANTOS, California

CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, JR., West Virginia

CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York

STEVEN SCHIFF, New Mexico EDOLPHUS TOWNS, New York

ILEANA ROS-LEHTINEN, Florida JOHN M. SPRATT, Jr., South Carolina

WILLIAM H. ZELIFF, JR, New Hampshire LOUISE McINTOSH SLAUGHTER, New

JOHN M. McHUGH, New York York

STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania

JOHN L. MICA, Florida GARY A. CONDIT, California

PETER BLUTE, Massachusetts COLLIN C. PETERSON, Minnesota

THOMAS M. DAVIS, Virginia KAREN L. THURMAN, Florida

DAVID M. MCINTOSH, Indiana CAROLYN B. MALONEY, New York

JON D. FOX, Pennsylvania THOMAS M. BARRETT, Wisconsin

RANDY TATE, Washington GENE TAYLOR, Mississippi

DICK CHRYSLER, Michigan BARBARA-ROSE COLLINS, Mic!

GIL GUTKNECHT, Minnesota ELEANOR HOLMES NORTON, District of

MARK E. SOUDER, Indiana Columbia

WILLIAM J. MARTINI, New Jersey JAMES P. MORAN, Virginia

JOE SCARBOROUGH, Florida GENE GREEN, Texas

JOHN B. SHADEGG, Arizona CARRIE P. MEEK, Florida

MICHAEL PATRICK FLANAGAN, Illinois = FRANK MASCARA, Pennsylvania

CHARLES F. BASS, New Hampshire CHAKA FATTAH, Pennsylvania

STEVEN C. LATOURETTE, Ohio ——

MARSHALL “MARK” SANFORD, South BERNARD SANDERS, Vermont
Carolina (Independent)

ROBERT L. EHRLICH, JR., Maryland

James L. CLARKE, Staff Director
KEVIN SABO, General Counsel
JupITH McCoy, Chief Clerk
Bup MYERS, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman
MICHAEL PATRICK FLANAGAN, Illinois = CAROLYN B. MALONEY, New York

PETER BLUTE, Massachusetts MAJOR R. OWENS, New York
THOMAS ©TM. DAVIS, Virgii FRANK MASCARA, Pennsylvania
JON D. FOX, Pennsylvania ROBERT E. WISE, JR., West Virgini:
RANDY TATE, Washington JOHN M. SPRATT, JR., South Carolina
JOE SCARBOROUGH, Florida PAUL E. KANJORSKI, Pennsylvania
CHARLES F. BASS, New Hampshire

EX OFFICIO

WILLIAM F. CLINGER, JR., Pennsylvania CARDISS COLLINS, Minois
J. RUSSELL GEORGE, Staff Director
MARK BRASHER, Professional Staff Member
ANDREW G. RICHARDSON, Clerk
CHERYL PHELPS, Minority Professional Staff

ap


119

Mr. Horn. We're going to have to recess for about 10 minutes.
There’s a vote on the floor, and we will return. So at 4:35 p.m.,
roughly, we're recessing. Let’s hope we can make it by 4:45 p.m.

[Recess.]

Mr. Horn. The hearing will resume. Let me ask you, gentlemen,
you heard the testimony of the officials from the General Account-
ing Office and the Office of Management and Budget, which pre-
ceded you. You mentioned a little bit of your reaction, but I'd like
a fuller view for the record of your reaction to their testimony. And
given what you're trying to do to present the holistic picture of not
only financial transactions, but the implications of what it means.

And obviously, they haven’t really touched on the areas both of
you have testified. What’s your reaction to what you heard?

Mr. BRECHT. I’m reminded of the Russian missile gap. They came
in and basically said, things are a mess but things will get better
in the future; it’s just going to take a long time. That was one of
the impressions I had. Another one was that accounting for Gov-
ernment operations is different.

Mr. Horn. Do you agree with that statement?

Mr. BRECHT. Well, absolutely, I do. And at the same time, I be-
lieve that the business community has some tried and true ac-
counting principles, methodologies, and probably more important,
ways of thinking about how to allocate capital, which I believe
needs to go above and lay on top of any accounting principles. We
don’t need to reinvent the wheel for the Government. We really
have a very, very strong place to start.

Mr. Horn. You heard my discussion with regard to the trans-
action and taxation.

Mr. BRECHT. Yes, I’m with you. I was having the same difficulty
as you were, not understanding what Mr. Chapin was saying, but
why he was using that as an excuse why not to book revenues or
think about things ——

Mr. Horn. Right. Treat taxation exactly as a business treats in-
come and revenues.

Mr. BRECHT. Well, in my report I suggest that we might even
want to at least, conceptually. It may not work out entirely prac-
tically in all ways. But conceptually, imagine that indeed the Fed-
eral Government is delivering products and services for a fee. Citi-
zens pay the cost of those goods and services, hopefully——

Mr. Horn. I think it was Oliver Wendell Holmes that said,
“taxes are the price of civilization.”

Mr. BRECHT. Well, and again, the orientation that, if we’re going
to pay these taxes, what value are we receiving? We have to have
some way to communicate that with to the citizens, as the Govern-
ment, so that we don’t have a situation like we have now, where
there’s just lots of negativity out there. We’re always blaming Gov-
ernment for something or another. And Government does a lot of
things well.

It can improve in a lot of areas, but people want to know what
they're getting for their money.

Mr. Horn. Right. Now, you mentioned the capital allocation proc-
ess.

Mr. BREcuT. I had one other point, in terms of what I took away
from the testimony.


68

his 14th year of his 15-year term, and has been advocating audited
financial data for all that period of time.

Additionally, when we finally did get legislation passed—to just
tell you the mood of the Congress at the time—in 1990, when the
CFO Act was passed, audited financial statements for departments
were only put in place on a pilot program. And there was to be a
study done, which OMB did, Nooking at the cost and benefits as to
whether or not it made sense in the Federal Government environ-
ment to have financial statements and to have them audited on a
regular basis.

io this has been slow going. We have been astounded ourselves
over the years as to why we couldn’t get this in place. I think we're
finally over the wrangling about whether or not this is a good man-
agement practice for the Federal Government to be in. There’s a
firm commitment on the part of the administration to go forward
in this area, which is something we have not seen in the past, over
the 20 years I’ve been with the General Accounting Office.

I do think we're going to get there, but it’s going to take a lot
of commitment. And I think the Congress can do its part.

Mrs. MALONEY. When are we going to get there?

Mr. Doparo. Well, the requirements kick in for fiscal year 1996.
We do have a significant greater portion of the Federal expenses
under audit now than we’ve had historically. We have over half the
budget under financial audit now, in preparing statements. By fis-
cal year 1996, the law calls for all—virtually all Federal outlays for
the 24 major agencies to be under financial statements, and to
have those statements be audited.

The Governmentwide financial statements are due in fiscal year
1997. So that’s the timetable set up by the legislation. Ed might
want to speak to the administration’s plan in that area.

Mrs. MALONEY. Could I ask, in the framework of a system that’s
worked very well in New York, called the Integrated Information
System, and really it literally, in one office, you can get all this in-
formation about all of the 25 different agencies in the city. It seems
to me that you still have it decentralized. You have each agency ac-
counting for it, and then you send it over to Treasury and they
compile everything. Is that how it works?

Mr. DESEVE. You pose a very good question. I’m also from a
State and local government background. I worked in a couple of
cities in California, one in New York, as an advisor, and several
States as an advisor. The tradition in the Federal Government, the
history in the Federal Government is the 24 major operating de-
partments have stand-alone responsibility. They have what we
would call profit and loss responsibility.

And the strategy that was used in 1990, under the CFO Act, was
to start with the basic, simple idea that they should account for
their own information, rather than taking the $1.5 trillion budget
and centralizing it in one accounting system. Each agency should
be a tub that stood on its own bottom.

Mrs. MALONEY. But isn’t that more complicated? Wouldn’t it be
better to be uniform?

Mr. DESEVE. You and I may not disagree. I’m trying to give you
kind of a history.

Mrs. MALONEY. OK.


79

Mr. FLANAGAN. Well, that is encouraging, and I’m glad you clari-
fied that for me. Because the thought of turning HUD or DOD or
IRS loose and saying, “why don’t you tell us how well you’ve done
this year,” is kind of scary. I’m glad that we’re moving on our way
to standardization. I appreciate the difficulty of trying to juggle
$1.5 trillion, give or take a couple of hundred billion, and accom-
plish this at the same time.

Tm sufficiently sympathetic, but I’m still, nevertheless, appalled
that we've come to the point where we're finally bringing in ledger
sheets. We’re now beginning to talk about how much money we
have and how much we can spend. I mean, I will sit on the floor
and I will argue for an hour and a half about a $2 million rifle
range in Tennessee. And, if we're to believe Mr. Chapin—and I
have no reason not to—we don’t know if it’s built.

We don’t care if it’s built. And, when it’s not built, we won’t find
out about it for a couple of years. But I will have burned an hour
of the people’s time, and God knows how much effort, over discuss-
ing it. I am suitably appalled. I would like a candid answer from
any of you as to, in these individual a la carte appropriations that
we have a tendency to do on the floor, how much of that resonates
anywhere?

mean, how much of this stuff is nonsense and are we wasting
our time, or does it actually ever echo down somewhere, and some-
body one day will hopefully be able to point to a rifle range or a
weapons system, or a warehouse full of material that the Air Force
may or may not have here or there? I’m just picking on DOD, be-
cause it seems to be the Department du jour today.

How much of my time is wasted? Feel free to answer as frankly
as you like.

Mr. CHaPIN. I'll try to add something to your understanding of
this. The services maintain stoutly that they have adequate unit
records. In other words, they claim that they know where their
tanks are, how many they have, what condition they’re in. And al-
though we found some problems, the unit accounting was better
than the dollar accounting. And the reason is that the unit ac-
counting is based on logistics records. The dollar accounting has al-
ways been done sort of on the side. The systems weren't tied to-

ether. So when you moved a tank from here to there, you might

ave been able to track it, in terms of its existence; but if you sold
it or you lost it, the dollar accounting didn’t necessarily get done.
So we have a disconnect here between the accounting systems and
the operating systems.

Now, businesses don’t operate that way, because businesses care
about the dollars. They live and die by the dollars. But the services
live and die by readiness, and readiness has always been the focal
point of their function. And everyone would agree that that should

e done. But we don’t agree that you can’t do the dollar accounting,
too. And so that’s the way it’s been; that’s the way it’s developed.

The whole emphasis has been on unit records and readiness and
so on. Unfortunately, when the services come to Congress, they
have to present some dollar information. And frequently, that is
created out of the kinds of records I described before, which are not
necessarily accurate. So when you get reports on—you get SARS
reports, for example. SARS are weapons systems reports that


15

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) government's ability to detect and correct problems in

its financial systems and controls.

FINANCIAL REPORTING AND MANAGEMENT: A WORK IN PROGRESS

I wish I could report to you today that current budgetary and
financial reporting give us all the tools we need to address
these critical questions. But I cannot. Financial accounting
information in particular has not been reliable enough to use in
federal decision-making or to provide the requisite public
accountability for the use of taxpayers’ money. Also, good
information on the full costs of federal operations is frequently
absent or extremely difficult to reconstruct. In addition,

complete, useful financial reporting is not yet in place.

Significant problems have been revealed in agencies' financial
management and accountability systems. For example, financial
statement audits have identified hundreds of billions of dollars
in accounting errors, mistakes and omissions that can render
information provided to the Congress and managers virtually
useless. Audits also have identified fraudulent payments and
ghost employees at the Department of Defense as well as duplicate

payments made to contractors. Moreover, audits are beginning to


128

Mr. Fox. I think the solution to that is Lyle’s capital allocation
argument. You let the States collect what they need, and then if
you feel that there is a need for additional miles of road in Mon-
tana, South Dakota or wherever, you allocate capital to that State
rather than skew the formulas around trying to make people happy
one way or the other. It seems to me that capital budgeting, as
practiced by State and local governments, as you pointed out, ought
to be at least looked at in great detail and perhaps even tried in
the Federal Government level.

But I think a lot of the development and so forth could be done
by State and local governments themselves. So you might not have
a whole lot of capital to worry about, in terms of are you going to
use a separate capital budgeting concept, or are you going to inte-
grate it into your current budget. Those are questions that you'd

ave to look at in terms of the extensiveness of the capital that
you're actually—if you have the current system and you have quite
a bit of capital spending, it would probal y—and you would have
tremendous arguments within Congress of what capital spending
should be.

Should it be education spending; should it be other kinds of so-
cial program spending? It would be very divisive. And it would be
a tough battle to face, and it might change from year to year, from
Congress to Congress, depending on——

Mr. Horn. Well, it’s also subject to manipulation.

Mr. Fox. Exactly.

Mr. Horn. In the sense that if you want to get a number of pro-
grams going off budget, you simply say, gee, this is a capital budget
expenditure.

Mr. Fox. That’s right.

Mr. Horn. And people in sincerity can make a good argument,
and you cited one in education.

Mr. Fox. That’s right. ’'m agains-—

Mr. Horn. One of the greatest bills of this century is the GI bill.

Mr. Fox. Exactly.

Mr. Horn. It was done for economic stabilization, not for edu-
cation.

Mr. Fox. That’s right.

Mr. Horn. But it created a post-War generation that essentially
have designed, built, constructed this country.

Mr. Fox. That’s right. But we did pay for that on a year to year
basis, as the money—and there’s some fairly large expenditures in
the late 1940's, early 1950’s, as you're well aware. I feel very
strongly that everything should be on budget. I think that taking
things off budget helps to cover up and to allow loopholes that peo-
ple will naturally gravitate to—that Members oF Congress will
gravitate to, that interest groups will be pushing for—to get things
off budget so it doesn’t really have to come under the full con-
straint of the Federal budgeting process.

One further comment I'd like to make is, you mentioned earlier
the importance of getting the ideas and generating ideas from your
employees and so forth. But another concept I think needs to be
more fully developed within the Federal Government is the Wal-
Mart philosophy of dealing with customers. I worked recently for


134

For the minority, we thank Cheryl Phelps; Mark Stephenson;
and David McMillen; and we’ve had two reporters today, since we
seem to go into the evening, Marianne Nash and Elina Dirolf.
Thank you very much for coming, and with that, we are adjourned.

(Whereupon, at 5:45 p.m., the hearing was adjourned, subject to
the call of the Chair.]

1)

35-299 (140)


14

GAO's Response to
Chairman Horn's Question for the Record
Subcommittee on Management, Information and Technology
Committee on Government Reform and Oversight
House of Representatives
July 11, 1995 Hearing

Please provide a brief history of the evolution GAO's work.
Origins and Early Years’

From its creation in 1921 until the end of World War II, GAO's
work consisted of detailed auditing of individual vouchers.
During this period, much of GAO's work was characterized by a
highly formal, legalistic review of each voucher, with approval
for payment and the settlement of the affected accounts being
dependent on the payment's conforming to an elaborate set of
rules governing the use of public funds. Additionally, GAO made
decisions on payments of public funds, reviewed claims and
settled accounts, and prescribed accounting systems and forms.

The Second GAQ

GAO's first major institutional transformation occurred during
the 1940s and 1950s. As a result of the expanded federal role in
the New Deal and the vast expenditures of World War II, the
voucher audit process grew beyond the capacity of GAO's staff.
Even with a staff of over 14,000, most of whom were audit clerks,
GAO could not begin to keep up with the waves of paper. The GAO
annual report for 1945 reported a backlog of $35 million of
unaudited vouchers.

Ultimately, GAO's wartime experience proved decisive in
influencing the agency to change. Comptroller General Warren
(1940-1954) recognized the futility of trying to maintain a
centralized voucher audit process. Thus, in 1947, after the end
of the war, he joined with Treasury Secretary, John Snyder and
Budget Director, James Webb to design a new approach to financial
management and auditing. Warren reorganized GAO, establishing
new divisions to develop and carry out comprehensive audits of
federal agencies. Under the new system, the departments and
agencies would do their own voucher checking and accounting; GAO
would concentrate on prescribing accounting principles and
checking the adequacy of agencies’ financial accounting
procedures and controls. This concept was subsequently embodied
in the Accounting and Auditing Act of 1950. From a total staff of
almost 15,000 employees at the end of the War, GAO shrank to

For a more complete discussion of GAO's history see GAO
= (GAO/OP-3-HP, November 1991) and The Evolution

Evaluations (GAO/OP-2-HP, January 1990).


32

made more explicit, thereby providing today's decisionmakers with

tools to alter this course.

Several approaches could be considered to prompt decisionmakers
to use this information when making resource allocation
decisions. One approach would be to think of the budget and
financial statements as a single package of financial reports.
Ideally, they could be provided to decisionmakers at the same
time. This would require that audited financial statements be
completed earlier and that a formal mechanism be developed to
ensure their joint distribution. Although this may seem a
trivial issue, I cannot overemphasize the need to stress that the
two types of reports are two parts of one whole. This would be
most apparent if they are provided together. Even if the most
recently audited financial statements are not available when the
President's budget is submitted, a financial report showing the
trends in financial statements over a period of time could

benefit policymakers.

Other mechanisms could be considered to prompt consideration of
financial information on the long-term consequences of choices in
the budget. For example, long-term simulations of current budget
policies, perhaps over a 30-year period, could be prepared
periodically to help assess the future consequences of current
decisions. The effects of policy changes as well as broader

fiscal policy alternatives could be projected over the long term

2i


1038

Finally, federal liabilities should be categorized by the percentage of federal exposure to liability. For
instance, the federal civilian and military pension liability is expected to result in a dollar for dollar
expenditure ~ 100 percent liability -- of federal funds. The bank deposit insurance liability will result in a 2
to 4 percent future expenditure of federal funds. Liabilities should be classified by the likelihood of future
expenditure (in percent) of federal funds.

jiture (in

V. Federal assets

Federal assets are things of value that are owned, The assets of the federal government include hard assets
and other assets, Hard assets of the federal government total nearly $1.5 trillion. They include cash and
monetary assets, gold, accounts receivable, inventories, loans receivable, property/plant/equipment,
deferred retirement costs, financial assets, advances and prepayments, and other assets.

financial plan, Past values and future projected values of| federal astets shouldbe recorded inthe budget
and financial plan

Federal assets are often neglected. Federal lands, resources, material, plants, and equipment should be
better managed. Benchmarks need to be set for these efforts. Federal government managers 3 should be

The Power to Tax is the most vital federal government asset. The Power to Tax is only as good as
citizens’ willingness to pay federal taxes. ‘The future value of the Power to Tax is calculated to be in
excess of $16 trillion.”

‘An additional federal government asset includes the Power to Create Dollars. “The federal government--
through the Federal Reserve--also has the power to create money and to control its supply. This ensures
that creditors will be repaid, at least in nominal terms, When the government's debt is large, it also
provides a temptation to create money, as well as inflation.”"" Finally, the federal government has the
Power to Borrow. This power has resulted in a $5 trillion debt.

VI. Net federal assets and asset/liability strategy

Developing a balance sheet for the federal government is the first step in gaining control of the many risks
that it faces.

°© John H. Makin, “Perspective on America’s Fiscal Policy,” American Enterprise Institute's Annual Policy Conference,
4991.
'" Office of Management and Budget, “Objectives of Federal Financial Reporting”, September 2, 1993.

8


39

agencies to meet the requirements of A-127, and gives vendors an
incentive to keep their systems up to date.

I agree with Mr. Chapin—further work needs to be done in the
systems area to integrate budget and financial management infor-
mation within and across agencies. This area needs extensive work
at this time so that the agencies can themselves comply with core
financial management requirements. However, in many agencies,
the account structures themselves do not facilitate the collection of
cost data and its association with program data.

In OMB Circular A-11, revised, lated June 6, 1995, “Agencies
are encouraged to review their budget account structures, and to
propose changes that would allow budget accounts providing re-
sources for a program with program results.” This initiative will as-
sist in integrating the requirements of GPRA with the annual
budget process. Any proposed changes will be accompanied by ex-
tensive congressional consultation.

And if I could digress and put a plug in here, it would be very
helpful, at some point, for this committee to perhaps get a briefing
on this. We’d be delighted to give it to you, because work with the
appropriations committees especially, and aligning account struc-
tures so that cost information can be directly related to a program
is something that’s going to be very important.

And at the moment, we do not have appropriation structures
that allow this. For example, in HUD, there is currently a program
called the Annual Contribution for Assisted Housing, which has $9
billion worth of budget—had, until the mark-up yesterday—$9 bil-
lion worth of budget authority associated with it. That number is
somewhat smaller now. It has all of the program areas of HUD and
over 40 programs in that one account structure. It makes it very
difficult to set up a system, even with the availability of sub-ac-
count information.

The final area I'd like to talk about—I’m sorry, the third area Pd
like to talk about is program performance and integrity. The Chief
Financial Officers Act is taking the lead in recommending to OMB
that the implementation of GPRA be closely integrated with the
budget process. This has been done through the work of the Chief
Financial Officers Council.

Within OMB, a task force is discussing various ways to integrate
performance initiatives and streamline work processes, both at
OMB and within the agencies, to produce better information with
which to evaluate and manage programs. The result of this group’s
work will be discussed with agencies and the Congress, with the
intention of considering changes for the fiscal year 98 budget proc-
ess.

This does not mean that any changes will be delayed until then.
In fact, results of GPRA pilots and the use of performance informa-
tion contained in the fiscal year 96 budget has already informed re-
source allocation decisions. The results of the recently concluded
OMB spring review of performance, and the use of performance
data in the fiscal year 97 data, will continue the progression to-
ward full GPRA implementation, and foster better management.

A focus on performance alone ignores an important component of
program execution, program integrity. Lack of program integrity
can lead to fraud, waste, or abuse, which will undermine program


64

Mr. Horn. We thank you for that most helpful statement. I now
yield to the gentleman from New Hampshire, Mr. Bass, for ques-
tioning of the witnesses.

Mr. Bass. Thank you very much, Mr. Chairman. Mr. DeSeve, I
gather from your testimony that the Federal Government is in the
process now of establishing—or you guys are, OMB is in the proc-
ess of trying to establish a real financial statement for the Federal
Government. Did I understand that correctly?

Mr. DESEvE. The Government Management and Reform Act of
1994 specifies the creation of such a statement. The actual folks
who are putting the statement and auditing the statement are our
friends at GAO. The compilers of the statement are our friends at
Treasury. And OMB sets the form and content and policy that goes
along with it. So it’s a tri-partite effort.

Mr. Bass. And it’s going to be a statement that contains real
numbers. For example, we're going to be hearing some testimony
from individuals who put together a document here, which is some-
what unusual, to put it mildly. The statements that you're talking
about coming up with are assets and liabilities, income and ex-
penditures, accrued expenses and so forth—just the way any busi-
ness would have a statement.

For example, unfunded liabilities for Social Security, Federal re-
tirement, so forth, would be placed there and trust funds and so
forth. Are you going to have a real financial statement? Are you
going to have assets and liabilities in this?

Mr. DESEVE. Yes.

Mr. Bass. I see.

Mr. DESEvE. I can say yes because I see Gene Dodaro shaking
his head.

Mr. Bass. Any of you can answer these.

Mr. Doparo. If I might add, Congressman, there have been pro-
totype financial statements prepared by the Department of Treas-
ury for many years now, which lay out standard financial state-
ments of the type that you’re mentioning. Those financial state-
ments however are not accurate. And we've included a letter from
GAO every year in the financial statements, saying that the users
have to be cautioned about the reliability of that information be-
cause they have not been audited.

We now have, through the Chief Financial Officers Act and the
Government Management Reform Act, which this Congress passed
last year, basically now, for the first time, in fiscal 96, you have
a requirement for every agency to prepare financial statements cov-
ering the operations of that agency; and then to have that informa-
tion audited so you can have reliable data of the type that you're
talking about.

So, one of the big initiatives that we’ve been working on is in-
creasing the reliability of information that’s currently being re-
ported. No. 2 is the fact that through the Financial Accounting
Standards Advisory Board, we're trying to create financial state-
ments that are much more useable in the Federal environment,
and not just adaptations of private sector financial statements. And
that effort is nearing completion as well.


35

While there is general agreement that such a report is needed,
there has been no consensus to date on how best to inform the
public. Based on a National Performance Review recommendation,
the Department of the Treasury is developing a Financial Report
to the Citizens which has as its goal the understandable
presentation of basic financial data. In the future, when
consolidated governmentwide financial statements are being
produced and audited, excerpts from those statements could form
the basis of such a report to the citizens. This would have the

advantage of basing the report on data that have been audited.

CONCLUSION

Improved financial systems and reports are essential to improving
the government's ability to provide accountability for public
xesources. 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.

24


67

and begin to set themselves, not necessarily in legislation, which
has been proposed, but perhaps in colloquy or reports, some notion
of what they think acceptable performance really looks like.

Mr. Bass. That’s it, Mr. Chairman. Thank you very much.

Mr. Horn. I thank the gentleman, and now yield to the ranking
minority member, Mrs. Maloney of New York. Do you perhaps have
an opening statement?

Mrs. MALONEY. Yes, I do, Mr. Chairman. May I have it submit-
ted to the record in the appropriate place?

Mr. Horn. Without objection, that statement will be put in at the
beginning of the hearing. Mr. Mascara’s statement will also be put
in at the beginning of the hearing.

Mrs. MALONEY. Great. Quite frankly, I was rather amazed to
hear your testimony, Mr. Dodaro and Mr. DeSeve, that in our great
country you think that our accounting reports aren’t accurate and
that the numbers on which they’re based aren’t accurate. I am just
amazed, with all the resources we have in the Federal Government,
why we just can’t have general accounting practices that are ac-
ceptable, in place and performing well.

I mean, I’m amazed. You said we couldn't rely on the numbers
because the information wasn’t accurate. And if you'll allow me to
reminisce a little bit, Mr. Chairman, I come from a city that is not
well known for good management. But I'll tell you one thing—you
can walk into the mayor’s office or the controller’s office, and with-
in an hour, they can give you a report on the financial status of
the city.

It may not be what you want to hear. In 1977, when we had fi-
nancial problems, the mayor had one set of books, the controller
had another. And after that, they decided we're going to have an
office that is comprised of independent appointees from the mayor's
office and the controller’s office. And they went into general ac-
counting practices; they went on-line in computers. And at the very
least, they can give you an accurate accounting of the financial sta-
tus of the city.

And I don’t quite understand why we have not accomplished that
in the U.S. Government. And when is that going to be accom-
plished? I think at the very least, we should be able, before you get
into performance standards, have a complete and accurate financial
status reporting system that is available to the Congress and any-
one else. Why has that not been accomplished; and when will it be
accomplished?

Mr. Doparo. I'll take a first stab at that. Quite frankly, good fi-
nancial management has not been a priority of administrations
over the years, and difficult to get the Congress to act on. We, for
a number of years—at least 12—had been advocating legislation to
have audited financial statements become a normal a management
practice in the Federal Government, as they are in the private sec-
tor and State and local governments.

But the same type of incentives aren’t there in place. At the
State and local level, you have to float bonds and there are all
kinds of requirements that the marketplace puts in place, as well
as the Federal Government or the private sector. But it wasn’t a
priority. In fact, this Comptroller General, Chuck Bowsher, is in


104

There are over a dozen categories of government liabilities. i r
with an asset. If it is not matched; the federal government's promise to citizens, contractors, or retirees
‘may not be able to be met.

One of many promises that the federal government makes is to repay it’s debt. The United States federal
‘government's debt is 14 percent of it’s total liabilities, Other major promises include pensions, welfare
payments, medical care, roads and bridges, and education expenses

Constructing a federal balance sheet brings together all the promises and assets that have made by a
government. Elected officials, government managers, and citizens all gain from this exercise

The federal Balance Sheet Template includes the following categories

Balance Sheet Template

Assets Liabilities (Promises)

Cash and Monetary Assets Debt & Yearly Surplus (Deficit)

Accounts Receivable Interest on Debt

Inventories Entitlements

Loans Receivable Insurance

Property, Plant, and Equipment Loans & Credit Guarantees

Deferred Retirement Costs Sponsored Enterprises

Financial Assets Medical

Advances and Prepayments Infrastructure

Other Assets Facilities Resources
Environmental

Claims Against Government
Long-term Contracts
Undelivered Orders

Other Contingencies

Each of the federal balance sheet’s asset and liability categories may have dozens of specific items.

Information about each item,

as.to it’s long term cost or value.

After the balance sheet is completed.

nd, ind projections made

iid be formulated. One of the

A federal asset/liability strategy should be formulated
‘major components of this strategy is the reduction of risks. Many risks are faced by the federal
government including interest rate, credit, liquidity, operation, management, and liquidation risks to name a

few

The federal government must give immediate attention to the full range of risks that it faces. A
comprehensive risks catalogue is produced via balance sheet and the Assevfiablity strategy. Thus
constructing a balance shept and then developing an assetliability strategy is a high priority item in today's

“bankruptcy " prone government operations

‘The Presiden should in:

abal: with their

w i will identi


126

Mr. BRECHT, Excuse me?

Mr. Horn. I say, we’re going to get to that; I never finished the
sentence.

Mr. BRECHT. Yes, but this ties into the same concept.

Mr. Horn. Right.

Mr. BRECHT. That is that realizing that you have a fixed amount
of money or capital. Capital is broader than money. Capital has to
do with all the aspects that actually go in to producing whatever
results you’re looking for. But in any organization, you have a lim-
ited amount of that capital. So there needs to be some form of dis-
ciplined process to decide what’s really most important.

If you, for example, just come up with an idea—oh, well, we need
to, for example in private industry, we have to make profits this
year; so let’s slash and burn our current budget. You run into situ-
ations, for example, people will cut R & D, which is the future of
the firm. And so the concern for the Federal Government is, is
there a way that we can think about these issues so that we're not
just cutting into our muscle and our marrow, rather than cutting
the fat out?

Mr. Horn. Eating our seed corn, was the title of one report the
Electronic Association did.

Mr. BRECHT. Absolutely.

Mr. Horn. It’s a good phrase for what we've been doing to our-
selves.

Mr. BRECHT. Absolutely. And then it fits into your notion about
consolidating a lot of the programs together into a generally similar
mission, that have similar missions. But these missions are articu-
lated by the Congress. Instead of worrying about line items in the
budget as much as we think about what should be the mission of
Government? What are the general missions that all these pro-
grams fit under? Do mission oriented budgeting—give that money
in block grants not just to the States and the cities, but to Federal
managers, and let them work out the issues, under the guidelines
of the benchmarks that Congress has established, how they want
to implement these programs.

What it does is it raises the level of input that Congress might
have in the management of the Federal Government. Because you
start having to have very deep conversations and dialogs about
what’s really important here; what should Government be doing;
what shouldn't it be doing; what are the general types of missions
that the Federal Government should be §oing, as opposed to just
trying to do a little bit of everything.

‘What's really clear from Harrison’s analysis is that the Govern-
ment can’t do everything, and it can’t even follow through on many
things that it has promised the citizens. So my sense is that what
citizens are looking for is a positive mission, a positive vision of
what the future looks like. Just balancing the budget or cutting the
deficit might be a stop gap, but it’s a negative mission. I think
what we need to do is turn that around.

I also think we need to be very careful about the vocabulary we
use, so that we're just not scaring people and making people feel
more disempowered and negative. We need the strength and the
imagination, the ingenuity and the creativity of the American pop-


45
EASAB PROGRESS
Accounting Concept Statements

FASAB has recommended and OMB has issued two accounting
concept statements ("Objectives of Federal Financial Reporting",
and "Entity and Display").
© ‘The Objectives of Federal Financial Reporting are designed
to guide FASAB in developing accounting standards that
address four major objectives:
Budgetary integrity -- FASAB clearly understands that
in developing accounting standards, recognition must be
given to: (i) the importance of budgeting in federal
financial management; (ii) the complementarity of
budgeting and financial accounting; and (iii) the need

to assure the accuracy of budget execution.

Operating Performance

In developing standards that
address this objective, FASAB recognizes that a myriad
of performance measures are the Government's
counterpart of business income, that expenses need to
be matched to the services and goods provided to the
public, and that federal managers require cost and
other information to manage efficiently and cost

effectively.


87

Mr. Horn. The chairman I’m talking about is Jamie Witten,
former chairman of the Committee on Appropriations; is that cor-
rect?

Mr. Doparo. That’s correct.

Mr. Horn. I suspect, knowing a lot of the gentlemen of the era
of the 1960’s, 1970's, and into the 1980’s, that many of them knew
how to work the system, and they really didn’t need anybody else
knowing how to work the system. And one of the problems was to
share information here, even with the members or other chairmen
or subcommittee chairmen. So it wasn’t just denying it to the citi-
zenry; it was denying information to colleagues.

And it’s really been the last 10, 15 years where there’s been a
growing revolt in the House that, sorry, we don’t do business that
way, which leads me to the legislative branch and the judiciary. As
you know, Speaker Gingrich has ordered a complete financial audit
of the Congress. To my knowledge—I might be wrong, and GAO
may correct me if I am and we'll put it at this point in the record
that the chairman is wrong and here’s the truth.

To my knowledge, no audit of this branch has ever been con-
ducted since 1788, in the first election of the Congress that met in
New York in 1789. Does GAO have any other information that we
ever had an audit on anything around here?

Mr. Doparo. There were audits of selected activities of both the
House and Senate that we were asked to do, GAO was asked to do.
The House bank being one——

Mr. Horn. The House bank. So when something blew up in
somebody’s face, they called GAO in.

Mr. Doparo. But you're correct in saying there has not been a
comprehensive audit of either House of Congress. It’s an accurate
statement. There are other parts of the legislative branch, like the
Government Printing Office, and General Accounting Office have
had regular annual audits now for 5 years. And they’re included in
our study.

Mr. Horn. How about the Library of Congress?

Mr. Doparo. Library of Congress is not audited on a regular
basis. We did attempt to do an audit, I think, back in 1988 of the
Library of Congress. But there isn’t an annual audit requirement
there.

Mr. Horn. Anyhow, Speaker Gingrich is trying to get this place
audited. Hopefully it will happen in time so the public remembers
that, we weren’t in charge, we're just getting the audit done. So
that’s one danger we have if it drags on a yon or something; that
we will look like we’re the ones that fouled things up. I’m curious
whether GAO is involved in that audit in any way? Has GAO been
consulted by the leadership, in terms of getting the private audi-
tors to do this?

Mr. Doparo. Yes. In fact, we were asked to cooperate in using
our contract that we have with public accounting firms, to actually
hire the firm. We helped in shaping the scope of work; worked very
extensively with John Lanehart, the House Inspector General.
also gave the auditors, Price Waterhouse, access to all our work pi
pers on selected aspects of the House that we had audited before.

So we've had a lot of close consultation with them in that audit
that they’re doing currently.



—-4--
UNDERSTAND.

THE REALITY IS CITIZENS MUST BE BETTER
INFORMED ABOUT WHAT GOVERNMENT ACTUALLY
COSTS IF THEY ARE TO BE MORE CENTRALLY
INVOLVED IN DETERMINING WHAT GOVERNMENTAL
MISSIONS AND GOALS ARE REALISTIC,
AFFORDABLE, AND ACHIEVABLE.

| LOOK FORWARD TO THIS AFTERNOON’S
TESTIMONY.

THANK YOU MR. CHAIRMAN.


BUDGET AND FINANCIAL INFORMATION—AN-
NUAL SHAREHOLDERS REPORT: HOW DOES
THE CITIZEN KNOW WHAT IS GOING ON?

TUESDAY, JULY 11, 1995

House OF REPRESENTATIVES,
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 2:10 p.m., in room
2154, Rayburn House Office Building, Hon. Stephen Horn (chair-
man of the subcommittee) presiding.

Present: Representatives Horn, Flanagan, Bass, Maloney, and
Mascara.

Staff present: J. Russell George, staff director; Mark Brasher,
professional staff member; Andrew G. Richardson, clerk; and

heryl Phelps, minority professional staff.

Mr. Horn. The Subcommittee on Government Management, In-
formation, and Technology will come to order. I'll begin with my
opening statement, while we're waiting for the ranking minority
member. I regret the 10-minute delay, but we had a vote on the
floor of the House that occurred at 1 minute of 2 p.m., when I was
here. Our first duty is to cast our votes, and I apologize for starting
ate.

Today we will hear testimony from experts on the Federal budget
process and Federal accounting systems. Too often the annual
budget ends up as an after the fact indicator of problems with Fed-
eral rograms. In its present form, the budget is sort of like a
checkbook that shows a balance, but tells little about the program’s
efficiency or underlying financial health.

We're working toward balancing that checkbook. A balanced
budget by itself, however, will not tell enough about our big pro-
grams’ long-term outlooks. Thus, it’s essential to include underly-
ing financial information in the annual Federal budget. Doing so
would make it clearer and more understandable to the citizen. It
would also provide a financial bill of health on such critical pro-
grams as Social Security, Medicare, infrastructure and environ-
mental clean up.

Each American needs to know where the Federal Government
stands financially. That knowledge would spur our citizens to de-
mand _ reform, realizing that current trends cannot be sustained.
The Credit Reform Act of 1990, which we will hear more about
later, is one example of how we could integrate budget and finan-

@


42

G. Edward Deseve
Controller, Office of Federal Financial Management
Office of Management and Budget
Mr. Chairman, Members of the Subcommittee, I am pleased to
be here today to discuss how the Chief Financial officers Act of
1990 (CFOs Act) and the Government Management Reform Act of 1994
(GMRA) contribute to efforts to better inform the American
taxpayer about how their tax dollars are spent.

Passage of the CFOs act reflected The Congress’ continued

commitment to better management of Federal resources, and the
production of information that is accurate, timely, and helps
policy makers make better decisions, This Administration has a
strong and deep commitment to better management of the Federal
Government and has worked closely with this subcommittee, the
full Committee, and the Senate Governmental Affairs Committee to
facilitate this improvement. The CFOs Act, the GMRA, and the
Government Performance and Results Act (GPRA) must work together
to provide the legislative foundation for developing accurate and
reliable cost information and performance data. Such information
is essential if the Executive branch and The Congress are to make
informed decisions and move successfully toward a smaller, more
efficient government that focuses on accountability and manages

for results.

In this time of resource constraints and questions about the
fundamental value of government programs, it is more important

than ever that the American taxpayers, managers, elected


B

take place. But we never undertook an audit of an entire service.

We started out in some of the civilian agencies, with GSA, the Vet-

erans Administration, Social Security Administration, which is

why, as Ed mentioned, those agencies have been producing finan-

Gia statements now for about 7 years and are having regular au-
its.

So there are some pockets of excellence in the Federal agencies,
and those are good models. But in fact many people thought we
were crazy when we went in and started auditing the Air Force.
It was too big to do all at once. Then we did the Army next, with
similar results. And we’re attempting to do an audit of the Navy
now, for the first time. And the Defense Department Inspector
General is doing an audit of the defense business operation fund,
which is about a $75 billion operation.

So we're getting a lot of good coverage. But the first set of finan-
cial statements for the Department of Defense, as a whole, are due
to be produced in fiscal year 1996, and those are to be subject to
audit.

Mr. Horn. What I would like, Mr. Dodaro, is to leave a big hole
in the record of a couple of pages, and have the General Accounting
Office furnish in that space what did they do in the 1930's? Now,
this office was created out of the separate controllerships, as you

now.

Mr. Doparo. Right.

Mr. Horn. With the Budget and Accounting Act of 1921; and cre-
ated in the legislative branch. And up until the Second World War,
there was very strict auditing by the General Accounting Office,
even during the Second World War, which was probably the great-
est undertaking in which this country engaged in the 20th century:
Think of the tremendous expenditures at stake, life and death, all
the rest.

I would be interested to know when we let up on the type of au-
dits that GAO regularly did from the time of the Budget and Ac-
counting Act. Now, my impression is, it’s the last decade, decade
and a half, two decades. But we need somebody with an institu-
tional memory or some scholar that has written a book on the sub-
ject to get us some facts here. Because Government became so mas-
sive, no question about it. The Johnson budget of 1965 was $100

illion.

That’s half of the interest we pay annually on the national debt
of $4.8 trillion. And that was considered a huge budget, and it was
the first time we had a unified budget. So I’d just be interested in
a little statement from GAO on how things changed.

Mr. Doparo. Sure.

(The information referred to follows:]


82

Mr. Doparo. Yes, within our lifetimes, we can see it. The De-
fense Department, in my mind, is the one that, because of cultural
issues there and size issues, I wouldn’t want to—or Id hesitate to
predict.

Mr. FLANAGAN. Thank you. Thank you, Mr. Chairman; thank
you, gentlemen.

Mr. Horn. Thank you very much, Mr. Flanagan. Let me pursue
several questions, Mr. DeSeve, that you have in your written testi-
mony. On page 21, you sum up that the 24 agencies that are cov-
ered by the ‘Chief Financial Officers Act, what the standard was to
complete an audit on the self-assessment. And as you sum it up,
you say, seven agencies reported that their financial management
systems could produce auditible agency-wide financial statements,
with limited manual intervention for fiscal year 1996, the target

late.

So that’s 7 of 24. Then the next seven agencies expect that sys-
tems enhancements will be completed in time to produce auditible
agency-wide financial statements with limited manual intervention
for fiscal year 1996. In other words, they're hopeful, and conceiv-
ably that will happen. So that gets us to 14 of 24 that have likeli-
hood of meeting the test of the act.

Nine agencies reported that system enhancements will not be
completed in time to produce audttible agency-wide financial state-
ments with limited manual intervention for fiscal year 1996. And
then our favorite agency comes up. The Department of Defense
does not expect to produce auditible financial statements for fiscal
year 96, even with manual intervention. Now, what I'd like for the
record at this point is the names of the 24 agencies; what amount
of the fiscal year 1995, I guess, the completed fiscal year budget,
do they have in dollars and percentage of the budget; and then
what is left out, I’d like to have there.

(The information referred to follows:]


BUDGET AND FINANCIAL INFORMATION—ANNUAL
SHAREHOLDERS REPORT: HOW DOES THE
CITIZEN KNOW WHAT IS GOING ON?

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

JULY 11, 1995

Printed for the use of the Committee on Government Reform and Oversight

Ee

U.S. GOVERNMENT PRINTING OFFICE
35-299 CC WASHINGTON : 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC. 20402

ISBN 0-16-053827-0



108

mittee, chairman of a subcommittee—and say, we're going to do it;
we're going to spend the money that needs to be done, and just do

it.

And that’s the decision we need to have made now, is somebody
to say, we're going to do this.

Mr. Horn. Doesn’t OMB already have this on disks and can ma-
nipulate it?

Mr. Fox. Yes, they can. They will not do this——

Mr. Horn. Why don’t they just send us one of the disks?

Mr. Fox. This is it, right here.

Mr. Horn. Yes.

Mr. Fox. I mean, you can buy it for $24 now at the—you can bu
a version that basically represents the budget that’s published.
Now, this is the full data base, the 10 meg of data, that would
allow you to manipulate all the data which the have, and present.
on a one time a year basis. Now, the actual development of soft-
ware will not be the major cost. The major cost, of course, will be
in the daily updating of the information.

Mr. Horn. As to expenditures for the current year or what?

Mr. Fox. That’s right. You would want to keep this up to date
in terms of authorization and appropriations process, as well as the
actual transactions that are taking place within each agency as col-
lected by the Department of the Treasury. And I can get into the
details of how that can be done. They collect this data. You’d have
to collect an additional few variables, in terms of the checks that
they cut and so forth, including object class information.

But it could be fairly easily done. I mean, this is not—you know,
the previous panel seemed to say, well, this is tough. One of them
informally said it will be 20 years before we really can get this
done. It could be done in a matter of months, rather than years,
if the decision is made to do it. And before the financial implica-
tions are realized, that decision should be rapidly made. As I point-
ed out earlier, in our estimation, it’s costing us at least $1 trillion
a year not to do this, or about $2 million a minute.

Mr. Horn. Amazing. Well, that completes your summary then,
Mr. Fox.

Mr. Fox. Yes, it does, thank you.

Mr. Horn. All right. Mr. Brecht, welcome, we're delighted to
have you here.

Mr. BRECHT. Thank you, Mr. Chairman. My name is Lyle Brecht,
and I’m the author of AmericaReport, which I believe that most of
the committee members should have a copy of.

Mr. Horn. We will put that in the record, along with your full
statement. Yes, it looks like everything can go, even some of their
line drawings, so that’s fine.

Mr. BRECHT. Chairman Horn, distinguished members, thank you
for your invitation to testify this afternoon. These comments and
suggestions are based on my experience as the author of
AmericaReport, A Common Sense Annual Report to the Citizens of
the United States. Today neither citizens nor Government man-
agers nor some Members of the Congress know as much about the
financial affairs of the Federal Government as they do about pub-
licly traded businesses in this country.


131

ing about it, I started realizing that if we just focus on the budget.
of the Federal Government, or the balance sheet of the Federal
Government, we're probably missing the big picture.

What I did is, I said, well, I’m going to think about the Federal
Government as a project of the U.S. economy, because it may not
be terribly important about exactly how much money the Federal
Government spends. It may have to do with, how does that flow
through and how does the whole economy look; is the economy
healthy or not? Also, it’s potentially misleading for the Federal
Government, for Congress, for example, to cut an item out of its
budget, thinking that somehow it’s saving taxpayers money, when
in truth all it’s doing is downstreaming those costs to the States
or to local governments.

And they get picked up there, and sometimes they get picked up
with less efficiency. So it actually costs the taxpayer more money.
And so these things are—it’s not like there’s any report that you
can look at that tells you this. It’s not like anybody has figured all
this stuff out. As I started going through my own analysis, and
looking at the cash-flow of the entire economy, it’s terribly complex.

I mean, it’s much bigger than any one person or probably any
one group of people can figure out. But at the same time, to me,
these issues are foundational. They're real important because oth-
erwise you make decisions thinking you have knowledge about
what you're doing, and you have good intentions, you want to
produce some results. And in truth, what ends up happening is
that you create additional costs or you downstream costs or you
produce an economy that’s less capable to respond to the global
marketplace, which is unbelievably competitive right now.

One of the big things that characterizes the modern global econ-
omy is that you have the capital—you have a free flow of capital
across national boundaries—anywhere in the world, wherever in
the world it’s needed, instantaneously. And that kind of dynamic
doesn’t lend itself to multi-year Government Accounting Office,
OMB processes, where they’re trying to figure out what it is that
theyre accounting for.

'e don’t have that kind of time if we want to be competitive and
continue to be a world power on this Earth. These kinds of con-
versations to me are real interesting.

Mr. Horn. You’ve given another reason why we should have
faith on occasion.

Mr. BRECHT. You've got to have faith.

Mr. Horn. That’s what it’s gotten down to. Some people had vi-
sion and other people didn’t; they took a risk. Seward’s Icebox,
known as the State of Alaska, for example. All of these things that
people said, you’re crazy; why are you doing that? They probably
said it about the Louisiana Purchase, which was the best land deal
in history.

Mr. BRECHT. Every business, every successful organization is
managed beyond the numbers, or underneath the numbers. You
can’t use the numbers to drive every decision. You've got to have
that vision.

Mr. Fox. Let me just say a couple things very quickly. One of the
things—I’m very intrigued by Lyle’s discussions, and I think he
adds a great deal to the debate. But one of the things that I’ve




109

This was my vision with AmericaReport—to report on the affairs
of Government, so that any citizen can understand where the
money each household invests each year is being spent, and what
results are achieved by the Government. I believe that such an an-
nual report is actually the missing link between the Government
and the citizens. Presently, Government publishes thousands of re-
ports each year.

Many are very difficult to understand. Many of them require
some actual expertise to really work through. And in this process,
for the Government to try to communicate to the people in this
fashion is like trying to talk underwater. The end result is a gar-
bled and disconnected set of contradictory facts that citizens believe
are the truth about Government.

As a Nation, I believe we lack three fundamental things: a unify-
ing vision of where we are heading for the future; answering what
purpose or mission Government should play in achieving this vi-
sion; and clarifying what the core values that we'll use to work at.
this purpose day in and day out. Today no document produced by
the Federal Government explains this vision. This is what citizens
want to know, more than anything else.

Any report to citizens must address our Nation’s vision for the
future. Congress should require that every agency, every depart-
ment, every program manager communicate their financial results
in a way that common people can understand. We need Govern-
ment to use language that means something to citizens, and re-
flects how they make decisions. Also the process for producing a re-
port to citizens may be just as important as the report itself.

In the research did for AmericaReport, I encountered Govern-
ment officials who believe that the amount of debt the Government
owes to citizens makes no difference, because we owe it to our-
selves. If this argument is carried out to its extreme, there is no
incentive to budget prudently, since whether the Government bor-
rows $1,000 from each citizen or $1 billion matters little.

I encountered officials who believe that the Federal Government
is not a business. Now, this seems obvious, but leaves the door
open for an accounting of Government activities that makes little
sense to ordinary citizens who engage in the business of the econ-
omy. I encountered one Government official who believes that the
White House will never let us tell citizens the truth concerning the
financial situation of the Nation.

However, this official was reminiscing about tryin to get reports
through both Republican and Democratic control Ned White Houses
over the past 20 years. I encountered a Government official who be-
lieves that as long as the gross domestic product is increasing,
there is absolutely nothing to worry about. Gross domestic product
does not account for many externalities. Some countries actually
have negative real growth, even with positive growth from GDP,
when externalities are taken into account.

My research suggests that this may also be the case for the U.S.
economy. I encountered, also, House Members who remain uncon-
vinced, even at this state, that the budget deficit is a problem or
should be a priority for congressional action. The process of devel-
oping an annual report to citizens hopefully will uncover and clar-
iw ese misperceptions.


30

current account structure evolved over time in response to
specific needs, it is both varied and complex. For example, some
accounts are organized by object of expenditure while others are
more closely aligned with programs. Accounts also vary in the
coverage of costs. Some accounts include both program and
operating spending for programs or activities while in other
instances, separate accounts are used. Or, a given account may

include multiple programs and activities.

FASAB's recent work has emphasized the need to consider the full
cost of programs and outputs when making budget and management
decisions. FASAB's recommended standards call for the collection
of costs by responsibility segment, a component of an agency that
is responsible for carrying out a mission or producing products
or services. The standards require responsibility segments to
capture the "full cost" defined as the costs of all resources
used (indirectly or directly) and the cost of support services
provided by others, net of any income earned as a result of the
program's operations. Financial statements prepared on this
basis will then show further breakdowns of cost by the various
programs carried out by the responsibility segments. This
emphasis on full cost will be crucial because it, rather than
cash outlays, is the appropriate cost measure to use with
performance measures when evaluating the cost and benefits of a

Program.

19


89

thought was probably pretty accurate. And we’ve seen a few sort
of scandalous affairs in the country in the last few years. Appar-
ently some were implementing the Ellander Doctrine.

But I'd just be curious, what are the differences, if any, that you
see that should be of concern to us?

Mr. DESEVE. Well, I guess the primary differences in my mind,
are two. First, that the transaction which begins the financial proc-
ess, the planning process, is the budget appropriation. There is no
real anal log, per se, in the private sector. You can have a profit plan
in the private sector, but you have to have customers. So in the
first case, you're dealing with appropriated dollars.

In the Federal Government, unlike State and local governments,
the cash based accounting is used almost exclusively, so that the
accrual of obligations, once a contract is entered into, is of less mo-
ment tian the budget authority as it exists, and then the actual
expenditure or outlay of those dollars, depending on how that is
measured. So there’s a measurement difference with the private
sector and the State and local sector, which almost exclusively use
either full accrual or a modified accrual form of accounting.

Those are, I think, the two fundamental differences. Don Chapin
is a much better person to answer those questions than I am, with
more specificity.

Mr. Cuapin. I think Ed DeSeve has named the principal dif-
ferences. But I would point out, the private sector has no equiva-
lent to our Federal Government non-exchange transactions.

Mr. Horn. Can you clarify that?

Mr. CHAPIN. By that I mean tax collecting, for example. It’s very
difficult to determine accounting information when there isn’t an
exchange transaction; when one side and the other don’t exchange
values. In the case of the American taxpayers, it’s very difficult to
determine how much they owe. So that’s a very difficult accounting
problem. It’s not so much a systems problem as it is an information

low problem.

Mr. Horn. Well, you're talking about voluntary versus involun-
tary. Voluntarily, in the private sector, we decide to buy something;
sometimes it’s compulsory, if the State has mandated, say, an air
pollution cleaning element under the environmental laws. But in
the taxes, why can’t you just consider that the same as revenue
that you'd have in a private corporation?

Mr. CHAPIN. Well, we have a voluntary tax system. We don’t
know that a taxpa er owes any amount of money to the Federal
Government unti he files a return or the Revenue Service agents
are able to find him and assess the tax.

Mr. Horn. But we don’t know a person is going to buy a product
until they buy the product.

Mr. CHAPIN. But we don’t have to account for that transaction
until the transaction actually occurs. There is a meeting of buyer
and seller, at which point there is the possibility to recognize the
transaction and to measure it accurately. And that’s typical of the
private sector. In the public sector, when we have non-exchange
transactions, there is an assessment process, and there is a time
in which the taxpayer is supposed to file his return.

But the Revenue Service doesn’t know who all the taxpayers are
or how much income they have earned, and therefore, how much


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12

Statement of Gene L. Dodaro
Assistant Comptroller General
Accounting and Information Management Division

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss an issue that the
Comptroller General has viewed as extremely important throughout
his tenure--ensuring more timely, reliable, useful, and
consistent information for managing and assessing the
government's finances. GAO has been actively urging improvements
in this area for over 20 years. Achieving such improvements is
essential to enable more informed decision-making and oversight
by congressional and executive branch policymakers and to enhance
efforts to better inform the American public of its government's

financial operations.

Fortunately, in the last 5 years, progress is beginning to be
made toward these goals. This progress, in part, has been
stimulated by the passage of the Chief Financial Officers (CFO)
Act of 1990 and the creation of the Federal Accounting Standards
Advisory Board (FASAB), as well as by efforts to strengthen the
budget process. During this period, many professionals involved
in budgeting, accounting, and management reporting have devoted
much thought and effort to developing a vision for more effective
and understandable financial management reporting for the federal

government.

Today I will talk about what kinds of information and reports

this vision entails to help policymakers to make well-informed


IMPLEMENTATION OF THE CFOs ACT

Since passage of the CFOs Act, the Federal Government has
made significant progress in addressing the challenges faced in
improving the financial management of the largest institution in
the world. However, much work needs to be done. Progress to

date has been considerable in a number of areas including:

Financial Management Systens

The poor condition of financial management systems has been
at the heart of the government's financial management problems.
An indication of the Administration's commitment to improving
financial management systems can be seen in the priority given
this issue by the CFO Council. The Council has made improvements
to financial management systems its number one priority for the
coming year. In spite of the progress that has been made in
developing financial management systems policy and defining

financial systems requirements much work remains to be done.

13


96

Even Ma and Pa grocery stores can work with their financial in-
formation in a Lotus type spreadsheet. OK, I think this is probably
enough of this. You can turn the lights back on.

Mr. Horn. Let’s say there is a mobilization. Or three mobiliza-
tions. How do we differentiate what those are?

Mr. Fox. OK.

Mr. Horn. Peacekeeping operations?

Mr. Fox. Yes. What you have to do in the future is to identify
these programs with program information, as well as to provide de-
tails in terms of erformance outcomes, et cetera. What we're try-
ing to show is, a lot of this information is already available. What
you need to do is begin to develop the capability to access it. That
concludes my testimony at this point.

[The prepared statement of Mr. Fox follows:]


xt)

about 6,000 by the end of the Warren era.

The GAO of the 1950s and 1960s was modeled on the public
accounting firms of the time. GAO was increasingly staffed by
professional accountants, many being CPAs, and a significant
number of GAO leaders were recruited directly from public
accounting firms. Staff levels continued to decline to about
4,000 by the mid 1960s. While much of GAO's work continued to
concentrate on financial aspects of federal programs, gradually
more attention was given to the examination of program
objectives. A good deal of effort was still devoted to reviewing
the legality of agency activities.

In the early 1950s, GAO expanded its field work, establishing
regional and overseas offices. The number of Defense audits
increased during the 1950s and 1960s. GAO's defense audits
became the subject of controversy in the 1960s. GAO reports
criticized both contractor and DOD practices, alleged
overpayments, identified by name persons allegedly involved in
fraud and malpractice and recommended voluntary refunds from
contractors. Controversy surrounding this work culminated in
1965 with hearings before the Military Operations Subcommittee of
the House Committee on Government Operations. Chairman Chet
Holifield severely castigated GAO for its supposedly unfair
treatment of the defense industry. The Holifield hearings
occurred concurrently with the creation of the Defense Contract
Audit Agency (DCAA), an organization devoted to defense contract
auditing. The creation of DCAA, along with the implementation of
the 1962 Truth in Negotiations Act, led to a reduction in GAO's
defense contract audit work in the late 1960s.

The Modern GAO

The appointment of Elmer Staats (1966-1981), an economist and
career civil servant, set the stage for GAO's second major
transformation. Staats stressed program results and the type of
analysis employed in the planning, programming, budgeting system
(PPBS) framework. Staats reorganized GAO to better carry out its
work, creating functional divisions with issue area
responsibilities.

In 1967, GAO was asked to make its first major program evaluation
when Senator Winston Prouty sponsored a provision in the Economic
Opportunity Act Amendments requiring GAO to review the
effectiveness of poverty programs. The Congress soon endorsed GAO
program evaluation work in the Legislative Reorganization Act of
1970 which required the Comptroller General to "review and
analyze the results of Government programs and activities carried
on under existing law, including the making of cost benefit
studies..." These new responsibilities were then expanded in the
Congressional Budget and Impoundment Control Act of 1974.

Program evaluation became an increasingly common activity. For
example, during the 1970s, GAO reviewed the effectiveness of the


36

Mr. Horn. Well, we thank you. Mr. Chapin, do you want to add
to that statement? Mr. Chapin is the Chief Accountant of the Gen-
eral Accounting Office.

Mr. CHaPIN. Mr. Chairman, thank you for the opportunity to
speak. I would like to add something and in particular inform the
committee of the activities of the Federal Accounting Standards
Advisory Board. Before the end of the year, hopefully as soon as
October, the basic standards for accounting and reporting by the
Federal Government should be in place. Although there’s some fin-
ish-up work to do, these basic standards provide a unique and very
useful Federal accounting model.

The Board has followed extensive due process to get acceptance
from users for its standards. The process is quite similar to that
followed in the private sector by, for example, the FASB, the pri-
vate sector accounting standards-setting board. Our Board is proud
that we have been able to do this in record time. The Board’s work
has been guided throughout by an extensive study of user needs,
which the Board made at the very start of its work.

This user need information has been articulated in the Board’s
statement on Objectives of Federal Financial Reporting. This has
been our guide throughout the process of setting standards, so that
we have a degree of uniformity and consistency in all of our work.
The accounting information that will flow from these standards will
supply what the budget does not. While the budget is an essential
planning document, and establishes controls over commitments and
outlays it does not provide all the information needed to manage
the Federal Government in an efficient and effective manner.

For example, it does not recognize most Federal assets or many
important Federal liabilities—all of which enter into a proper de-
termination of the cost of Government goods and services. Knowl-
edge about these assets and liabilities is also necessary to safe-

ard the Government’s resources and to provide data for future

udgets. Armed with the budget and with the accounting informa-
tion that will flow from these standards, accounting information
that can be related to the budget, Federal managers should be able
to improve the efficiency and effectiveness of Government oper-
ations.

In that respect, the Board has emphasized providing accrual ac-
counting information in a form most useable to those who are used
to working with the cash based budget. Where consistency in the
budget is not possible because of the basic difference between cash-
based accounting and accrual-based accounting, the Board has at-
tempted to provide reconciliations and other types of bridges so
that proper communication and understanding can occur.

Throughout its work, the Board has stressed the need to report
accurate! ly the gross and net costs incurred by the agencies in each
of the sub-groups who will be reporting entities. The bottom line
in the Principal operating report, the Statement of Net Costs, is the
net cost to the taxpayer of the activities carried on by the agency.
Importantly, that statement will also show the cost and net cost for
each of the agencies’ programs.

This information will help make the Government Performance
and Results Act effective, and provide the needed and, thus far, the
missing cost information to those who formulate budget requests,


48

Statements of Federal Financial accounting standards (SFFAS)

FASAB has recommended, and OMB has issued, three Statements
of Federal Financial Accounting Standards (SFFAS) providing
accounting standards for sixteen financial reporting categories.
FASAB has recommended, and OMB is about to issue, a fourth
statement encompassing both concepts and standards for managerial

cost accounting.

° -SFFAS #1 Accounting for Selected Assets and Liabilities --
This statement provides standards for five asset
categories: Cash, Fund Balance with Treasury, Accounts
Receivable, Interest Receivable, and Advances and
Prepayments; it also provides standards for four liability
categories: Investments in Treasury Securities, Accounts

Payable, Interest Payable, and Other Current Liabilities.

¢ —- BFFAS #2 Accounting for Direct Loans and Loan Guarantees --
This statement was designed to complement budgeting for
Federal Programs under the Credit Reform Act of 1990. This
standard represents a break from traditional accounting
valuation in that the net present value of the total Federal
Subsidy for direct and guaranteed loans is accounted for at

the time the loan is made.


7

Testimony of Lyle A. Brecht to the Subcommittee on
Government Mariageient, Information & Technology
11 July 1995

Background of Author

The genesis for AmericaReport started around our family's dining room table over dinner. My
seventh grade daughter asked me a simple question, "Daddy, what does the government actually
do?" I thought that was a reasonable question for her to ask so I pursued it.

Before I go on any further, let me say a few things about my background so you'll understand
better where I ended up from this pursuit. My educational background includes graduate level
degrees in systems thinking (Univ. of Minnesota) end business (Harvard). My first job out of
graduate school was to analyze the economics of nuclear power plants. I read everything written
‘on this subject at the time. I concluded that the methodology used to judge whether nuclear
power was a good investment was fundamentally flawed. This caused quite a stir at the time, It
‘was contrary to the conventional wisdom of the day, although it later proved to be true.

‘One of my next jobs was for the U.S.E.P.A. I performed field research concerning the 201 grants
program, This program gave money to localities for waste water treatment plants. I discovered
that many of the cash flow analyses done by consulting engineers to support the type and size of
treatment plant were incomplete. Future operating and maintenance costs were often understated
Thus, a community accepting "free money" from the feds might find themselves bankrupt or
senior citizens forced out of their homes as local tax rates were raised to keep up with these
unexpected costs. Working with EPA, I designed a marketing program for less costly waste water
treatment. This program saved communities $1.2 billion over previously projected construction
costs

Since these early jobs in my career, I have done consulting work for a variety of public and private
sector clients, My clients include some of the largest companies in the world. I performed unique
and often highly complex analytical work. I read annual reports for fun, I've read maybe a few
thousand over the years, I also read extensively in many technical disciplines.

With this background, I pursued answering my daughter's question concerning government. What
was looking for was a simple report that described what government was doing, why it was
doing it, and what results it was accomplishing, I also didn't want a spin - just the simple truth
‘What I discovered was that such a document did not exist.


EUTURE FASAB_WORK

After completion of the basic standards described above,
there will remain considerable work for FASAB, including
codification of the standards and assisting in interpreting the
standards. In addition, FASAB has identified issues that require
attention, but are not addressed in the basic standards. These
include: accounting standards for natural resources, the
recognition and measurement of expenses, and accounting for the

cost of capital.

12


49

SFFAS #3 Accounting for Inventory and Related Property --

This statement provides standards for six asset categori:

inventory (held for sale), operating materials and supplies,
stockpiled materials, seized and forfeited assets,
foreclosed property, and goods held under price support and

stabilization programs.

SFFAS #4 Managerial Cost Accounting -- This statement
encompasses both standards and concepts relating to
managerial cost accounting. Presently most Federal entities
do not have systematic cost accounting methods or
procedures. This statement requires Federal entities to
accumulate and report the full costs of their activities.
This cost information will be useful to taxpayers, managers,
elected officials, and policy makers in making decisions
about resource allocation and program priorities. Also,
cost information will be essential to accurately report on

and evaluate performance.


78

not, that the agencies are going through a various set of programs,
and they’re going to try to establish accounting methods on their
own. And they’re going to try to do something without a lot of cen-
tralized guidance or without a lot of, perhaps, even liaison or co-
ordination amongst themselves.

Mr. DESEvE. Let me distinguish—the question I was trying to
answer for Mrs. Maloney was why there wasn’t a single accounting
system within the Federal Government.

Mr. FLANaGan. Yes.

Mr. DESEVE. I guess the answer is that historically, and I can’t
again, vouch for history, the chairman may want the same type of
report from me. But historically, each agency was asked to produce
its own financial information. Now, this is not to say that we don’t
supply standards across the Government. As Mr. Chapin indicated,
the Financial Accounting Standards Advisory Board will be finaliz-
ing those standards very shortly.

MB, throughout the years, GAO’s yellow book, various OMB
circulars tell agencies how to do that. And we then make sure they
comply uniformly with how they’re supposed to do it. The continu-
ation of those standards, so that the Department of Housing and
Urban Development should look like the Department of Energy,
should look like the Environmental Protection Agency, is very
much there. You shouldn’t be misled.

If you are, then we've got to go back and fix why you're misled.
But it’s almost like a company like General Electric, for example,
which would say to one of its subsidiaries, you keep your own
records in GE credit; you keep your own records in the large steam
generator division; and you do your accounting—we don’t have a
single accounting system here at General Electric. That’s a strategy
that General Electric uses to produce audited financial statements
for each of its divisions.

They then consolidate those at the central level. What Mrs.
Maloney was saying was that in New York, and certainly in Penn-
sylvania and certainly in Philadelphia where I come from, we used
a different strategy. We had a single accounting system, and the
State police didn’t have their own accounting system any more
than the welfare department did. They all bought into a central
system.

Here in the Federal Government, it’s been decentralized, I sus-
ect, for historical purposes. I suspect that both the agencies and

ongress felt that they wanted independence from the great heavy
hand of OMB, or the great heavy hand of GAO. The chairman
might even have better insights than I do as to why it happened.
What we're trying to do is make sure now that there is standard-
ization across each system, and we're getting closer and closer to
that each day, and that the information is reliable.

About 47 percent of the agencies who are currently under au-
dited financial statements have clean opinions. That means about
youghly 25 percent of the agencies throughout the Government.
And it’s growing over time. We're not there yet. But as Gene indi-
cated, in about 2 years, they'll all be audited; for 1996, they’ll all
be audited. We hope that more and more of them over time will
get clean opinions as they go.


88

Mr. Horn. Now let’s move to the judiciary. What is the status
of the judicial branch in terms of audits? Does GAO audit anything
in the judicial branch?

Mr. Doparo. We do selected type of reviews; like, for example,
courthouse construction and those type of things. But no financial
audits have been done. We’ve not been asked to do those. We don’t
do those. So the status is that basically the judicial branch is not
subject to an annual financial audit requirement.

ir. HORN. You would have to be asked by whom? The Chief Jus-
tice of the United States or the Committees on the Judiciary or
what?

Mr. Doparo. It could be either one. We would probably have to
be asked by one of the committees. And one of the problems that
we have, from a resource standpoint, is that we’re trying to get
enough audit coverage of the executive branch and cover a lot of
the money. The judicial branch is about, I think, somewhere be-
tween 2 and 3 or 4 percent of the Federal budget. So we haven’t
made that a top priority, because of the limited amount of money
over there, and the fact that we’ve been trying to get the bulk of
the dollars in the executive branch audited.

So it’s really more of a matter of a resource constraint from our
standpoint, than anything else.

Mr. Horn. Well, let’s have our committee staff, both majority
and minority, and your staff take a look at that, and see if some-
where we can work in, just for the sake of having a base with the
administrative office of U.S. courts, which is a very well-run oper-
ation. See what they’re doing. And if we could be helpful to have
a joint audit as a base, then we’re agreed.

I don’t think any branch of the Federal Government, be it legisla-
tive, executive or judicial, should be exempt from a basic audit now
and then. And I think the Speaker felt the same way with the leg-
islative branch. They’ve been exempt since 1788 somehow; so let’s
change that.

Mr. Doparo. And for the record, Mr. Chairman, I know the
Comptroller General feels very strongly the same way. We’ve had
a number of discussions along these fines. And I’m sure he’d be
happy to talk with you about it as well.

Mr. Horn. Well, let’s work out something, and see if we can’t do
that, just as a base.

Mr. Doparo. OK, good.

Mr. Horn. Now, what I'd like to know, and maybe Mr. DeSeve,
you're the one to do this, and Mr. Chapin, certainly, with your pri-
vate sector experience—you can all comment on it. What are the
principal differences in the accounting systems between the private
sector and the Federal Government? are there principal dif-
ferences? Can we not apply corporate financial accounting of the
private sector to the executive branch? I realize there’s no profit;
although when I was doing my book on the Senate appropriations
process years ago, I was talking to Senator Ellander, who, without

uestion, was the hardest working member of the Appropriations
ommittee.

And I got into the problem of nonprofits. And he immediately
said, Steve, nonprofits are where they divide up the profits among
the staff. So that was his view of nonprofits, which I always


43

than ever that the American taxpayers, managers, elected
officials, and policy makers know how much programs actually
cost, which programs are working and providing good value, and
where changes are needed to improve program effectiveness and
efficiency. I believe the topics you asked me to address today
all play an essential role in providing these users of financial
information with the data they need to make informed decisions on
the critical issues faced in better managing the Federal

Government.

Today I will provide information on each of the specific

topics you requested.


129

Congressman Inglis from South Carolina. And this was a very in-
teresting concept that he had.

When he started evaluating many programs, he would say,
what’s the Wal-Mart philosophy here; how does the customer look
at this; how does the citizen look at this? And I think that this is
something that we need to pay more attention to, in terms of par-
ticularly those means tested programs that affect the poor; those
programs that affect veterans; and those programs that affect the
aged. We need to be looking more and more to them for evaluation,
for analysis on what we can do to make that program more suc-
cessful for them.

And I think in many cases, you'll find that the people have great
ideas about cutting costs and so forth. And I think that’s one thing
the Federal Government does not do very well. We don’t really pay
attention to the customer. And we need to do that.

Mr. Horn. Successful businesses have done that.

Mr. Fox. Exactly, and this is——

Mr. Horn. I don’t know if you're familiar with Target stores.
Here’s a successful operation. The customer is always right.

Mr. Fox. That’s right. I ran into a situation just recently where
the passport office in Rockville, MD is open from 9 a.m. to 11 a.m.,
Monday through Friday. Now, that’s not a very friendly customer
operation.

Mr. Horn, Yes.

Mr. Fox. I mean, these are the kinds of things that all of us are
well aware the Federal Government does that we need to change.
Perhaps we should turn that over to a private operation, to some-
one who’s open 8, 10, 15 hours a day—let them handle the passport
procedures. But this is just one example of many things that need
to be done in the Federal Government to make it more customer
friendly:

Mr. Horn. Right. Do you want to add something, Mr. Brecht, to
the capital budget?

Mr. BRECHT. Yes, thank you. I see two problems. One, if you seg-
regate capital budgeting from the rest of the budget, you're making
an assumption that those specific capital items have economic
value. The example that was previously used was education. There
is a built-in assumption, for example, that if you spend money on
education, it does produce value. But yet if you believe the reports
that the Department of Education is putting out, where half the
schoolchildren, or three-quarters of the schoolchildren are not able
to read proficiently at their age level.

And there are all the different commission reports on the deficits
of our educational system. That begs the question.

Mr. Horn. On the other hand, it might be Wizard of Oz-edry, but
the statistics have been steady over time, that if you're a college
graduate plus graduate school, you make more than the average
college graduate. If you’re a college graduate, you make more than
the average high school graduate. And the average high school
graduate, now I’m talking with a diploma, makes more than the
person who has completed the eighth grade.

Mr. BRECHT. Absolutely.

Mr. Horn. So there seems to be some correlation, no matter how
incompetent some schools might be. It might just be that they’ve


113

Testimony of Lyle A. Brecht to the Subcommittee on
Government Mamagement, Information & Technology
11 July 1995

© benchmarks for establishing long-term goals and objectives
© performance measures that help government managers track progress toward the
benchmarks.

Congress should focus its efforts at defining mission and establishing benchmarks for programs
Without this foundational step, formulating a budget for the program is mere guesswork and
involves directing money toward "good works" rather than toward producing results,

Meaningful performance measures for each program should drive decisions as to which programs:
to fund and at what level

Program level financial information can be displayed using World Wide Web Internet technology.
Systems deployed at the program level can gather information and make it available in real time.
There is no need to wait for the Agencies and Departments to build expensive, financial
‘management systems.

The Congress should reengineer the budget process in ways that produce collaboration with the
federal managers, These federal managers are the ones who must lead, organize, inspire, deploy,
measure, and reward those who implement the programs Congress funds.

Citizens Need an Objective "Report to Citizens"

Each year literally thousands of documents are chumed out purporting to report the reality of
‘government operations. These reports are merely one Agency, or Department's, or special
interests idea of reality - and often a narrow slice of reality

To compound the confusion, this torrent of segmented information hits the media where it is
sanitized, packaged into digestible bite-size tidbits, and washed down the citizen's gullet between
advertising messages. The end result is a garbled impasto of disconnected, contradictory facts that
citizens believe are the truth about government.

This swirl of misunderstandings, dis- and misinformation has been going on a long time. This
imbroglio is caused primarily by the lack of three fundamental things: 1) the need for a unifying
vision of where we are heading in the future, 2) answering what purpose or mission government
should play in achieving this vision; and 3) clarifying what the core values are that well use to



122

plement that system Governmentwide, in probably 5 to 10 years.
The top of the pyramid is——

Mr. Horn. You're thinking of the Coast Guard system, or you’re
toinking of what they’re working on under the Chief Financial Offi-
cers Act?

Mr. Fox. The Coast Guard system.

Mr. Horn, The Coast Guard.

Mr. Fox. A Coast Guard type system that would fully integrate
information. Now, it may be less, give or take a few hundred mil.
lion. But it seems like it cost the Coast Guard $2 million or $3 mil-
lion to develop this system. And if you multiply that times, consid-
ering the size of the Coast Guard, times other agencies, you're talk-
ing about hundreds of millions of dollars, perhaps $1 billion.

Now, the top of the pyramid is what I demonstrated earlier. And
that could be generated for very limited amount of expenditure,
and very quickly—in a matter of months. It would virtually change
the way Congress works. It would change the way the media re-
ports the way Congress works. And I think this is—the previous
panel fails to recognize the importance of making this information
available to citizens and the media and the Members of Congress.

As you are well aware, and pointed out earlier, with your com-
ments about Mr. Witten, information is power. And when the infor-
mation becomes available to every member, the media and citizens,
you'll have a retired gentleman in Des Moines calling you up next
week, if he had access to the information, and saying, “Congress-
man Horn, do you realize, when you were talking about Defense”—
this had been televised on C-SPAN, hypothetically—“do you realize
when you were talking about these programs that you can go in
now and get this information.” And then he gives you a 15-minute
discourse on his analysis.

You're taking notes furiously because you say, “yes, let’s ask
those kinds of questions. You'll have citizens—”

Mr. Horn, Right.

Mr. Fox. And this moves us back, very interestingly enough, to
the Athenian democracy as developed in 6th century, B.C., where
each citizen had to actively participate in Government a number of
times in their life. They would actually take a month or a year off
and actually become an actual manager, implementer of Govern-
ment activities. What I’m predicting for the 21st century is, we'll
begin to see very active citizen involvement.

Maybe not millions of people, but thousands of people will be-
come involved with this information as it becomes available, just
as they’re involved with C-SPAN now, and be calling up members,
becoming kind of watch dogs in various areas that they have an in-
terest in. This is one reason why we need to make this available.

Mr. Horn. That’s why the Internet is so popular.

Mr. Fox. Exactly, exactly. I would also like to say that the Fed-
eral Accounting Standards Advisory Committee was created in
1990. It’s interesting, it was created on October 10th, which was,
I believe, the 28th anniversary of the report of the President’s
Commission on Financial Standards on Budget Concepts. And they
are now going to produce their final report this year, which is 5
years later.


127

ulace. And I think that the Congress can do a lot to engender that
energy.

Mr. Horn. Point well taken. As you krow, the successful corpora-
tions and private businesses have been those that have asked the
People that are on the firing line, making the product, how they
could improve the product. Those of you that are management con-
sultants go in and get paid for doing what the boss ought to be
doing, which is walking around and listening to the employees. So
you make some good suggestions here.

Now, let me get back to the capital situation. One of the propo3-
als before the Gongress, authored by the chairman of the full com-
mittee, so I am very sympathetic with it, is the idea of a capital
budget. Now, what are your feelings on the idea of a capital budg-
et, which would include the investment money of the Government
that has a long-term return to society, whether you're talking
about bridges, highways, railroads—all the things that Congress
did to fund the expansion and the Westward movement, for ex«m-
ple, the transcontinental railway, canals, so forth, moving people
and products around more conveniently than if they trudged
through mud roads.

We have longer-term ones. And the definitional problem, obvi-
ously, is important here because the idea is to get those particular
funds off budget in the sense that we now have an airport improve-
ment fund; we now have a highway trust fund. As you know, Presi-
dents, regardless of party, regardless of ideology, have sat on ex-
pending those moneys to use them as a reduction of the annual def-
icit and making the fiscal situation look better than it really is.

So I'd just be interested in your feelings on this. And if you don’t
like those ideas, what’s a better substitute?

Mr. Fox. Capital budgets are very important, as you know, for
most governments in the United States—both State and local gov-
ernments.

Mr. Horn. Often they are part of the basic budget.

Mr. Fox. That’s right.

Mr. Horn. Not separated into the separate capital budget,
though.

Mr. Fox. That’s right.

Mr. Horn. Except in Pennsylvania, and maybe one or two others.

Mr. Fox. That’s right; you're right. My feeling is that, for in-
stance, in the area of highways, the State collects the tax in most
cases. ‘Why not just quit, collecting a Federal tax, and let States col-
lect a comparable tax, more or less, whatever they would like to

lo?

Mr. Horn. Well, they do, but your problem at the Federal level
comes in equalization. In other words, Wyoming and Montana don’t
really get enough money to maintain their interstate highways.

Mr. Fox. That’s right, that’s right.

Mr. Horn. These are States with lots of miles—or as I remem-
ber, a British debating team came through Texas. They said, Texas
is miles and miles of miles and miles.

Mr. Fox. That’s right.

Mr. Horn. So that’s Montana and Wyoming, with very tew peo-
ple, except the people driving through the State, to leave some
guest tax on.


CONTENTS

Hearing held on July 11, 1995 .
itement of:

Dodaro, Gene L., Assistant Controller General, Accounting and Informa-
tion Management Division, General Accounting Office; Donald Chapin,
Chief Accountant; Paul L. Posner, Director, Budget Issues, Accounting
and Information Management Division; and G. Edward DeSeve, Con-
troller, Office of Federal Financial Management, Office of Management
and Budget ..

Fox, Harrison W., Jr, President, , Citizens for Budget Reform; and tyle
Brecht, publisher, AmericaRepo1

Letters, statements, etc., submitted Tort the record by:
Brecht, reaht: Lye publisher AmericaRe; or, prepared statement of ..
Edward, Controller, Offic Federal Financial Management,

Sits of Management and Budget, prepared statement. of

Dodaro, Gene L., Assistant Controller General, Accounting and Informa-

tion Management Division, General Accounting Offi
FY 1995 estimates for CFO agencies and others
Information concerning evolution of GAO’s work
Prepared statement of ..

Fox, Harrison W., Jr., Pre:
statement of

Maloney, Hon. ly PI
it New York, prepared statement of ..
Mascara, He nk, a Representative in
Pennsylvania, prepared statement of .

yr Budget Reform, prepared

qq)



106

PRS will be user-friendly and will make timely and comprehensive information more readily accessible to
the media, taxpayers, citizen groups, and elected and appointed officials of the United States.

Conclusion

‘The federal government should adopt and use on a daily basis a Comprehensive Federal Budget, Balance
Sheet, and Financial Plan which will provide

* the identification of a broad range of risks inherent in federal promises (liabilities)

* an in-depth Program Reporting System

* a comprehensive compilation of federal spending and revenues

* a complete listing of federal assets and revenues

* an easy to use electronic “window” accessing the detailed working of the federal government
* the latest financial management techniques and tools, including asset/liability management

‘Adoption of these changes will result in massive changes in the way the federal government works
‘The Citizen’s Budget is needed to help end the bankrupt behavior of the federal government and provide
all taxpayers with value for their tax dollars.


66

measures as having sufficient credibility. And what we came away
with was a consensus by all State officials that you need an incuba-
tion period, which is why we have the pilots, particularly for some
of the sensitive areas.

Mr. Bass. Another question—if an account has multiple pro-
grams in it, that makes measuring cost by program exceedingly dif-

cult. Are current Federal accounting systems adequate to break
down costs by programs?

Mr. DESEveE. The answer is, probably not; which is one of the
reasons we want to go through the process with agencies of realign-
ing their account structures, working with appropriators to get
some agreement on that. If we fail in doing that, we can create
pseudo-codes; we can create artificial crosswalks to allow it to hap-

en.

But right now, the account structures in many agencies need sig-
nificant revision. And that’s why we, in A-11 this year, asked agen-
cies to consider those revisions.

Mr. Bass. Performance reports are being described as providing
useful information about agencies. To be truly useful, the informa-
tion included in the reports must be reliable, verifiable, and com-
parable over agencies. Is there any plan to develop performance
measurement standards that can facilitate performance auditing?

Mr. Doparo. Part of that—the testing, the reliability of the per-
formance measures—is expected to be done through the annual
audit requirement under the Chief Financial Officers Act. Many of
the data that’s included in what’s now termed to be the overview
of the reporting entity in assessment of performance, there’s cer-
tain requirements that the auditor has to check to make sure that
that data is not inconsistent with information presented in the fi-
nancial statements.

But we do need to look at, in the future, how best to assure the
reliability of all performance measures, particularly those perform-
ance measures that are not financial based. And that’s something
that’s an excellent point, and I think needs to be worked on. Right
now we're trying to just get the basic financial data straightened
out. But the reliability of performance measures is key.

And we need to focus on that. We’ve had many discussions about
it, and I think we need to focus on that a little bit more.

Mr. DESEVE. The second part of your question is more difficult;
that is the establishment of standards either within an agency or
across agencies. In order to do that, you have to first, along with
Congress, get an agreement about what an appropriate standard is.
For example, in a credit program is it an appropriate standard to
have a 10 percent default rate, for example, in that program?

It may be that that’s exactly what you're trying to do, and if you
only had a 5 percent default rate, you wouldn’t be broadly meeting
the mandate of that program to out and find first time home
buyers or minority home buyers along the way. So there needs to
be a dialog between Congress, which establishes the authorizing
Purpose for, again, for example, for a student loan.

If we had a zero default rate on the student loan, we probably
would not be making the right student loans, according to the con-
gressional intent along the way. So there needs to be a dialog as

‘ongress looks at the performance measures. They need to ask,


52

Stewardship -- This proposed statement is to recommend
standards for reporting on the Federal Government's
responsibility for certain resources entrusted to it. This
information would be reported as "Supplementary Stewardship
Information." Generally the costs of these resources are
reported as expenses in the financial statement. However,
these expenses are intended to provide long term benefits to
the public. Therefore, in the proposed stewardship
statement, the Board has proposed that data on these
resources should be highlighted to show the long-term nature
of these resources and to demonstrate accountability over
them. The statement identifies the following stewardship
categories:
° Stewardship PP&E
Heritage Assets, Federal Mission Assets, Stewardship
Land
° Stewardship Investments
The costs incurred in providing education and training
programs financed by the Federal Government for the
general public, and the costs incurred in financing
research and development efforts
° Other Stewardship Information
Information that will aid in assessing the sufficiency
of future budgetary resources to meet obligations as

they become due, including social insurance.

11


101

Recommended Federal Budget, Balance Sheet, and Financial Plan
Discussion with Recommendations (Underlined)

L. Congressional and President's Budgets

The Comprehensive Federal Budget, Balance Sheet, and Financial Plan provides a system that,
reflects recent advances in Brancial management” 1 begins with the President's s budget The Presidents

outcomes andres
Th ional bu the President. Each

authorization committe, ‘Appropriations subcommittee, andthe Ways and Means and Finance commitees
should provide the appropriate foresight, legislative initiatives, and oversight. And the congressional

ion iat ified. The complexity created by the current
systems make it virtually impossible to meet deadlines and review constructively federal programs.

Federal programs achieving the expected outcome and reaits should be identified and federal managers
rewarded ha

terminated,

Also, legislat ive action needs to be taken to

direct/mandatory spending. These so called “uncontrollables” should be brought Ader ela cro by
the appropriate committees

HL, Budget receipts, expenditures, lending, and recognition of other spending or losses

The President’s and congressional budgets should fully reflect receipts, expenditures, lending, and
recognize all other spending or losses that might be expected, Off-budget federal activities should be
placed back on budget. The current Presidential and congressional budgets are not fully unified budgets as
existing legislation has placed certain activities off-budget. This has resulted in understatement of the
deficit by over $100 billion per year.

“Measures of budget resources and spending are frequently misleading, making it difficult for budget users
to compare program and policy levels, and to understand the full magnitude of governmental operations.””
For example, the federal government's use of offsetting calculations “removes from visibility” billions in
revenues and outlays. All offsetting receipts should be fully accounted for in the budget documents.

Private companies and many families and individuals plan for emergency or unexpected spending. The

federal government should plan for “regular” emergencies or natural disasters, The federal budget should
set aside each year, in a reserve account, funds for emergencies and natural disasters.

‘Today expired appropriatins are available for expenditure for up to five years. No funds should be
obligated or spent unless legislation is enacted extending the expired appropriations.

” Elmer Staats, “Federal Budget Concepts and Procedures Can be Further Strengthened”, United States General Accounting
Office, March 3, 1981, page 3.


26

the size and nature of these programs, understanding their
financial condition is important to understanding the financial
condition of the government as a whole. However, uncertainty
surrounds long-range estimates. For example, the present value
of Social Security's 75-year estimate of its actuarial deficit
increased by about $1 trillion between fiscal years 1993 and
1994. Nevertheless, decisionmakers need to be aware of this huge
deficit--$2.8 trillion as of September 30, 1994--which is looming

on the horizon unless actions are taken to address it.

It is crucial for decisionmakers to take claims on future
resources into account when budgeting, but the strength of the
underlying claim must also be considered. The strength of claims
on future resources is really a continuum ranging from very firm,
as in the case of actual liabilities like the public debt, to
less firm, as in the case of commitments to make payments like
social insurance, and finally to the mere expectation that
current policies will be continued, such as continued support for

education.

There are even claims for future spending that are less firm than
the expectation that current spending programs would be
continued. These claims could be thought of as unmet needs--
spending on needs that have not been addressed in current
programs. Examples of estimates for such funding are as much as

$425 billion for maintenance and improvements to highway

15


22

basis gave decisionmakers misleading signals on the cost
comparisons among grants, loan guarantees, and direct loans.
Other areas in the federal budget could potentially benefit from

the accrual approach.

The Savings and Loan crisis of the 1980s illustrates an area
where cash-based budget reporting was misleading. During the
1980's, as hundreds of thrifts failed, the cash-based budgetary
system did not signal the Administration and the Congress of the
deteriorating financial position and federal budgetary cost
commitments associated with the nation's deposit insurance system
until cash was actually paid out to depositors. The cash basis
reporting in this case was a lagging indicator of trouble that
failed to signal budget decisionmakers in time to avert or limit

the damage.

Concerns that cash-based budgeting can be misleading for some
programs led to proposals to extend the use of accrual budgeting
to federal insurance programs. In the fiscal year 1993 budget,
the Office of Management and Budget (OMB) proposed using a credit
reform approach to budgeting for these programs. We are
currently studying the use of accrual budgeting for federal
insurance programs. Our work to date has revealed shortcomings
with the cash approach to budgeting for these 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

1


105

risks. match assets and liabilities, and propose a plan that will bring federal assets and liabilities into
balance,

VII Federal expenditure tracking via “chart of accounts”

‘When citizens and the media join in the debate about the public s they consume and the price they
are willing to pay, government responds with more careful and creative taxing and spending choices. As
citizens becoming increasing aware of the tremendous overlap and duplication among federal
programs, they are demanding that program numbers and size be reduced.

The tracking of federal expenditures “chart of accounts” via a Programs Reporting System (PRS) is
urgently needed, PRS will identify how many programs are currently operated by the federal government,
This will be done in a manner that can be easily and widely understood. ‘The PRS project will give the
media, citizens, elected officials, and government managers-timely information and the analytical tools
they need to gain control over the federal government's programs, More careful and creative taxing,
spending, and program reduction choices--more bang for the taxpayer's bucks-will be the result

Gaining access to federal program information and analysis is often frustrating. In fact, no one knows how
many federal programs there are! No electronic link between federal budget accounts and programs exist
A senior economist of the House Budget Committee Majority staff recently observed that “is very difficult
to obtain information about the full range of federal programs.” Without readily accessible program
information, duplication, waste, and inefficiency is running rampant within the federal government.

For example, over 300 federal welfare and 157 federal jobs overlapping programs are currently operated by
the federal government. Unlike most businesses, the federal government does not often compare, review,
and identify and then eliminate redundant programs that are “on the books.”

Developing a program reporting system (PRS) is the first step in gaining control of the federal government
welfare, health, education, defense, foreign operations, and social service systems

PRS will be electronically available to citizens, press, government managers, and members of Congress and
their staffs. Overlapping and duplicative programs will be identified, The PRS will provide ready access 10
budget, management, accounting, and eventually performance program data. The major goal of PRS is to
provide incentives for legislators and program managers to improve federal program efficiency and
effectiveness, These incentives are largely lacking today ~- as little is known about programs by the
average citizen and legislator

The PRS Project will be produced in three phases, Phase I - Program Data Collection will identify current
program data, collect historical program data, assemble program data projections and all information will
be electronically added to database, Phase II - Program Analysis will generate the capacity to review
federal program trends, provide the ability to use program data for management and projection purposes,
provide for the analysis of programs -- clarified and enhanced by program goals, objectives, and
benchmark comparisons, allow the presentation of program by types -- welfare, health, children, jobs, for
example, and provide the gbility to compare and contrast programs across program types

Phase III - Program Options will allow strategic presentation of federal program options, insure measures
of program performance across programs and agencies, provide knowledge of effects of program
modifications on budgets, and allow comparison of program options in constant and current dollars


34

information on how taxes have been spent and estimates on how
future taxes may be spent, it is not intended for the average
citizen's use. OMB formerly published a Budget In Brief that was
more accessible than the full budget document, but it was
discontinued years ago. For fiscal year 1996, OMB once again
included a citizen-oriented document as part of the budget
documents. A Citizen's Guide to the Federal Budget, Fiscal Year
1996 provided an overview of the budget, highlighting such
concepts as the deficit and the debt, and reviewing the
President's 1996 proposals. It did not, however, provide much
insight on the long-term implications of current spending

policies.

The public needs a report that is easy to understand, concisely
presented, and able to capture and focus its attention on
critical issues. The information contained in such a report
should be clear and understandable to the average person.
Another essential element of the report would be an explanation
of how the government has performed during the past year,
including a statement on whether the government and its citizens
are better off than they were last year. It also would be
important for such a report to include some perspective on the
long-term implications of current budget policies and provide a
commentary on the relationship between federal fiscal policies

and priorities and the future economic well-being of the nation.

23


115

Testimony of Lyle A. Brecht to the Subcommittee on
Government Management, Information & Technology
11 July 1995

5. Make assumptions explicit. As Einstein remarked, "our theories determine what we
measure." Peter Drucker, a respected management consultant, says, “what you measure is
what you get and if you can't measure it, forget it, itis probably not worth doing in the
first place."

6. Producing a Report to Citizens is a divergent problem. Convergent problems are those
problems where the more we study them, the more we converge on an acceptable, clear
solution. With a divergent problem, the more we study the problem, the more divergence
in views and ideas for solving the problem appear.

7. Say something important in the report. In my conversations, I encountered:

© government officials who believe that the amount of debt the government owes to
citizens "makes no difference because we just owe it to ourselves.” Given this
perspective, what is the incentive to budget more prudently since whether the
government has borrowed $1,000 from each citizen or $1 billion matters little?

© government officials who believe that the federal government is not a business.
This seems obvious, but leaves the door open for an accounting of government
activities that makes litle sense to ordinary citizens who engage in the business of
the economy. The result is, as Harrison Fox's work has uncovered, liabilities that
are unaccounted for, either on the balance sheet of the federal government or their
impact on the P&L statement measured, as AmericaReport attempts to do.

© —_agovernment official who believes that "the White House will never let us tell the
citizens the real truth" concerning the financial situation of the nation. However,
this official was reminiscing about trying to get certain financial reports through
both Republican and Democratic controlled White Houses over the past twenty
years. His judgement was that “less than half of AmericaReport would get by the
White House."

© a chief of an influential Congressional reporting unit believes that "as long as the
Gross Domestic Product is increasing, there's nothing to worry about." GDP
‘masks or does not account for so many externalities. Some small countries have
negative real economic growth even with positive growth in GDP when



58

In addition to requiring agency-wide financial statements,
GMRA requires the Director of OMB to designate agency components
that must prepare and submit separate stand-alone audited
financial statements. OMB is working closely with the agencies
to develop criteria for determining the agency components subject

to this requirement.

We anticipate that the improvements in the timeliness and
accuracy of financial information reported by OMB to the Congress
in November 1993, will extend to all agency activities as a
result of the expansion of the audited financial statement

requirements of the CFOs act.

Strengthening Financial Management Personnel and Organizations

Essential to successful achievement of the CFOs Act
requirements is a quality Federal financial management work force
and appropriate CFO organizational structures to achieve
financial management priorities. To achieve these objectives,

agency CFOs

° have established CFO organization structures to ensure

effective delegation, communication, and accountability;

* are working to improve recruitment, training, and retention

of qualified financial management personnel; and

17


112

Testimony of Lyle A. Brecht to the Subcommittee on
Government Management, Information & Technology
11 July 1995

whether the capital allocated to specific government programs produces value

It is difficult to obtain useful financial information concerning the programs the federal
government manages. Program level information is often buried deep within thick, inaccessible
documents. What financial information one can get is hard to interpret. This is because financial
data is presented without the context of program mission, benchmarks and measures of
performance

Lawmakers end up making budget decisions without the benefit of knowing what programs are
producing value - and which programs are not performing. Without this basic information,
budgeting is primarily political, subject to. special interests lobbying. The question of what
produces the most value from a fixed amount of capital is never addressed.

The Vision

‘The solution to the problems mentioned above is to publish a "Report to Citizens." The budget
process must also be reformed

Budget Reform Measures

Two budget process reforms are required:

1) the development and use of a rational capital allocation process for determining which
programs to fund. Programs should be funded because they create measurable value for
shareholders - the citizens. Also, a discussion of which level of government should manage
these programs or whether the private sector should manage the activity needs to take
place for each program.

2) the use of modem information technology to track the results of government programs in
real time and distribute this information widely.

Three things are necessary to implement a capital allocation process for determining what
programs to fund:

© the mission of the proposed program


76

municipal waste water treatment construction grant program and
the New Jersey negative income tax experiment. Congress also
turned to GAO for information and analysis during the oil supply
disruption of 1973 and to review, on a regular cycle, the quality
of data produced by the Energy Information Agency.

GAO's evolution continued under the current Comptroller General,
Charles Bowsher, who was appointed by President Ronald Reagan and
assumed office in 1981. GAO's work continued to involve a mix of
issues extending from the very detailed to the very broad. The
expanding scope of GAO's activities was exemplified by GAO's
alerting the Congress to the financial condition of the nation's
savings and loan and banking institutions and its increasingly
outspoken concern about the financial condition of the
government. As the 1980s unfolded, GAO assessed the problems of
the government's finances and suggested a conceptual framework
for a new financial management system embodying an integrated
approach to the budget and accounting components. In addition,
GAO's work provided recommendations aimed at improving the
budgetary process.

GAO also renewed its emphasis on financial auditing. GAO urged
the departments and agencies to produce meaningful annual
financial statements and to ensure the reliability of those
statements through an independent audit. Those views gained
acceptance and in 1989, GAO audited the financial statements of
the U.S. Air Force, an effort whose scope exceeded that of any
previous financial audit in history

In the years that have followed, GAO worked closely with the
Congress to improve the financial management of the Government.
In 1990, the Chief Financial Officers (CFO) Act, which GAO
strongly supported, was passed, creating a federal government
pilot program for agency-wide financial statements. As part of
the implementation of the CFO Act, GAO conducted several large
scale audits and assisted agencies in developing their financial
management systems. In 1994, Congress expanded the CFO Act by
passing the Government Management Reform Act. This Act requires
annual agency-wide audited financial statements for the 24
largest executive departments and agencies beginning with fiscal
year 1996, and sets the stage for GAO to audit the consolidated
government wide financial statements starting for fiscal year
1997.


28

nature. Others view these programs as "pay-as-you-go"
entitlements similar to those financed by general revenues, with
a liability for only the amounts that are currently payable.
There are strongly held views on both sides of the question. The
majority view among FASAB members is that no long-term unfunded
liability exists although there is a public perception of an
enduring commitment and support for liability treatment. FASAB
is exposing for public comment an accounting standard that would
call for reporting amounts due and payable at year end as a
liability and for full disclosure of several different estimates
for various populations and time periods of these programs.
FASAB believes this is the most feasible way to deal with the

issue.

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. As I noted earlier,
GAO's own simulations of current budget policies over the longer
term helped policymakers understand the sustainability of current

policies.

Information in new financial reports on assets owned by the
federal government as well as federal investments intended to
have future benefits for the nation can also provide a valuable

perspective for budgeting. Stewardship reporting would cover

7


94

[Note.—Due to high printing costs, the information referred to
above can be found in subcommittee files.]

Mr. Fox. Thank you very much. Budgeting is often the subject
of public consideration. But it usually loses most people’s attention.
As Gladstone has observed, “budgets are not merely affairs of
arithmetic, but in 1,000 ways go to the root of individuals, the rela-
tionship of classes and the strength of kingdoms.” I think the lack
of attention is being somewhat overcome in recent times by events
in California, of which, Mr. Chairman, you’re very much aware.

In Orange County, the consequences of not including a balance
sheet and an asset liability strategy as part of the budget and fi-
nancial Rrocess has been catastrophic. Orange County bankruptcy
has shocked the Nation’s financial markets, and placed every citi-
zen in Orange County at risk. And some of the things I’d like to
talk about today relate directly to the lessons we’re learning from
Orange County, from Mexico, from Brazil, many from New York
City, from Bridgeport, CT—all Government who have gone bank-
rupt in times past.

I did a little calculation a few minutes ago, as I was listening to
the previous witnesses. And it’s my calculation that the Govern-
ment has added to its liability, since this hearing started, a little
over 3 hours ago, about $200 million, or about $2 million a minute.
For a few of these minutes, in terms of actual expending resources,
we could come up with a system which would satisfy many of the
needs, I think, that were expressed earlier, when you were ques-
tioning the other witnesses,

We're not talking about a lot of money, at least for the first
round, when we're developing these systems that are normally in
place in the private sector. And Mr. Chairman, I'd like to com-
pliment you for you observations earlier about the importance of
applying many of the tools and concepts that the private sector cur-
rent ly uses to the Federal Government. This is something we need

0 do.

I’ve worked in the Congress for seven Members of Congress. Be-
tween these stints, I move out to the private sector, and I’ve
worked for 7¥2 years with financial institutions. During my work
with these financial institutions, many of which were in as bad
shape as the Federal Government is now, when I went to see them.
In many cases, in a matter of a few months, we were able to put
into place systems that would at least allow the management to
make the kinds of decisions they needed to make to hopefully get
themselves in a solvent position.

What we're talking about today is very doable. The resources are
not that extensive, compared to the amount that we're losing each
year or adding to our liabilities. We’re adding over $1 trillion a
year to our liabilities, because of poor management. That’s our cal-
culation. I'd like to spend about 2 more minutes summarizing, and
then I want to give a short demonstration of a software package
that we are developing that would help provide the information I
think you and others are looking for.

I have here, as part of my submission, a summary of rec-
ommendations from my testimony, and I'll just read the general
recommendation. The current unified budget presented ty the
President each February and acted on by the Congress should be


9

Mr. Horn. Thank you all for coming. We look forward to your
testimony. At this point, I will swear you all in, and we will start
with, the first witness. If you would, stand and raise your right

and.

[Witnesses sworn.]

Mr. Horn. Thank you, please be seated. That is a formality
which the subcommittees of the Committee on Government Reform
and Oversight follow. We would appreciate it if you could limit
your statement to 5 to 10 minutes. give this panel more leeway
than usual, because I think we'll be able to proceed easily that
way. And then we throw it open to questions, alternating between
majority and minority.

d obviously, your full, written statement will be put in the
record, after the individual introduction. So summarize the high
points any way you would like. You have roughly 5 to 10 minutes
to do that. Then we'll throw it open to questions, after you've all
finished. So if we can begin with Mr. Dodaro, the Assistant Con-
troller General, Accounting and Information Management Division
of the General Accounting Office. Welcome.

STATEMENTS OF GENE L. DODARO, ASSISTANT CONTROLLER
GENERAL, ACCOUNTING AND INFORMATION MANAGEMENT
DIVISION, GENERAL ACCOUNTING OFFICE; DONALD
CHAPIN, CHIEF ACCOUNTANT; PAUL L. POSNER, DIRECTOR,
BUDGET ISSUES, ACCOUNTING AND INFORMATION MANAGE-
MENT DIVISION; AND G. EDWARD DESEVE, CONTROLLER,
OFFICE OF FEDERAL FINANCIAL MANAGEMENT, OFFICE OF
MANAGEMENT AND BUDGET

Mr. Doparo. Thank you, Mr. Chairman. Good afternoon. Having
been before this committee several times, I’m prepared for a 5-
minute summary. With me today, to my immediate right, is Don
Chapin. Don is GAO’s Chief Accountant and has been our rep-
resentative to the Federal Accounting Standards Advisory Board.
Also with me is Paul Posner, Director of our budget group, to Don’s

right.

ire pleased to be here today to discuss efforts to strengthen
the reliability and usefulness of information for managing the Gov-
ernment’s finances. GAO has long advocated financial reporting re-
form, and we are pleased to see this committee pursue this topic.
Achieving improvement is essential, as you pointed out, to enable
more informed decisionmaking and oversight by policymakers, and
to better inform the public.

Mr. Horn. I might note at this time that a quorum is present,
thanks to Mr. Bass. Go ahead.

Mr. Doparo. Thank you. As you pointed out, Mr. Chairman, dif-
ficult decisions are facing the Nation as it implements a new fiscal
policy path toward a balanced budget, and those decisions require
solid budgetary and financial information that fully discloses the
current condition of programs and the stakes flowing from budg-
etary choices.

loreover, public demands are high for controlling costs and en-
suring accountability. Now, I wish I could report today that the
current reporting approaches in the Federal Government give us
all the tools we need to address critical questions about the full


77

Mr. Horn. Because you went in, and I thoroughly endorsed it.
In fact, I wrote a book that’s made that recommendation—Program
Review. As I remember, you were permitted to do that because the
Legislative Reorganization Act of 1946 wanted you to do it. But
Sam Rayburn, Speaker, and Clarence Cannon, chairman of Appro-
priations, never permitted that to be done, as ‘jong as both of them
were alive,

It was only after they died that the GAO was able to get into
program review, which I think you've done a very fine job in that
area. But I wonder, and I see this in universities as they talk about
policy studies and forget public administration, if we got so imbued
with program review that we forgot about the nuts and bolts of
basic financial systems.

Now, it’s sort of like the little bo saying the emperor has no
clothes. If there’s no system in that financial system, I can see the
frustration a trained and skilled accountant like Mr. Chapin would
have when he says, what is this stuff?

Yet thousands of people are employed, making this sort of Wiz-
ard of Oz atmosphere come true. ‘And when you throw it all back,
there’s nothing there—the old guy is hiding behind a machine, and
that’s the Wizard of Oz. Well, that’s the financial system we've got.

Mr. Doparo. Well, we can get you the detailed statement.

Mr. Horn. We'll save a Tittle space for you on that subject.

Mr. Doparo. But my recollection of history is that from 1921 up
until World War II, GAO’s role was examining individual vouchers
and certifying pay ent ahead of time.

Mr. Horn. Right.

Mr. Doparo. And as World War II came about, the decision was
made that Government had grown too much. And then our role
was changed the Accounting Act of 1950, to basically have the exec-
utive agencies keep their own accounting systems and put them in
place. And GAO was to have an audit role.

Mr. Horn. Spot check, if you would.

Mr. Doparo. Spot check those systems. And you're right, as Gov-
ernment grew in the 1960’s and the 1970’s, we moved more into
program evaluation. But I can detail that all out.

ir. HORN. Well, we can all say more on the Defense. Mrs.
Maloney and I are suitably outraged generally over there. So
maybe we'll get into it a little more. I now yield to the gentleman
from Illinois, Mr. Flanagan.

Mr. FLANAGAN. Thank you, Mr. Chairman.

Mr. Horn. The distinguished vice chairman of this committee,
and I’m glad he’s here.

Mr. FLANAGAN. Vice chairman, perhaps, distinguished remains to
be seen. Good afternoon gentlemen. I join the outrage of the panel-
ists here, and I’m glad for my opportunity now to vent, as well.
What’s $28 billion among friends? I have a deep question. As you
were talking about the different agencies and the problems that
they’re encountering and the different accounting methods, appar-
ently, that they're going to engage in and then report back to you
on their various successes and failures.

I am deeply confused as to why that power is decentralized, and
why the agencies are going to run with this on their own, maybe
succeeding and maybe not. We were discussing earlier, were we


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5

STATEMENT BY CONGRESSMAN FRANK MASCARA
BUDGET INFORMATION HEARING
JULY 11, 1995

GOOD AFTERNOON MR. CHAIRMAN. AS AN
ACCOUNTANT AND THE FORMER COMPTROLLER OF
WASHINGTON COUNTY, PENNSYLVANIA, THIS IS
THE KIND OF HEARING | CAN REALLY SINK MY
TEETH INTO.

NUMBERS, ACCOUNTING, THE FEDERAL
ACCOUNTING STANDARDS ADVISORY BOARD
(FASAB), THESE ARE ALL THINGS | UNDERSTAND
AND RELATE TO!

FOR A NUMBER OF YEARS, | HAVE SHARED THE
CONCERN THAT GOVERNMENT BUDGETS,
INCLUDING THE FEDERAL GOVERNMENT’S BUDGET,


1

Testimony of Lyle A. Brecht to the Subcommittee on
Government Maiagement, Information & Technology
11 July 1995

CREATING SHAREHOLDER VALUE:
‘THE NEW STANDARD FOR
EVALUATING GOVERNMENT PROGRAMS

Mr, Chairman, distinguished Members, thank you for inviting me here to testify this aftemoon. I
will make comments for the record concerning this subcommittee’s plan to publish a "Report to
Citizens." I will also suggest ideas for reforming government operations. My comments and
suggestion are based on my experience publishing AmericaReport: A Common Sense Annual
Report to the Citizens of the United States (exhibit attached).

Background - the Starting Premise

Ina participatory democracy, the budgetary problems government faces cannot be solved
without input from the citizens - the shareholders of this government.

It is essential for shareholders of a business to be well informed about the business’ operating
results, Shareholders of a business need this information in order to judge if its managers wisely
invested the capital shareholders let them use.

It is essential for shareholders of government, the citizens, to be well informed about
government's operating results. This is absolutely necessary in order for citizens to participate in
decisions concerning where to invest the capital citizens make available to the government,

‘What concerns citizens is whether the nation is receiving value for the dollars they “invest” each
year. Whatever money government spends or promises to spend must create value for citizens - if
not today, then tomorrow.

The federal government presently spends one quarter of the annual GDP for the United States.
Yet, there are few concrete measures to determine whether this is the right amount of capital to
allocate to government operations, too much, of too little.

Programs are rarely funded based on performance or results, A rational means is seldom used to
determine the budget for an activity. As a resul, itis almost impossible for citizens to judge


81

another vendor post to our own general ledger so that we then
have an accounting record subject to audit.

That electronic streamlining will give us, a: more accurate infor-
mation; b: it will free up a lot of people. And we need those people
to do the kind of audit work that we were just talking about. If
FTE is a scarce resource, and it’s a pool, and we can move FTE
from being data entry clerks to working on financial statements,
we've achieved a tremendous increase in the skill level of those in-
dividuals.

We've also probably achieved better accountability for resources
along the way. So that’s one of the things that we see in procure-
ment reform.

Mr. FLANAGAN. OK. You've described the indirect benefit of using
the VISA card as to more or less privatize the paper trail, just as
a matter of consequence of streamlining the system.

Mr. DESEvE. And I was using that as an example. We very heav-
ily support, first of all, the integration of procurement and financial
systems. Right now, they really are two different systems. Mr.

yhapin was in fact. deseri ing them, in a sense, in the Defense De-
partment. But the integration of those systems, first of all; and sec-
ond, as much privatization as possible of those systems.

One of the difficulties, as you know, in procurement reform,
though, is in a Government objective, fairness and making avail-
able to many vendors the availability of Government procurements
is very different from the commercial side, where they will choose
three or four vendors, and they’ll use just those three or four ven-
dors exclusively. We have, for a variety of reasons, a different prob-
lem. So our problem is more difficult and even more needful of elec-
tronic solutions than even the commercial process.

Mr. FLANAGAN. One wrap-up question, Mr. Chairman, and it will
be easy for them to answer because I think our panelists will say
I don’t know. But I'll give you a chance anyway. The processes
begin this year, 1996. We're embarking on something exciting;
we're getting near the end of our road. When are we going to be
at a point when we can look at a sheet and say, it’s red, or hope-
fully, in 7 years, it’s black, and we know that to some degree of cer-
titude?

Mr. Doparo. The answer to that varies by department. Some you
can do right now with some certitude. When we will have that for
the entire Federal Government—one of the critical paths, quite
frankly, is the Defense Department. Until we can get the Defense
Department, which is a significant portion of Federal discretionary
spending, straightened out, you're not going to be able to have reli-
able Governmentwide statements. You'll have individual agencies
that are achieving change.

So Defense, to me, is the critical path. That and Medicare, Med-
icaid expenditures. Social Security has had a good system for a
while. , from the revenue collection side, we're making some
progress there. They’re not there yet, but they’re at least commit-
ted and trying to work with us on it. So we at least have the reve-
nue side of Government trying to be covered.

So I think we’re short term, relatively short term. And when I
say short term, in an institutional——

Mr. FLANAGAN. Within my lifetime.


107

Mr. Horn. I notice the firm that has the copyright on that was
Allspice Technologies. Is this readily available to the public now, or
what?

Mr. Fox. Yes, we would make this available to anyone. In fact,
we do have—the House Oversight Committee is in the process of
having a comparable program built. They’re actually entered into
a contract with the programmer that runs Allspice. And they’re
going to be able to move various agencies and programs from one

lepartment to another, to see what reorganization would do in
terms of the actual budgetary implications.

So you can begin to see the power of these tools. For very little
Money, you can in to develop the tools that allow you to do vir-
tually anything. The things that you had promised to do as a new
Congress. Right now, frankly, many of the promises that have been

ade will not be able to be kept, unless you have the ability to
work with the data and to manipulate it. Because the staff—and
being a staff member many years myself—you’re in there trying to
grab volumes off the shelf, trying to make sense out of this.

Often you can’t do it because you don’t have the program exper-
tise. This system would allow you to reach into the lowest level,
lowest common denominator and pull out that data almost instan-
taneously. We would hope that eventually this would be updated
on a daily basis.

Mr. Horn. Now, you said House Oversight is looking at his for
the standpoint of departments, within the legislative branch?

Mr. Fox. No, this would be Federal Governmentwide.

Mr. Horn. How are they into that with their jurisdiction? I’m
just fascinated.

Mr. Fox. That’s a question I can’t answer.

Mr. Horn. Yes. They aren’t.

Mr. Fox. Well, they’re in the information business, through the
House Information System.

Mr. Horn. Yes.

Mr. Fox. And they’re oversight there.

Mr. Horn. Well, if they’re putting it on House Information Sys-
tems so we can all access it——

Mr. Fox. That’s right, exactly.

Mr. Horn. There’s about 20 other committees that have an inter-
est in it.

Mr. Fox. Exactly, exactly.

Mr. Horn. Interesting.

Mr. Fox. One final comment is, we’ve been working on this for
about 4 years, in terms of trying to interest individuals. And al-
most universail: , when we present this to budget analysts at OMB,
to Members of Congress, to citizens, they all say, wow, you mean
we don’t have this now; or, this would be our dream.

The problem has been that no one has been willing to put the
cash on the table. We've gone to foundations; we’ve gone to this
Congress, through House Information System; and we've gone to
individuals. But nobody seems to be willing to bite the bullet and
say, let’s do it. And I found this true in the private sector as well.

at you have to do is get one of the senior or the chief operating
officer, chief executive officer, get someone at the top to say, we're
going to do this—like a Speaker of the House, chairman of a com-


92

And I think there’s a real need to get some agreement. My expe-
rience in parts of the Federal Government, on the executive side,
have been, they’re often counting things that you can count, and
they aren’t attempting to measure things that really count, which
aren’t necessarily the things you can easily count. So I would hope
between OMB, CAO, the congressional groups and Chief Financial
Officers Council, and other executive groups, that we get some
agreement on when do we know progress has been made and how
we're doing.

Mr. Posner. If I could just add, as a non-accountant, to this dis-
cussion. One concept that really FASAB’s been very important in
discussing, that I think is a key difference, is the stewardship re-
sponsibility of the Federal Government. We like to think of the
Federal Government as an operating entity that, much like busi-
ness, has payroll and large organizations. But it also has a unique
responsibility, as you well know, to the long-term and short-term
economy.

And I recall when I was here several weeks ago, we were talking
about this concept of how do you recognize the investment con-
tribution the Federal Government’s programs are making to that
economy. And unlike a private business, the important things we
care about, we generally don’t own. They’re not traditional assets.
They're things that contribute to long-term values, which is why
the GPRA makes more sense when you're thinking about setting
your goals for that.

And that’s why you've got to think about a different way of valu-
ing that contribution.

Mr. Horn. That’s a very good point. Let me put four questions
before you. You don’t have to answer them today, you can answer
them in writing. But the first is, besides the insurance and credit,
what other areas would accrual accounting help Congress make
better budget decisions, and how about Federal retirement pro-
grams?

The next question is, with GAO, you mentioned credit reform in
your testimony as an example of a use of accrual accounting. Some
costs associated with a loan are not counted in budgeting for the
loan, and would, including administrative costs and the subsidy de-
termination, allow for more rational budget deliberation by Con-
gress?

Another question that’s important is, what is your reaction to the
so-called zero cost credit programs not subject to appropriations?
Several new Government-sponsored enterprises have recently been
proposed, such as Government-sponsored enterprise for small busi-
ness investment corporations, and another for venture capital. Is
there a danger that these entities, not controlled by any annual ap-
propriations process, might result in taxpayer losses?

And last, currenti: , agencies pre-fund only about 25 percent of
retirement costs for Federal employees. This results in an un-
funded liability, which will have to recognized in the future. It
also understates agency personnel costs, skewing the decision be-
tween investment and personnel and competing needs. How should
a Federal balance sheet and a Federal budget treat this retirement
liability, which is a cost of employing someone that is not realized


60

Management Accountability and Control

Improving management accountability is the goal of a number
of related efforts underway across the Federal Government. OMB
and the CFO Council have given priority to two specific
initiatives: (i) implementing a new approach to management
controls that helps managers achieve results, and safeguard the
integrity of their programs; and (ii) integrating and
streamlining management reports to provide more useful
information, especially performance reporting, to decision

makers.

OMB has revised Circular A-123, Management Accountability
and Control, to eliminate the requirement for paperwork
intensive, stand-alone management control programs in agencies.
Too often these programs focus on the reporting process, rather
than on building appropriate controls into agency operations to

ensure good management.

Agencies have traditionally produced a myriad of program and
management reports. Producing separate, overlapping management
reports has not served internal or external decision makers well.
Therefore, the CFO Council has recommended that management
reports produce better planning information and performance data.
This initiative was undertaken after enactment of GMRA which
permits the streamlining of financial management reports after

consultation with the appropriate Congressional Committees.

19


56

Improvements have been made, but significant work remains to
be done to improve and upgrade the agency and government-wide
financial management systems themselves. As an example of the
task ahead, agencies reported that 53% of their operational
systems will need to be replaced or upgraded in the next five
years, Substantial resources will be needed to make these
financial systems improvements. Without these enhancements,
efforts to improve financial management in the federal government

will be severely hampered.

Improved Federal Financial Reporting

In November 1993, OMB reported to Congress on the benefits,
accuracy, difficulties and costs associated with Federal
agencies’ audited financial statements. The report concluded
that audited financial statements are bringing about marked
improvements in the timeliness and accuracy of financial
information used for decision making. It also pointed out that
the preparation and audit process is uncovering important systems
deficiencies, stimulating the strengthening of internal controls,
fostering improvements in financial systems, and creating

interest in better measures of program performance.

15


18

allocation process as well as agencies’ accountability for
resources. FASAB's extensive consultations with users and
potential users of financial statements showed that they 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 various programs cost
and how were they financed? What was achieved for this
spending? What are the government's assets and are they
being effectively maintained and used? What are the

government's 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 cost
effective systems and controls over its programs and assets?

Can it detect and correct problems?

These recent initiatives promise to improve financial controls

and information in the federal government. However, they will


47

Entity and Display is a conceptual statement that provides
guidance as to what should be encompassed by Federal
Government entity's financial reports, establishes
guidelines for the makeup of each type of reporting entity,
identifies new types of financial reports for communicating
information for each type of reporting entity, and suggests
the type of information each type of report should include.

The concept statement suggests modifications for each of the
existing principal financial statements. The most
significant modification is to the “operating statement"
(income statement). That statement is renamed the
“Statement of Net Costs" and is modified to show the
entity's cost of providing goods and services. The gross
cost would be offset by revenue earned when such services
are sold to users. The "bottom line” of the Statement of
Net Costs would show the entity's cost left to be financed

by the general taxpayer or by borrowing.


51

Property, Plant, and Equipment (PP&E) -- This proposed
statement divides the diverse universe of PP&E held by

federal agencies into 4 categories: General PP&E, Federal

Mission Property Plant and Equipment, Heritage Assets, and
Stewardship Land. The only category that would require
depreciation would be general PP&E. In addition to PP&E,
this statement includes accounting standards for deferred

maintenance and cleanup costs.

Revenue -- This proposed statement deals with basic
standards for classifying, recognizing, and measuring
resource inflows. The statement describes revenue as coming
from two sources: exchange and non-exchange transactions.
Exchange transactions occur when a Federal entity provides
goods and services to the public or another Federal entity
for a price. Non-exchange transactions arise primarily from
the government's power to demand payment from the public,

e.g., taxes, duties, fines.

10


80

would describe, for example, the costs of—the program costs, pres-
ently and in the future, for a system like the F-18 attack bomber,
which is the mainstay of the Navy’s aircraft carrier capability. And
it’s planned to be the continuation of that capability. And the pro-
gram, I think, is—and the SARS shows something like $65 billion
of present and future expenses for this. Now, of course, future in-
formation is problematic, but the historical information should be
accurate. But we found that even the SARS information is not to-
tally accurate. There are some development costs, for example, that
sort of get lost in the shuffle.

So even these kind of special reports that you get aren’t always
accurate. But they’re more equipped to produce special reports
than they are equipped to produce general financial statements.
It’s when you try to put all of these bits and pieces together, and
you don’t have a general ledger—you don’t have a ledger account
that says this is our assets and subsidiary records that tie in that
are also related to the logistics records.

When you don’t have that kind of connection between your sys-
tems, you’re bound to have problems. And then if no one cares
about the accounting, if no one cares what the balance sheet looks
like, if no one cares what the dollars are, you’re bound to have this
kind of result. And for years, no one cared. So that’s sort of a his-
tory—I could go on at length. It’s the kind of thing that you have.

Mr. FLANAGAN. I am amazed, and I’m very nearly dumbstruck,
so I’m going to move on to a variation of the question, with your
indulgence, Mr. Chairman. This committee is moving, as you know,
to procurement reform. And we have some very specific ideas on
how we're going to accomplish that. We’ve had extensive hearings
about it. If you have a collective or individual opinion on this, how
will your accounting processes be affected by this, or even en-
hanced, in any way, shape or form? -

Mr. Doparo. One of the ways that it has an impact is through
the procurement of information systems and technology. One of the
big issues in modernizing these systems is to provide for ready
means of procurement. And that’s one connection that I could see
off hand. And I think that’s something that’s been a problem in the
past in information systems generally, and accounting systems in
particular.

And whatever can be done to streamline the procurement process
could go a long way toward facilitating that process.

Mr. DESEveE. I think the view that I’ve had for some time is that
moving toward electronic commerce, moving toward higher pay-
ment thresholds with accountability, utilizing that kind of tech.
nology to free accountants, auditors, payroll clerks, payment clerks
and so on, to do other work is very appropriate. So to the extent
that we can use a VISA card now, and with the VISA card, we get
a record of all of the transactions that’s broken out.

But the work is not done by Government clerks, but done by oth-
ers. So we don’t have to input the data; we don’t have to move a
piece of paper through five different work stations in order to get
the transaction recorded. We can initiate the transaction in one
place; we can get a record; we can use that record as an audit trail,
as necessary; and even, in some cases, have a tape from VISA or


13

decisions and provide effective oversight. Recognizing that the
budget is the primary framework for making most decisions about
the use of federal resources, I will also address how financial
information and audited financial statements can better
contribute to the budgetary debate as well as provide the
foundation for ensuring accountability for achieving results and
adequate stewardship over federal resources and assets. Finally,
I want to discuss the status of efforts to inform the American

taxpayer of the government's financial condition.

THE IMPORTANCE OF RELIABLE INFORMATION ON FEDERAL FINANCIAL
CONDITION AND COMMITMENTS

The nation is faced with fiscal pressures which will continue to
occupy the center of public debate for years to come. We
recently simulated the long-term outlook of current budgetary
policies for Chairmen Kasich and Domenici.’ Current trends are
unsustainable over the longer term and would lead to deficits
exceeding 20 percent of gross domestic product by 2025, due
largely to the pressures an aging population will place on social
security and health care programs as well as mounting interest
costs to finance the debt. Congressional action to move to a

balanced budget clearly will help address these concerns.

‘The Deficit and the Economy: An Update of Long-Term
Simulations (GAO/AIMD/OCE-95-119, April 26, 1995).

2



55

Several organizations are working on improving Federal
financial management systems including the CFo council, the Joint

Financial Management Improvement Program (JFMIP), OMB, Treasury,

and individual agencies. Their accomplishments includ

. In January 1995, Treasury implemented FACTS which collects
agency standard general ledger (SGL) account balances to be
used in producing the Government's Consolidated Financial

Statement

. In January 1995, JFMIP published the Framework for Federal
Financial Management Systems. In June 1995, it published

the Inventory System Requirements.

* In July 1995 OMB began using its government-wide budget
system, MAX, to provide budget execution information and

related analytical capabilities to OMB program analysts.

Progress is also being made in consolidating and
standardizing systems through the use of department-wide systems
to replace individual bureau systems. The percentage of agency
systems designated as department-wide standard systems has
increased from 26% as of September 30, 1993 to 29% as of
September 30, 1994. In addition, the number of systems under
development designated as department-wide standard systems has

increased from 57% to 62% during the same period.

14


2

cial information. We need to build on that example, and find addi-
tional ways to include financial information in the budget.

Congress can and should include in its budget resolution a listing
of future liability claims and responsibilities. That way, every
Member is accountable to the citizenry, and the citizens and tax-
payers will gain insight into the country’s long-term financial is-
sues. And the voters will be more informed than they are now, as
they cast their vote. Our witnesses this afternoon include Gene
Dodaro, Assistant Controller General from the General Accounting
Office; Ed DeSeve, of the Office of Management and Budget; Har-
rison Fox, representing Citizens for Budget Reform; and Lyle
Brecht, publisher of AmericaReport.

[The prepared statements of Hon. Carolyn B. Maloney and Hon.
Frank Mascara follow:]


72

Mr. DESEVE. That’s right.

Mr. Horn [continuing]. About the Defense Department can’t find
$15 billion somewhere.

Mr. Doparo. I believe this is accurate, Mr. Chairman. I can go
back and get you the accurate figures. But I believe as of March
of this year, $28 billion sticks in my mind as the figure that was
unmatched.

Mr. Horn. $28 billion?

Mr. Doparo. $28 billion.

Mr. Horn. They only leaked half of the story, then, out of the
Pentagon.

Mr. DopDARO. Well some of it—and I can provide the accurate fig-
ures, but that one sticks in my mind. And a lot of it—the different
figures—have to do with the amount of time that the disburse-
ments have been unmatched. And that’s why there’s a subset of the
$28 billion that have been unmatched for a period of time.

And there was some discussion as to whether they were going to
stop looking, as to whether they could find the accurate documenta-
tion to it, because a lot of these processes are still manual paper-
driven processes, and they can’t locate a lot of the contract records.

Mrs. MALONEY. Would the chairman yield for a second?

Mr. Horn. Certainly.

Mrs. MALONEY. I am appalled by what I’m hearing; I’m abso-
lutely appalled. And I compliment you on all the fine hearings
you've had this year. You've worked. at two or three hearings a
week, it seems like—more than any other committee. But I think
that you should have a hearing on this. I mean, this is outrageous.
I mean, I find this unbelievable.

Mr. Bass. Will the chairman yield for just 1 second?

Mr. Horn. Certainly.

Mr. Bass. Is that $28 billion—you alluded to it—over a long pe-
riod of time? It’s not an annual figure, but rather it’s a cumulative
number over some number of years or decades; is that correct?

Mr. Doparo. That’s correct, that’s correct. And I must say, the
department, rompted by a legislative requirement, is beginning to
try to get a handle on this. For example, beginning this summer,
due to this legislative requirement, they’re not to make any pay-
ment over $5 million without checking and matching it first. And
then that figure gradually is to drop down to $1 million.

And we're monitoring that effort to see if they’re actually going
to be able to pull that off. And they’re trying to do it electroni-
cally—by introducing some electronic ability to do the matching.
But we're focusing in on that, and trying to monitor what’s going

on.

Mr. Horn. What Mr. Chapin found in his audit of the U.S. Air
Force is why they tell every officer candidate, get yourself a good
master sergeant who can keep the paper flowing. Well, they've kept
a lot of paper flowing. But let me ask a more fundamental ques-
tion. The General Accounting Office used to audit the Pentagon
regularly. When did they stop doing that?

ir. DODARO. To my knowledge, the first financial audit that we
did of the records was in 1989, when we started with the Air Force.
And we would audit—GAO, historically, like we audited other
agencies, would audit discreet programs or activities that would


27

infrastructure and about $130 billion for water treatment
facilities to meet environmental standards. In considering these
future claims, one must be careful because unmet needs, which
create pressures for spending, are in no sense existing claims on
the government. Any effort to compile a list of future claims
needs to discriminate among the various strengths of the claims

to present a balanced picture of the future for decisionmakers.

Financial reports based on FASAB's recommended standards will
provide valuable information to help sort out these various kinds
of long-term claims. The recommended 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 will be provided on potential future claims
that, although not traditional liabilities, represent the
government's role in making future social insurance payments.
Although these claims are not firm enough to warrant recognition
as liabilities on balance sheets, FASAB, in developing standards
for reporting on the claims, recognized the unique expectations
placed on government for the delivery of services and benefits
deemed to be important to the public. Social Security and
Medicare are viewed by many people as having characteristics of

long-term unfunded liabilities because of their “contributory”

16


70

of information here, a little piece of information here—most of it
wrong—and put together a financial report.

The GAO—excuse the expression—raised hell. We got a lot of
people’s attention, including people at the Department of Defense.
But change comes very slowly. When you have thousands and thou-
sands of people used to doing things in a sloppy manner—and slop-
py is the word—it’s hard to get even the clerks to do things right.
In the accounting systems, when you don’t have a set of books,
when you've never used a general ledger, when you don’t have rec-
onciliations, where no one has done any auditing of the financial
statements, where there haven’t been any financial statements be-
fore—I mean, this is Third World.

This is God-awful. And that was the beginning. And that’s the
nature of the—it’s an extreme example, but not atypical of what we
found when we began to do the audits of these agencies in the Fed-
eral Government. Some are OK, but few, very few, escaped the
qualified opinion. Most, in the first few years, get a disclaimed
opinion, because we haven't the foggiest idea about whether they're
right or wrong.

The Internal Revenue Service, which we’ve audited for years is
a total—well, was a total mess. It’s beginning to shape up a bit.
But if you look at some of these reports the GAO issues now, you'd
be appalled. I recommend to you, when it comes out, reading the
report, our report on the Internal Revenue Service, which will be
out soon. It will give you a sense of what’s wrong in the Federal
Government; what’s wrong with the systems; what’s wrong with
the accounting; what needs to be done.

And work has to be done. The systems have to be put in place.
The people have to be trained. We need better people in Govern-
ment; we need people with more expertise. It’s just an immense
task. It’s unbelievably hard for anybody to understand how this
could occur. But it has occurred, and it’s slowly beginning to re-
spond. When I came down here—I’m running off at length—but
when I came down to the Federal Government, I knew we had a
problem.

And I thought that, well, I'll come down a few years, we'll fix it.
A few years went by and we were still trying to make people aware
of the fact that we had a huge problem. Fortunately, we were fortu-
nate with the Congress that they passed the CFO Act, which gave
us a start. The act has now been extended. We're beginning to roll.
It’s like trying to push a big rock up a mountain, with resources
as small as ants.

So we make a little progress and we slide back; we make a little
more progress and we slide back. I will tell you that we're making
progress. I wouldn’t be here if we weren't. T vould be totally dis-
appointed. I think we’ve got it underway. I think we're going to
cure this problem. I’m afraid I’m going to be retired before it’s all
cured, but I think we’ve got this thing underway. And the Congress
has done the right thing by equipping the administration with
laws—the CFO Act, its extension; the GPRA.

The Congress has done everything it could to respond to the
needs, by providing the administration with the incentives to get
it done. But I tell you, when you have a job like this, it takes time.


63

After analyzing the survey results, OMB, GAO, and Treasury
formed a task force comprised of agency CFO and 1G
representatives. The objective of the task force is to develop a
strategy and a plan to overcome impediments disclosed by the
self-assessment and to assure preparation and audit of the fiscal

year 1997 government-wide financial statement.

Two subgroups have been established within the task force to
address separately preparation and audit issues and bring those
issues to the full task force for resolution. The full task
force and the subgroups have been meeting regularly and are

making substantial progress.

This concludes my prepared testimony, Mr. Chairman, and I

look forward to answering any questions.

22


20

concepts to record budget authority and outlays, (2) the use of
financial information on liabilities and long-term commitments to
help address the sustainability of current budget policies, and
(3) consideration of managerial cost accounting concepts in
budget accounts to permit decisionmakers to consider more easily
the full costs associated with program outputs or outcomes to be

reported in financial statements.

WHEN SHOULD ACCRUED COSTS BE USED AS THE BASIS R_ BUDGETARY
ALLOCATIONS?

The method of reporting budgetary transactions influences
decision-making. Therefore, choices about the basis of budgetary
reporting ultimately represent trade-offs among the purposes of
the budget. Cash and accrual represent two alternative
measurement bases for budgetary reporting. Cash reporting
recognizes transactions when cash is paid or received.
Accrual-based reporting, used in financial statements, recognizes
transactions or events when they occur regardless of when cash

flows occur.

The current federal budget, with limited exceptions, is reported
on a cash and obligation basis. Cash-based budgeting focuses on
control over current spending and the assessment of the short-

term economic impact of fiscal policy. Cash is advantageous as a

method of control because it can be easily measured and tracked.


37

and to those who review those requests. The Board has also
stressed providing accountabilities, either by recording dollar infor-
mation on assets, investments, liabilities, contingencies and com-
mitments, or by providing dollar and other kinds of information
about them when it is not possible to recognize or measure the dol-
lar data, and include them in the financial statements themselves.

I believe that the Congress will find that reports based on the
Board’s standards will vastly improve its ability to work with the
budget and provide oversight of Federal Government operations. At
this point, I’m not worried about whether the Board can perform
its difficult task; I think it has substantially accomplished it. My
worry for the future is whether Federal accounting systems which,
Mr. Chairman, I’m sure you know, are in terrible shape—whether
those systems can be made sufficiently operational to execute the
Board’s standards and provide the much needed accounting re-
ports.

Thank you for the opportunity to make this statement.

Mr. Horn. We thank you for that most helpful statement. We
now have Mr. Paul L. Posner, the Director for Budget Issues, Ac-
counting and Information Management Division of the General Ac-
counting Office.

Mr. Posner. I have no statement, so I'll satisfy the committee’s
time constraints, and offer my time to someone else.

Mr. Horn. This leaves wonderful time for questions.

Mr. Posner. That’s right.

Mr. Horn. If you were a Ph.D. candidate in an oral, you would
want to get the committee members fighting with each other, and
then you just wait until the 2 hours is up. OK. Now we have the
Honorable G. Edward DeSeve, Controller, Office of the Federal Fi-
nancial Management in the Office of Management and Budget.
Welcome.

Mr. DESEvE. Thank you very much, Mr. Chairman, members of
the subcommittee. Thank you for the opportunity to appear before
you today. I’ve submitted more extensive formal testimony for the
record, which covers the topic before us today in the broader con-
text of such legislative initiatives as the Government Performance
and Results Act, the Chief Financial Officers Act, and the Govern-
ment Management and Reform Act.

These legislative initiatives are intended to work together to pro-
vide the legislative foundation for developing accurate and reliable
cost information and performance data. Such information is essen-
tial if the executive branch and the Congress are to make informed
decisions and move successfully toward a smaller, more efficient
Government that focuses on accountability and managing for re-
sults.

Within this context, I would like to focus on three areas: the inte-
gration of the budget formulation and execution process with finan-
cial standards, statements and account structures; the role of per-
formance and program integrity in budgeting and financial man-
agement; and the streamline of current reporting processes. The
complexity of programs within and across departments requires a
carefully designed infrastructure to assure that programs and fi-
nancial data are available to managers, policymakers, and the Con-


57

An indication of the financial management improvements
agencies are making can be seen in the increase in agencies’
financial statements determined by independent audit to be in
conformity with prescribed accounting standards (unqualified
opinions). For FY 1993, 47.1% of agency audited financial
statements were given unqualified opinions by their independent
auditors. This is a marked increase from the 34.5% of FY 1991
audited financial statements receiving unqualified opinions.
This steady improvement in the quality of agency financial

statements is encouraging.

As a result of passage of the GMRA of 1994, major segments
of the Federal Government's operations that had not benefited
from the organizational discipline brought about by the CFOs Act,
which applied only to limited agency functions and certain pilot
agencies, will now benefit from that experience. These

operations include, for example:

© about $16 billion, or nearly 63%, of the Department of
Energy's annual appropriations accounted for by its

integrated contractors

© about $90 billion appropriated to the Navy

© more than $11 billion, or about 90%, of the Department of

Justice's budget authority.

16


23

assumptions used to model future costs.

For example, for the Pension Benefit Guaranty Corporation (PBGC),
the current cash-based budget estimates that collections will
exceed outlays by about $1.1 billion for fiscal year 1996.
Analysts agree that this is not an accurate indicator of the
financial condition of this program, but they disagree on how to
measure the federal commitment. OMB has proposed recognizing
future obligations for pension insurance at the point the
government extends the commitment, using a probabilistic estimate
involving long-term projections of bankruptcies of covered firms
and the funding status of their pension plans. OMB's most recent
estimate of PBGC's obligations, as shown in the Analytical
Perspectives of the President's fiscal year 1996 budget, ranges
from $20 billion to $40 billion. Financial statements, on the
other hand, recognize future obligations based on terminated
plans and those plans that are reasonably probable to terminate.
On this basis, PBGC's 1994 financial statements, the most recent,
reported the present value of future benefits as just over

$9 billion for these plans.’

Furthermore, future cost estimates may be subject to significant
annual fluctuations. Estimates of PBGC's future cost for pension
benefits decreased significantly in the last year. OMB's current
*FASAB's recommended standards will continue this method of
reporting a liability and will also require disclosure of the
probabilistic estimate if it differs from reported liability.
12


90

tax they owe. And as you may know, there is over $100 billion said
to be in what’s called the tax gap. And we have no way of finding
out accurately, at present, how much that is, who owes it, what
sectors of the economy owe it and so on.

There are various efforts to measure that, but it’s not subject to
a typical private sector accounting system. There have to be new
ways of finding out who owes that money and how we can collect
it. % that’s a major difference. One other difference——

Mr. Horn. I must confess, I fail to see the point, after having
studied accounting and studied accounting in relation to the firm,
as seen by an economist, and so forth and so on, I just don’t see
the point. And I guess I’m dense today. But you have a transaction
when they pay those taxes.

Mr. CuapIn. Right.

Mr. Horn. The fact that there’s $100 billion still out there, that
we all agree is probably pretty correct, with the underground econ-
omy, which is partly Congress’ doing. They let millions of people off
the hook from filing income taxes, under the 1986 act. And in our
cash economy, our illegal alien economy, there’s no question there’s
a mutual agreement as to avoid the law. You’ve got this tremen-
dous cash group, certainly in southern California, Texas, Florida,
and Michigan, coming over the Canadian border.

The only way you would get them is through the sales tax. You
don’t get them through the income tax, obviously.

Mr. CuaPin. Right.

Mr. Horn. But a transaction is there; it can be accounted for. It
can be posted on the revenue stream. Now, the fact that we miss
some, granted you can’t predict it. But you can’t predict that the
people aren’t going to buy your product this year because some nut
says it’s been poisoned suddenly, and all your sales drop. But your
sales drop, so you have less to post on the revenue side of the pri-
vate firm. So I guess I’m missing something here.

Mr. CHAPIN. We both agree on what the fundamentals are. I
would like to think that ultimately, the accounting for revenue
from the Federal Government could be extended to the point where
we had some accurate measurements of those who owe taxes and
have not yet filed returns, or not been audited yet. Once we can
get to that point, where we have more accurate information, the
revenue stream of the United States will be enhanced. We'll be able
to go after the people that owe taxes.

eople that are paying more than their fair share because others
don’t pay, will be benefited. So I think it’s a goal. And the revenue
service right now is trying to enhance its measurement system so
it does do better accounting. If I can elaborate?

Mr. Horn. Sure.

Mr. CHAPIN. It’s only been since the GAO has started its audit
that the Revenue Service has made an attempt to recognize, in its
accounts, the amount that’s actually receivable for assessments
that it has made. In other words, we have been on a cash account-
ing basis until just recently. And even now, there is no systematic
measurement of the accounts receivable of the Revenue Service. It’s
done basically through statistical estimation—by looking at the op-
erating file and making an estimate of the total amount of taxes
that taxpayers owe.


44

EEDERAL ACCOUNTING STANDARDS

The Federal Accounting Standards Advisory Board (FASAB) was
established on October 10, 1990 by Memorandum of Agreement among
the three principal agency heads (the Secretary of the Treasury,
the Director of the Office of Management and Budget, and the
Comptroller General) concerned with overall financial management
in the Federal Government. At that time, the Federal Government
did not have a comprehensive set of accounting standards.
However, it was widely recognized that a comprehensive set of
accounting standards was needed, and that compliance with these
standards must be measured on a regular basis in order to ensure
the integrity of the financial information reported to the
American taxpayers, managers, elected officials, and policy

makers.

By the fall of this year FASAB will have recommended a
framework for Federal financial reporting and the basic standards
needed to carry it out. OMB expects to issue the standards by
the end of the year. After issuing the standards, OMB will
fulfill its responsibility to prescribe the form and content of

agency financial statements by modifying its existing “Form and

Content" guidance to incorporate the new standards. The revis
"Form and Content" guidance is expected to be completed by late

next summer.


85

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62

One of the first steps taken was to request the 24 agencies
covered by the CFOs Act to complete an auditability self-
assessment. The self-assessment was designed to highlight
impediments that agencies will face in preparing and auditing the
FY 1996 agency-wide statements required by GMRA. The following
is an example of the information disclosed by the self-

assessment

. Seven agencies reported that their financial management
systems could produce auditable agency-wide financial

statements (with limited manual intervention) for FY 1996

* Seven agencies expect that systems enhancements will be
completed in time to produce auditable agency-wide financial

statements (with limited manual intervention) for FY 1996

* Nine agencies reported system enhancements will not be
completed in time to produce auditable agency-wide financial
statements (with limited manual intervention) for FY 1996,

and
* One agency, the Department of Defense, does not expect to

produce auditable financial statements for FY 1996 even with

manual intervention.

21


86

Mr. Horn. Are we dealing, off the top of the head, is it one-third
left out, or is it less than a third? What do these 24 really eat up
in budgetary resources?

Mr. DESEVE. These 24 are 90 percent, gentlemen?

Mr. Doparo. Ninety-eight.

Mr. Horn. Ninety percent.

Mr. DESEVE. Ninety-eight, almost, yes.

Mr. Horn. So we've left 10 percent out.

Mr. DESEVE. Yes.

Mr. Horn. The smaller agencies.

Mr. Doparo. Exactly, and that’s of the executive branch, not con-
sidering the legislative and judicial.

Mr. Horn. Well, I’m going to get to both the judiciary and the
legislative—we might just as well take that up now, because we'll
just put that as an exhibit in the record. I’m interested in sort of
getting it in proportion so the average citizen, the average member
can see it. Now, in terms of the executive branch, we know they’re
getting there. Where they got off the track, I’m not sure. If I re-
member, isn’t the current Comptroller General a former Assistant
Secretary of the Navy, was it?

Mr. DopDARo. Yes.

Mr. Horn. For financial management?

Mr. Doparo. That’s correct,

Mr. Horn. He must have had a pretty good idea when he came
here how fouled up they were.

Mr. Doparo. Yes, he did, and that’s one of the reasons he’s made
it a priority over his tenure, to try to get change.

Mr. HorNn. I gather that the commendable actions of the Comp-
troller General in trying to straighten this out weren’t exactly wel-
comed by Congress at the time he started on that crusade. Is that
a fair statement?

Mr. Doparo. Yes, it is.

Mr. Horn. OK. I am told that the chairman of the Appropria-
tions Committee at that time opposed the thought of a Chief Finan-
cial Officers Act, and that he didn’t want to give them any money
to implement the act. Is that a fair statement?

Mr. Doparo. Yes. That occurred right after the act was amend-
ed. In fact, there was a subsequent vote on the floor on that issue.

Mr, Horn. What do you think motivated the chairman on that
point?

Mr. Doparo. I’m really not in a position to comment on the moti-
vations. I think there was some concern that some of this activity
may duplicate some of the work that was being undertaken at that
time. I think there was also a certain degree of satisfaction on the
part of certain people, that they thought they had all the informa-
tion that they needed through the budget process and the appro-
priation process on the Hill.

That was part of the discussion and debate. I think a lot of peo-
ple felt the cost of implementing audited financial statements
would have outweighed the benefits of it. So there was some of that
discussion at that point in time. So those were some of the argu-
ments against moving in that direction, and that a lot of this infor.
mation really wasn’t needed, from that standpoint.


121

trillion a year or $2 million a minute, and the kinds of social disas-
ters that we're seeing around the country in terms of especially the
low income, we need answers in months and days.

Just as a way of moving away from that, I think that the part
of our population that’s being immediately affected by the ineffec-
tual accounting systems and measurement systems and ineffective
and almost no use of asset liability management, those sectors of
the population that are suffering the most are the low income. I
know this from personal experience, being vice chair of the Public
Housing Authority in Rockville, MD. In the last 2 years, the money
that is ing expended by the State of Maryland for aid to families
with dependent children program has decreased by 25 percent.

When Government starts cutting back and starts experiencing
problems, as we are with our poor financial systems, the people
that suffer the most are the ones with the least power, the least
lobbying capability. And what we're seeing is that those people that
are at the lower end of our economic scales are suffering tremen-
dously. And they cannot go on suffering very long. We're seeing
some tremendous things building up, and I think we're going to
need to make some changes.

And I think that’s one of the strongest arguments, I think, for
making these changes fairly rapidly, and determining which pro-

ms work to help people economically and socially, as well as the

nancial component. So I find that they’re very unresponsive to the
social needs of the country. I’ve felt that, I think, in my own per-
sonal interaction with many people from the General Accounting
Office and other Government agencies. They have been focusing on
the dollar transaction, and not looking at the social consequences.

Although many GAO reports now are beginning to reflect the so-
cial as well as the economic consequences. And I think the Mem-
bers of Congress would be well advised to take a look at those re-
ports. The second thing that I find is that they talk about the com-
plexity of these systems, and how difficult it’s going to be to imple-
ment them. Well, the Coast Guard has already implemented a sys-
tem, an executive information system, which is on par with most
any private corporation.

‘hey’re integrating many different accounting, management, per-
sonnel systems, and they’re adding performance into this. So we
can show that actually a Government agency can do this, if they
make up their mind to do it. This is the Commandant of the Coast
Guard decided he was going to have a system which was com-
parable to systems in the private sector. And he’s developed this
now over the last 3 or 4 years. It’s in operation; it’s being used.

I just talked to a Coast Guard officer a few days ago, and he said
it’s very, very helpful; in virtually everything they b they refer to
it. You might imagine it would be, if you had a system like this
available.

Mr. Horn. We did have some testimony from the Coast Guard,
and it was very helpful.

Mr. Fox. Good, so you’re well acquainted with that.

Mr. Horn. Right.

Mr. Fox. So that’s the bottom of the pyramid, in terms of infor-
mation. Our estimate is that it would take about $1 billion to im-


124

dated by the Federal Government. And we're not just making these
numbers up. These are numbers which are generally provided di-
rect! from the General Accounting Office and Congressional Budg-
et Office.

Mr. Horn. Now, to what degree are any of the numbers you have
here on page 45—the liabilities, potential liabilities, which begins
on 44—to what degree are those stated in the annual budget of the
President of the United States?

Mr. Fox. Very limited number. You have some reflection in
terms of Social Security liability. The best comparison to be made
with the report that was mentioned earlier, it’s a consolidated fi-
nancial statement for the United States which is published annu-
ally by the Treasury Department. And we don’t have time to go
through and make a detailed comparison, but there are some par-
allels. But the bottom line is, they underestimate liabilities by
about a factor of four or five at least.

And we're estimating liabilities in our new report coming out for
1995—I have some preliminary numbers. We're looking at probably
about $50 trillion in liabilities. Some of those would have to be in-
dexed, in terms of potential losses. But you're looking at some very,
very large numbers that have to be taken into consideration; the
largest being the Social Security unfunded liability, which is now
over $8 trillion, and increasing at the rate of between $250 billion
and $400 billion a year, which is not put into any of the calcula-
tions in the current budget.

Much of the debt each year is not included, because it’s so-called
off budget increases—interest paid on trust funds, et cetera. So I
don’t necessarily want to get into nitty gritty details of my testi-
mony, but the bottom line is that we need to develop a comprehen-
sive approach to budgeting, and that would include a balance sheet
and a financial plan.

Mr. Horn. So what you're recommending is that the annual
budget document submitted by the President to the Congress ought.
to include these areas.

Mr. Fox. Exactly.

Mr. Horn. Now, one way they could include the liability section,
for example, would be in the special appendices end of the budget,
where we have asked them—when I was vice chairman of the U.S.
Commission on Civil Rights, I went over to see the Director of
Budget, and he did implement it. The idea of cross cutting where
are civil rights and funding throughout the executive branch.

Mr. Fox. Exactly.

Mr. Horn. ‘And I don’t know if that document still exists, be-
cause I haven’t had a chance to look at that part of the budget yet.
But it did appear starting in the Nixon administration; and last I
knew, it was in. But it could either be in there, or just as a sepa-
Tate section, so Congress knows up front what you have to worry
about.

Mr. Fox. Exactly.

Mr. Horn. The American citizens get some sensitivity to that,
too.

Mr. Fox. Each one of those lines, too, in your balance sheet,
should be linked back into the budget, since you’re matching the
accruals with long-term liabilities. And what this does for you is it



31

The information provided by these new standards will be useful in
budgetary decision-making. Since this type of cost information
is not currently clearly reported in the budget, financial
statement reporting of it would provide decisionmakers a more
complete picture of program costs. And because the budget
account structure is generally not aligned with the
responsibility segment concepts that will underlie financial
reporting, additional analysis or crosswalks would be needed to
enable decisionmakers to consider this information in allocating
resources. In addition, if the account structure is re-examined
in light of various cross-cutting initiatives like those in the
Government Performance and Results Act, the question of whether
to try to achieve a better congruence between budget accounts and

the accounting system structure should be considered.

WHAT OPTIONS COULD PROMPT CONSIDERATION OF THE LONG-TERM
FINANCIAL OUTLOOK?

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. This information
can be used in conjunction with other kinds of actuarial and
economic analyses already available. Although most budget
decisions are made annually, they carry long-term consequences
and potentially encumber future generations’ resources.

Periodically, the implicit long-term fiscal consequences can be

20


--3--
THAT BETTER ACCOUNTING METHODS WILL HELP
PREVENT SUCH MISTAKES FROM REOCCURRING.

WHILE THE MEMOS PREPARED FOR
SUBCOMMITTEE MEMBERS BY BOTH THE MAJORITY
AND DEMOCRATIC STAFFS DWELL ON THE
PROBLEMS POISED BY THE PRESENT FEDERAL
BUDGET, | WAS HAPPY TO READ THAT GAO WILL
TESTIFY IT BELIEVES THE SITUATION IS ON THE
MEND.

IT IS OBVIOUS WE MUST FIND SOME METHOD
OF LAYING OUT THE TRUE COSTS OF GOVERNMENT
SO WE CAN BETTER DECIDE HOW TO DIRECT OUR
INCREASINGLY SCARE RESOURCES. AND PERHAPS
MORE IMPORTANTLY WE MUST ALSO DEVELOP A
SIMPLIFIED BUDGET THAT ALL AMERICANS CAN


46

Stewardship -- With this objective, FASAB is
acknowledging that Federal financial condition involves
not only the Government's own balance sheet, but its
financial ability to continue to carry out its
Constitutional responsibilities and its contribution to
the wealth and well-being of the Nation.

Systems and Controls -- This objective was adopted to
recognize the Federal Government's need for systems and
controls that are cost effective, provide appropriate
information, and reasonably assure the integrity and

efficiency of operations.


--2--
DO NOT ACCURATELY DEPICT A GOVERNMENT’S
FINANCIAL STATE OF HEALTH.

THEY ARE OFTEN HIGH ON SPENDING
INFORMATION AND LOW ON ANY KIND OF WAY OF
DETERMINING THE GOVERNMENT'S LONG-TERM
ASSETS OR FINANCIAL HEALTH.

AT THE FEDERAL LEVEL, OFF-BUDGET
LIABILITIES SUCH AS FEDERAL DEPOSIT INSURANCE
AND FEDERAL CREDIT PROGRAMS ARE NOT
CLEARLY REFLECTED. FAULTS IN THE FEDERAL
DEPOSIT INSURANCE PROGRAM THAT WERE NOT
CAUGHT IN TIME, LED TO THE TRILLION DOLLAR
S&L CRISIS OF THE LATE 1980'S.

TAXPAYERS WILL SIMPLY NOT TOLERATE SUCH
ERRORS IN THE FUTURE. AND | AGREE WITH FASAB


40

performance and public confidence in Government. With the recent
publication of revisions to Circular A-123, OMB has highlighted
the need for the design of programs and the evaluation of their per-
formance to have, as an integral component, the continual assess-
ment by program managers of the risk inherent in each program
component, and strategies for its abatement.

Ideally, this should be done as part of the budget formulation
and execution process. Finally, report streamlining. The financial
statements required under the CFOs Act and GMRA have been im-
portant in identifying weaknesses in accounting structures, and in
refining financial data. In many cases, the lack of integration with
budgetary reporting and the overlap with other reporting require-
ments makes these financial statements less useful than they
might otherwise be.

In the GMRA, OMB asked for and was given pilot authority to
waive statutory reporting requirements in consultation with Con-
gress. In February, Director Rivlin notified Congress of OMB’s in-
tention to use this authority to streamline various reporting proc-
esses. In concert with the CFO Council, OMB has identified five
agencies who are willing to serve as pilots for an accountability re-
port, which would combine financial results, program integrity in-
formation and program performance information into a single re-
port.

I might again digress. This is an accountability report, produced
by the Department of Veterans Affairs. And I think that if you re-
view it, you'll find that it’s a model not only with popular informa-
tion—for example, you can see the drop in in-patient days in VA
hospitals, but you can also see the increase in out-patient days, as
part of a strategy to reduce the cost of in-patient stays but improve
the treatment by increasing out-patients—and there are very good
graphics in it.

It also has a discussion of the high risk areas in its internal con-
trol report, and it has its audited financial statement all in one
cover. It’s not an enormous document; in fact, you probably, if you
cut it down another 50 pages, would have something that could be
used by the informed public. It’s not a popular document, per se.
But this is the prototype that we’re trying to move toward of get-
ting financial information, performance information, and program
integrity information in a single document.

This is the first year it’s been done; there’s more to come. And
we'll be coming back to Congress to discuss the five agency proto-
types as soon as they’ve been through the review process at OMB
and have been selected. In order to qualify as a pilot, the agencies
will need to assure their resource management organizations—that
is the budget side at OMB—that they have the capability to
produce their information on a timely basis, and that the informa-
tion will be useful as part of the budget formulation and execution
process.

While the Office of Federal Financial Management, which I head,
will continue the consultation with Congress, the active involve-
ment of the RMOs is an important step in the implementation of
the integration of management and budget contemplated by OMB
2000. In conclusion, for the public to be able to understand the re-


120

Mr. Horn. OK.

Mr. BRECHT. That is the very clear understanding that we need
big financial management computer systems to get the basic data
for actually running our country. I don’t know whether or not I
agree with—I agree with the statement, but I don’t know if—I see
how it’s being implemented out there in the agencies, and I’m not
agreeing how they’re doing that.

Mr. Horn. Do you want to elaborate on that? Are you worried
about excessive investment in computers of the past decade, as op-
posed to how one—

Mr. BRECHT. We're not dealing with computers of the past dec-
ade, we’re dealing with computers from about 1977, 1987 model
computers out there. No, what’s happened in business, for example,
is they've done just exactly what, for example, Mr. Chapin was dis-
cussing, where they pull together the operating systems and the ac-
counting systems. at they call them is transaction management
systems. You don’t have this bifurcation, like there is right now in
the Federal Government.

But what’s happening at the Federal level in the agencies, what
I see, is that they’re investing in what I call big, hard wired sys-
tems—lots of COBOL programming, lots of designing data ele-
ments. I don’t know if you’ve seen the data element book itself for
this massive system they’re talking about; it’s 8 inches thick. You
can’t build a system. That’s part of my background, I’ve actually
designed and implemented large transaction systems out in the pri-
vate sector. Something that complex is not doable, for any amount.
of money, for any amount of timeframe.

My suspicion is that we may not have to do that to get where
we want to. We may not have to account for every nit and nat,
which is typically an orientation that you'd want from an account-
ing standpoint. ut from a management standpoint, you need to
generally know enough about what’s going on to make good man-
agement decisions. And I believe that’s where we should start.

Mr. Horn. That's interesting. Mr. Fox.

Mr. Fox. Yes. First of all, I've been—I want to correct one thing
that I said earlier in the fact that the data base was only available
in three places. The data is also available at the General Account-
ing Office, for general information, as well as the development and
historical data base, which we just found out about fairly recently,
that goes back a number of years. And I think this is going to be
very useful.

And hopefully we can make it available through the House Infor-
mation System and the Thomas System. My direct response, in
terms of what was said in the previous panel is, No. 1, relates to
the pace at which the various systems are being developed. For
years I’ve dealt with the General Accounting Office, as a staff per-
son on Capitol Hill. And typically, when you make a large request,
they’re very good about many small requests, they will send up five
or six people and try to talk you out of doing the request.

And they all pe out in the hall and wring their hands, and pat
each other on the back when they back you down a little bit. But
I think this is an indication of the basic problems that we face in
the Government. Many times the solutions are seen in terms of
years or decades when, in fact, with the liabilities increasing at $1


19

require agencies to change the way they do business in the
financial management arena. Their successful implementation will
depend on support both from agency leadership and management as
well as the Congress itself. We have been pleased by the support
the Congress in general and this Subcommittee in particular have
provided for these initiatives and hope to continue working with

you on these important issues.

NGTH ING THROUGH USE OF FINANCIAL DATA

As financial information improves, it also will enable greater
integration of financial accounting information and budgeting to
better assist policymakers in sorting out claims and allocating
resources. Budget decisions are strongly influenced by the type
of information reported and the way choices are framed. We have
consistently maintained that budgeting can be enhanced by more
integrated consideration of financial data. However, such
integration is highly dependent on improving the accessibility of
financial information to budget decisionmakers. FASAB, in
recommending accounting standards, has attempted to bridge the
existing gaps by adopting budgetary approaches to the extent
consistent with accrual accounting concepts appropriate for

measuring operating performance and reporting on stewardship.

The areas of the budget where the prospects for integration

appear most promising include (1) the selective use of accrual


14

Difficult resource allocation decisions are facing the nation in
order to implement and sustain a new fiscal policy path. These
decisions require good budgetary and financial information that
fully discloses the current financial condition of programs and
the stakes flowing from budgetary choices--both present and

future. Moreover, public demands are high for the government to
accurately account for the effective use of a dwindling pool of

resources and to provide services cost efficiently.

The federal government's budget process as well as its financial
reporting and management systems should be expected to
collectively provide the information necessary to address
difficult issues. The budget should provide sufficient
information to permit decisionmakers to (1) effectively allocate
scarce resources among competing programs, (2) formulate fiscal
policy addressing macroeconomic goals, and (3) communicate
budgetary priorities and program performance data to the public.
The budget is a forward-looking plan that should help the nation
assess the implications of choices; it should be formulated using
accurate and reliable financial data on actual spending and

program performance.

Financial statements and reports should also provide reliable and
relevant information. In addition to ensuring basic
accountability for the proper use of budgetary resources, we

should expect such reports to address (1) the full costs of


CAROLYN @. MALONEY
Tr Dismer, Rew Yon

= cammessstge tia Bas ad

Bouse of Representatives
‘Blashington, DE 20515-3214

HON. CAROLYN MALONEY -- OPENING STATEMENT

HEARING ON “BUDGET AND FINANCIAL INFORMATION -- ANNUAL SHAREHOLDERS
REPORT: HOW DOES THE CITIZEN KNOW WHAT IS GOING ON?"

July 10, 1995

Chairman Hom, thank you for providing the Committee this opportunity to examine how
the Federal government organizes and presents budget and financial information. As a nation,
we are faced with increasing fiscal constraints and increasingly difficult choices amongst
competing social and economic priorities. While we may differ on the best way to approach
these isues, clearly all Americans are well-served by improved accountability for public
resources and better informed decision-making on the part of the Administration and the
Congress.

Currently, the Federal government's budgetary and financial reporting practices do not
accurately depict the full coxs of Federal operations or the goverment’s tne financial
condition. the General Accounting Office, financial statement audits have
‘Senied hundreds of bilions of dlls ia accounting errors, mistakes and omissions, including
problems of uncollected revenues and unrecognized liabilities and potential losses.

I recently released a report on one such area -- delinquent non-tax receivables, These
delinquent receivables range from unpaid user fees and court costs to deadbeat parents and
nuclear power plant licensing. “The shocking bottom line of this report was that inthis area
alone, dead-beats owe the Federal government over $50 bilion, Ths 1s 4 jount
in these days of tight fiscal restraint and I am working on legislation to improve our ability to
collect some of this money -- money owed to American taxpayers.

Serious deficiencies in Federal accounting procedures render fiscal information provided
te Congress and the Executive branch virually useless. Furthermore, they may impede
Congressional efforts to effectively restructure the government, reduce Federal spending,
eliminate the deficit and bring balance to the budget.

am interested in learning from the GAO and OMB whether the implementation of the
Chief Financial Officers Act of 1990 and the creation of the Federal Accounting Standards
Advisory Board have moved us any closer toward improving budgetary reporting and accounting
practices and correcting weaknesses in the government's depiction of its financial operations.



132

found is that we need to use the tools, going back to your original
concept that there are a lot of tools out there that the private sec-
tor uses that we should be taking a strong look at. And one of the
things that I haven’t talked too much about—I’d like to just talk
for a minute or two about—is the balance sheet.

And the balance sheet that we’ve developed for the Federal Gov-
ernment is really a tool, a categorization. And it’s kind of like
Lenais in the early 1700's, developed this notion of kingdom, phy-
lum, all the way down to species, varieties. This balance sheet is
really a framework, a categorization for analysis. And one thing
that you can use the balance sheet for is to go through and say,
what's really important; what are the priorities.

And for instance, if you start going down the list, and you say,
insurance, loans and credit guarantees, Government sponsored en-
terprises, these probably have a less priority than Social Security,
retirement security, paying interest on the debt, perhaps pensions.
And I think this is one thing that we can gain from having a bal-
ance sheet, being made part of your full budgeting financial plan-
ning process, is we begin to say, “well, it would be nice to have in-
surance, but maybe that’s something the Federal Government
should not do.” Same thing with loans and credit guarantees, and
as well as Government sponsored enterprises, which are a fairly re-
cent phenomena since the 1930’s, when the Federal Home Loan
Bank Board was established.

And those are the kind of hard decisions, those are difficult deci-
sions, because insurance like the FDIC bank insurance fund is al-
most un-American to challenge that as saying well, the Govern-
ment shouldn’t be in that.

But the facts are, only Canada and the United States, in terms
of Western developed countries, have a Federal Deposit Insurance
Program. It’s very inefficient. Just the savings, the BIF fund for
the savings and loans has lost 15 to 20 percent in terms of its total
insured worth over the last 3 or 4 years. That’s an incredible hit.

That’s a hit that no private insurance company probably would
ever allow happen. And so we have to begin to Jobk at what the
Federal Government should be doing. The balance sheet helps us
determine some of those things. Also, that feeds into the informa-
tion. If we have the information, then we can be looking at this
overlap in terms of jobs programs, et cetera. We just have an awful
lot to do in, I think, a fairly short period of time.

And my final comments would be that we need to develop an
overall strategy in combination with this committee, perhaps Con-
gressman Cox, the Budget Committee, other Members who are

interested in developing an overall stra’ to tackling this in-
credibly complex financial management and social management
challenge, and put together something that we can do quickly. I’ve
been working in this institution off and on since the late 1960's.
And I have to leave after, many times, 2 or 3 years, because I get
so frustrated at how slowly we operate. I just can’t stand it any-
more.

I go out and work in a private sector, and eventually come back
and try to do a few more things. But I think we're at a take-off
stage. The people want this; I think that’s probabl the most im-
portant thing. And we have the technology. Technology is very ca-


110

Such a process can also produce a closer collaboration with Fed-
eral managers. These Federal managers are the ones who must
lead, organize, inspire, deploy, measure and reward those who im-
plement the programs Congress funds. I have a number of rec-
ommendations for the budget process. My assessment right now is
that the budget process itself creates many financial problems for
the Nation. Congress needs to change the budget process now.

Two budget process reforms I believe that are needed are, Con-
gress needs to immediately start using a capital allocation process

‘or determining which programs to fund, which to eliminate, and
which should be done by someone other than the Federal Govern-
ment. In any organization, even one as big and powerful as the
U.S. Federal Government, there is a limited amount of available

capital.

is limited capital must be spent in the most productive fashion
possible. As a Nation, we must prioritize and focus on what is im-
portant. We cannot do everything. Every dollar must be allocated
to those activities that produce measurable results. Programs
should be funded because they create measurable value for share-
holders, the citizens.

Congress must decide what produces the greatest value from a
fixed amount of capital. Also, Congress should decide which level
of Government should manage these programs, or whether the pri-
vate sector should manage the activity. Also, Congress needs to im-
mediately start using modern information technology to track the
results of Government programs in real time, and distribute this
information directly to the people. Program level financial informa-
tion should be combined with the program’s mission, benchmarks
and performance results into a one to three-page summary, and
shared widely.

Systems deployed at the program level can gather information
and make it available in real time. For example, this information
could be published on the Internet’s World Wide Web. That con-
cludes my summary remarks for today, Mr. Chairman, subcommit-
tee members. Thank you.

[The prepared statement of Mr. Brecht follows:]


69

Mr. DESEVE. And we're playing the history out now. Mr. Chapin
is probably chomping at the bit at the moment, because he and I
both think that the idea of moving toward what I’ve called an ac-
counting utility, which you call a single integrated financial man-
agement system, on a Governmentwide basis makes a lot of sense.

Until, though, we get the transaction level reconciliations done,
so that we know that even at the lowest level, the financial system
is working, it’s harder to do the design of the very large system.
Frankly, the very large system will be enormously larger than New
York. I don’t mean to make this sound so difficult.

It’s a big job. And so the decision was made in 1990, that we're
implementing now, was that at least the Defense Department—
$250 billion—have a single financial management system, subject
to audit. That in itself is extraordinarily difficult for them. They
currently, according to Mr. Hamry, have about $19 billion worth of
mismatched expenditures and obligations.

Mrs. MALONEY. Wow. Excuse me, is the audit an independent
audit, or is it a Governmental audit?

Mr. DESEVE. Well, we think it’s independent, because it will be
done by GAO.

Mrs. MALONEY. OK. They do excellent audits, I think. That’s why
I’m amazed that this has never happened before. I mean, it’s just
fundamental good management practice to know how much you
have in the bank.

Mr. Doparo. Part of the problem—and I’m going to ask Don to
expand on this a little bit, because he comes with 30 years’ experi-
ence from the private sector. But part of the problem, before the
Chief Financial Officer was passed, we had to get agencies volun-
tarily to put together the financial statements and sort of not invite
us in for an audit, but at least agree to be audited, because it re-
quires a lot of significant involvement.

What you've not had at the Federal Government level yet is what
you had in New York City, a financial crisis in the early 1970's.
And you've had a lot of motivation for change and discipline that’s
been imposed by market forces. New York City can’t borrow money
and do other things unless they have it. At the Federal Govern-
ment level, we just keep cranking the money out.

But this is an area Don has a lot of good thoughts on. I’m going
to ask him to comment on it.

Mr. CHaPIN. I came to Washington in 1989, and undertook Mr.
Dodaro’s present position. One of the first things I did was to con-
duct an audit of the U.S. Air Force. The results were shocking, ab-
solutely shocking to me, who had spent many, many years auditing
in the private sector. I had never seen anything like it. Just appall-
ing, appalling.

Mr. Horn. Could you translate those words into a few examples?
You’re now getting my interest quite excited, and Mrs. Maloney is
similarly excited.

Mr. CuaPIN. Tens of billions of dollars unaccounted for. Inven-
tories that no one had reconciled with the records. Materials that
couldn’t be found. Liabilities that weren’t recorded. The financial
statements made no sense. They were patched together from pieces
of information, not from a real set of books. We'd take a little piece


24

estimate represents a downward revision of $40 billion to $50
billion from its fiscal year 1995 estimate. PBGC's September 30,
1994 financial statements also reported a downward adjustment of
$1.5 billion from its September 30, 1993 statements. Under an
accrual method, these types of estimation fluctuations would have
to be reflected in the budget through a reestimation process,

which may raise more problems.

In light of these reestimation problems, substantial questions
are raised about the practicality of an accrual budget approach
for some of these programs. The challenge involves weighing the
potential distortions arising from the cash-based approach with
the risks and uncertainties involved in estimating longer-term
accrued costs for some programs. In areas where accrual
information is not considered reliable enough to be directly
incorporated into the budget, such information could nevertheless
be used as a supplement to the budget. Our upcoming report on

budgeting for insurance will address these issues.

HOW CAN OTHER POTENTIAL FUTURE COSTS AND CLAIMS BE CONSIDERED IN
BUDGETING?

There are a number of programs that under current policy could
result in large future government payments but whose costs are
appropriately not booked in the budget as budget authority and

outlays. The future costs of Social Security and Medicare are

13


10

cost of programs, or about the value of what the Government owns
and what it owes others, or about the Federal Government’s finan-
cial ability to satisfy future commitments. But that’s not currently
possible.

The facts are that financial accounting information in particular
has not been reliable enough either to facilitate decisionmaking or
provide effective public accountability. Also, good information on
the cost of Federal Programs is frequently absent or difficult to re-
construct. As I’ve discussed previously before this subcommittee,
there are significant problems in agencies’ financial systems.

Financial statement audits have identified serious control weak-
nesses and hundreds of billions of dollars in accounting errors and
omissions that can render information provided to the Congress
and managers highly questionable. Also, audits are just beginning
to shed more light on the Government’s true financial condition.

Fortunately, I can report today that the progress is improving in
financial reporting, due to implementation of the Chief Financial
Officers Act, and the creation of the Federal Accounting Standards
Advisory Board. Tools are now being put in place that promise to
get the Federal Government's financial house in order. First, begin-
ning next fiscal year, all major agencies, covering about 98 percent
of the Government’s outlays, are required to prepare annual finan-
cial statements, and have them audited.

Second, an audited Governmentwide financial statement is re-
quired to be produced, starting for fiscal year 1997. And finally, the
Advisory Board is developing new standards that will yield more
useful financial information. These recent initiatives hold much
promise, but they will require support from agency leaders as well
as the Congress to succeed.

As financial information improves, it will also enable greater in-
tegration between accounting and budgeting information to better
assist policymakers in sorting out claims and allocating resources.
One such promising area is the selective use of accrual concepts to
record budget authority and outlays. Although cash based budget-
ing serves udgeting purposes well in most cases, for a select num-
ber of programs, it does not adequately reflect the future cost of the
Government’s commitments, or provide appropriate signals on
emerging problems.

In these cases, the accrual approach would better record the full
cost to the Government. As you pointed out, in fiscal year 1992, ac-
crual budgeting principles were applied to loan and loan guarantee
programs. Other areas, such as Federal insurance programs, could
potentially benefit from the accrual approach as well. Our work
today, in studying this issue has revealed shortcomings with the
cash approach to budgeting for these programs, but also high-
lighted difficulties in estimating future costs, due to lack of ade-
quate data.

Another opportunity exists to use financial information on liabil-
ities and long-term commitments to help address the sustainability
of current budgetary policies. The strength of claims on future re-
sources range from very firm, such as liabilities like the public
debt, to commitments to pay social insurance programs, and finally
to the mere expectation that current policies and discretionary pro-
grams will be continued.


29

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.

‘TURED TO CONSIDER
MANAGERI INCEPTS?

The way budget and financial accounts are organized also
influences decision-making. Currently different account
structures are used for budget and financial reporting. This
makes using these reports together difficult and may prevent

decisionmakers from benefiting from all available information.

We are currently finishing a study of the budget account
structure for Senators Domenici, Roth, and Hatfield. The report
describes the budget's current account structure, which is

reflective of the multiple uses of the budget. Because the

18


98

* It gives the Treasury Department needed information for its management of cash resources and
the public debt.

* It provides the Presidential and congressional support agencies -- OMB, CBO, GAO, and CRS —~
with the data and policy direction they need to perform their assigned tasks.

‘These many purposes require a Comprehensive Federal Budget, Balance Sheet, and Financial Plan.
In order to inform the public and increase executive and congressional understanding, the federal budget
and financial plan should satisfy the following criteria. The budget and financial plan should

* be simple ~- “readily understood”
* bea honest and fair representation of the financial condition of the federal government
* promote thrift -- “does a program, service, or activity provide real value”

* protect freedom and promote equality

These values - simplicity, honesty, thrift, freedom and equality -- are widely held by the citizens of the
United States.? Every time an elected or appointed official and federal workers makes a decision or
performs a service she/he should ask themselves if what they are doing satisfies the above value criteria.
Specifically they should seek to reflect these widely held vaiues, of their fellow citizens, as they put into
operation the missions, goals, objectives, and benchmarks prescribed by the comprehensive federal budget.

Program outcome and results measures indicate whether a government has been successful or failed in it’s
attempt to meet the budget and financial plan’s underlying values. The hierarchy of values-missions-goals-
objectives-benchmarks-policies-programs-outcomes and results should be the frame of reference for
‘government budgeting, balance sheet management, and financial planning decisions by those entrusted by
Citizens with government office or employment,

Federal “check book” Budgeting

Today's federal unified budget is little more than “check book” budgeting. It does not serve US citizens,
the Congress, federal managers, or the President very well

‘The federal government manages its finances with little more than a check book. Check book budgeting
tracks on a yearly basis federal spending and income with limited attention paid to program outcomes and
results. Little systematic professional review is given the promises (liabilities) the federal government is
responsible for, it's assets, or the risks inherent in both. And at the end of the year, the defict-- no surplus
since 1969 -- is added to the national debt

If.a family used the federal government check book budgeting approach, they might describe their budget

ithmetic as ~- “we need $35,000 to live this year, but we will spend $45,000. At the end of the year, we

will just add the extra $10,000 to our credit card debt. And then we will be able to start the new year with
a zero check book balance!” This approach is not sustainable for the family or the federal government.

After many federal budget, program, and financial management failures, citizens are in revolt. Severe
strains are showing. Taxpéyers perceive that they are not receiving value for their tax dollars from federal
check book budgeting. They are justifiably concerned as federal managers often have little guidance as to
the goals, objectives, and benchmarks that they should be striving for. Furthermore the decision makers,

* Milton Rokeach, The Nature of Human Values, The Free Press: New York

3


91

So even now, we don’t have a good handle on the admitted liabil-
ities. So I’m perhaps going way into the future, but I’d like to see
us do that accurately, systematically, and then extend it to those
who should be paying who don’t. And if we can get that far, we'll
improve the tax collecting ability of the country.

Mr. Horn. Well, I’ll add one more point to this subject. You have

od point on what you're saying. And I'd like to improve that
ability. But if the Internal Revenue Service did what the Customs
Service did years ago, about 20 or 25 years ago, which is go after
some of these tax avoiders with a net worth analysis, based on
what they’re doing. Now, the minute a lot of that function went out
of {Castoms over to the Department of Justice, they dropped the
all.

The great cry up here was, well, let’s get those people in Justice,
because they enforce the law. Nonsense. Customs was enforcing the
law in the Treasury. And my understanding is the Department of
Justice has done very little along that line. Maybe I’m wrong, and
GAO probably ought to take a look at that. Because the whole net
worth analysis works out well in court.

Mr. CuaPIn. Right.

Mr. Horn. And you can either get them on the criminal side or
the civil side. That would shake a few trees of huge tax avoiders.

Mr. CHAPIN. That’s right.

Mr. Horn. I’m thinking of the drug enforcement area, where
they dropped the ball also on that.

Mr. CHaPIN. That's correct.

Mr. Horn. So I think it’s a very interesting discussion. Is there
anything else you want to say on comparability?

rr. CHAPIN. One other point. The private sector, as Ed said,
doesn’t have the dual accounting responsibility—the dual systems
requirement—that arises as a result of having to do budget ac-
counting on a cash basis and financial accounting on an accrual
basis. But I don’t believe the private sector has the diverse needs
for information. If you look at some of the accounting systems of
the Federal Government, you'll see that Federal managers want all
kinds of different kinds ore data.

There’s no uniform agreement as to what data is required. So
you have unbelievably complex account structures. That’s another

roblem that we face in Government—to try to get people to settle
‘or less than everything they need, because by providing everything
they need, we increase the chances of inaccurate information. So if
we can get agreement on what’s needed, what information is need-
ed, then we'll be able to simplify the information structures.

Mr. Horn. That’s an excellent point. There’s no question part of
the problem is not only Federal mangers, but congressional man-
agers on micromanagement, where they're asking for data that
sometimes has no relationship to the information you need to make
a decision—political, executive, legislative decision. And it would be
nice if we could work out an agreement—and we've held hearings
on this benchmarking idea that Oregon is doing, in terms of what
are the goals; how do we measure when we're part way there, half-
way there, all the way there, in terms of a consensus of a commu-
nity of people served and the Governors, elected by the people to
serve them


11

Financial reports based on the Advisory Board’s recommended
standards will provide valuable information to help sort out these
various kinds of long-term claims. Decisionmaking can also be en-
hanced by using managerial cost concepts in tandem with budget
accounts to more easily see the full costs associated with program
outputs and outcomes to be reported in financial statements.

Currently, different account structures are used for budget and
financial reporting. The Advisory Board calls for capturing the full
cost of activities associated with Government activities or results.
This type of information is currently not reported in the budget,
and there is a need to strive to achieve a better congruence be-
tween budget accounts and the accounting system structure.

Several approaches also could be considered to prompt
decisionmakers to use financial reports to have a longer term focus
on commitments of the Federal Government in making resource al-
location decisions. One approach would be to eventually include
trends in audited financial information in the reports, over a period
of time. Also, Tonger term simulations of current budget policies at
the very least could encourage a public dialog focused on the long-
term outlook, and might engender pressures for programmatic re-
form and fiscal changes sooner than when a crisis emerges.

In closing, I want to emphasize that better financial and budg-
etary information will not hecessarily make difficult resource allo-
cation decisions easier, but it would better ensure that everyone
fully understands the implications of various policy choices. More-
over, reliable financial reporting is essential to restoring public con-
fidence in the Government’s stewardship of tax funds and in per-
mitting more effective oversight.

We look forward to working with this committee in the future on
these important issues. Thank you, Mr. Chairman, that concludes
my summary.

[The prepared statement of Mr. Dodaro follows:]


97

Harrison W. Fox, Jr. Ph.D.
President
Citizens for Budget Reform

The Citizens’ Budget
Mr. Chairman, thank you for the opportunity to present my views about The Citizens’ Budget.

‘The essence of my views are summarized below

‘The current “unified” budget presented by the President each February and acted on by the Congress
t ified and expanded to include a Comprehensive Federal Bi Balance Sheet.
Financial Plan.
The Concept of the

Comprehensive Federal Budget, Balance Sheet, and Financial Plan

‘What should be included in the comprehensive budget of the United States? It should present -- the .
“essential ingredients” of the financial plan; federal assets and liabilities and risks inherent in both, and
missions, goals, objectives, benchmarks, and outcome and results measures, for all federal programs. All
these should be presented for the coming year and for at least five years into the future, The
comprehensive federal budget should be a “living document”, with daily updates available electronically to
citizens, the media, Congress, the President and his appointed officials, as well as federal managers,

‘The comprehensive budget serves many purposes:’

+ It provides citizens with information about the national economy essential for private business,
labor, agriculture, and other groups, and for an informed assessment by individuals of
governmental stewardship of the public’s money and resources.

* It presents the President's budget. The President's budget makes requests of the Congress for
funding programs -- old and new, for outlays and appropriations, and revenues as well as
identifying federal assets and liabilities, the risks inherent them, and strategies that will
manage these risks

* It presents the congressional budget. The congress’ budget responds to the President's request by
establishing functional dollar targets, levels of spending ~- authorizations and
appropriations, appropriate revenues, and deficit or surplus as well as accepting or
proposing new asset/iability strategies.

* It proposes an allocation of resources between the private and public sectors, and within the
public sector.

* It establishes national and program missions, goals, and objectives as well as establishing
benchmarks.

* It provides for the measurement of program outcomes and results in order that the programs that
are working can be continued and those that are not can be redirected or terminated.

* It embodies the fiscal policy of the federal government for promoting jobs, price stability,
economic growth, trade, commerce, and the general welfare of all citizens,

* It provides the tess for executive and agency management of federal programs.

" These purposes are adapted from, Report of the President's Commission on Budget Concepts, page 2. Substantial
‘modification and updates are provided.


102

‘The current federal budget fails to recognize the full increase in federal debt. The federal budget should
i I in it This would include interest expenses
associated with so called federal “trust funds”

Finally, the feder t should list all spending -- cash an ~ where promi me
v For instance, government worker pension reserves are grossly under funded and many
potential future environmental cleanup costs are not fully recognized in the federal budget.

Finally the total budget deficit equals net lending, plus the expenditure account deficit, full increase in the
federal debt and other promises, spending, and losses

III, Means of financing

The total budget deficit is financed by borrowing, the reduction of cash balances, sale of assets, and other
financing. Means of financing “shows how much of a budget deficit is to be financed by borrowing, and
how much by other means.” Treasury and Federal agency borrowing from the public and from federal
trust funds are included as means of financing,

at it reflects the total budget deficit that is fin:
The increase in the total budget deficit will include borrowing from trust funds.

IV. Outstanding federal liabilities

The increase in federal liabilities each year is now over $1 trillion per year or about $2,000 per United
States citizen. In 1995, this will include over $300 billion in additional Social Security unfunded lability,
$318 billion increase in federal debt, and tens of billions of increases for nuclear waste cleanup, road and
bridge repairs, medical payments, federal employee pensions, and environmental cleanup promises. This
yearly increase added to the already huge federal debt raises serious questions about the future ability of
our children and grandchildren to pay for our current lack of stewardship.

The yearly increase in debt and other liabil
workout should begin!

esis unsustainable, America is in bankruptcy. The

Federal liabilities are the total of all promises, loans, guarantees, claims, contingencies, contracts, and
undelivered goods. Federal government liabilities include fourteen categories of promises that must be met
by the taxpayers. On September 30, 1995 these liabilities totaled over $36 trillion

Retirement related liabilities add up to 25 percent of USA federal government liabilities. Future welfare
benefits are responsible for over 15 percent of federal liabilities. Bank, savings and loan, and credit union
deposit insurance equal nearly 14 percent of taxpayer liabilities. The unfuunded Social Security liability is
approaching $8 trillion, “This liability represents the present value of the projected excess of future benefit
payments to. those presently participating in the Social Security program over contributions still to be
made by them and by theigemployers on their behalf” The top ten federal liabilities are each over $1
trillion. And the next nineteen total over $100 billion each?

* Consolidated Financial Statements of the United States Government, 1993 Prototype, Department of Treasury, page 32.
° USA Annual Shareholders’ Report for Fiscal Year Ending September 30, 1994, Citizens for Budget Reform, pp. 5-11.

7


118

Testimony of Lyle A. Brecht to the Subcommittee on
Government Management, Information & Technology
11 July 1995

My next approach was to get somebody else to write it, I failed at this attempt - so I wrote it
myself, It took me about a year and a half to read a few tens of thousands of goverment
documents and a few hundred books by experts who purported to understand various aspects of
government operations. Then it took me about six months to write up what I had learned and to
publish it in a pretty format so that others might enjoy this information,

When I wrote it, my hope was to produce a politically neutral report. I wanted to just tell the
truth as well as I understood it at the time. I used the metaphor of the federal government as a
business

The resulting AmericaReport has been praised by various individuals and groups of vastly
differing political views and persuasions. Some say itis the best thing that has ever been written
‘on the budget for the layman. The report has been recommended by the Financial Executives
Institute, a professional association of 14,000 Chief Financial Officers, Treasurers, and
Controllers - whose members actually produce the annual reports of public companies.

Members of the House Budget Committee distributed copies of AmericaReport at a town meeting
they held last fall prior to the budget deliberations - with favorable reception by citizens attending
these meetings.

In the past few months, officials and staff from the U.S, Treasury, Office of Management &
Budget, National Economic Council, National Performance Review, Government Accounting
Office, General Inspectors’ Office, Federal Accounting Standards Advisory Board, Association of
Government Accountants, and the White House have spoken to me about various aspects of my
report, Some of these conversations were initiated by me and some were initiated by the various
officials

AmericaReport was produced at great personal sacrifice to me and my family. Many times along,
the way, I wanted to stop. However, it was almost as if T couldn't stop myself from thinking about
these issues of budget and government and what these issues mean to all Americans and to future
‘generations. This is my small contribution to the vision on which America was founded.


65

So hopefully, with both of those initiatives coming to the fore-
front, you'll have more reliable information and all the information
of the type that you mentioned.

Mr. DESEvE. The first statement is scheduled for production
after fiscal year 1997, Don?

Mr. CHaPIN. Right.

Mr. DESEVE. And that would mean it would be in calendar 1998.
And I can assure you that one of the fondest wishes of the Presi-
dent is that he be there to receive the first statement.

Mr. Bass. Sure, I believe that. I have a couple questions I’d like
to ask you pentlemen, just to get into the record here. OMB Cir-
cular A-11 has been revised to ask agencies to include in the fiscal
year 1996 budget more program performance measures, and to link
goals to the resources required to produce them. Will this initiative
result in useable information at this stage of the implementation
of the GPRA? Or is it premature to require it of the agencies at
this time?

Mr. DESEVE. We think that it has and does provide important in-
formation. During the Director’s review last fall for fiscal year 96
budgets, there was extensive discussion of performance in those
hearings. Similarly, we just finished what we call our spring review
of program performance, where we went in great detail with many
agencies about what it was they intended to accomplish; how they
intended to accomplish it; and what resources they would be using.

We focused there on the key programs, the most important pro-
grams. It’s our intention to expand that in the fiscal year 97 budg-
et; and as agencies develop their strategic plans and move toward
performance budgets in 1999, to continue that expansion. We'll be

appy to share that information with the committee or with the ap-
propriate appropriations committees who will also be interested in
it.

Mr. DopaRo. My view is that it would be appropriate at this
time to begin using the performance measures in that context. And
it’s consistent with the schedule outlined in the Government Per-
formance and Results Act, which was gradually to f° from pilot
status and expand it to Governmentwide use eventually.

I would, however, caution, at this juncture that the need to use
discretion in interpreting and using those performance measures,
in terms of their reliability, the underlying data used to support
them, and also the absence of a lot of cost information on unit costs
of performance to eventually get there. But I think it’s quite appro-
priate to begin the dialog on this, because it’s going to take some
time for full implementation, the way that Congress envisioned
when they passed the Government Performance and Results Act.

Mr. Posner. If I can just add one additional point to that. I think
the plan for the Government Performance and Results Act was
very much of a phased in implementation, and appropriately so, be-
cause performance information, particularly on outcomes and
measurement is not an easy thing to do. We at GAO, several years
ago, did a study of the States that were reputed to be the leaders
in performance measurement.

And we looked to see to what extent were these measures used
by the legislature in appropriating funds. And we found that by
and large they weren't, Tpecause the legislature did not view the


71

Mr. Doparo. I think the one thing I’m really encouraged by, this
past year was the first time, on the Senate side, the Appropriations

ommittee overseeing the Department. of Defense held a hearing
on financial management. And Chuck Bowsher testified at that, in
a hearing held by the Armed Services Committee. Before it was ba-
sically the Government Reform and Oversight and its predecessors,
and the Senate Committee on Governmental Affairs, and those
committees that have legislative responsibilities.

But the appropriations committees and the oversight committees,
the authorization committees really need to focus on this issue to
get the agencies’ attention. It’s become important at Defense be-
cause it’s draining money away that could be used to enhance read-
iness. Ed mentioned the problem of unmatched disbursements. De-
fense has $28 billion that they've made payments, that they can’t
trace back to know what they paid for.

They overpaid contractors by at least $1 billion, where the con-
tractors voluntarily return the payments. And I could go on and on
to define the appalling that Don mentioned, but I won't. But we did
add the Department of Defense and the Internal Revenue Service
to our high risk program this year, to try to provide adequate impe-
tus to put in place the requisite changes.

Mrs. MALONEY. I have a series of questions, but I’m going to
defer to the chairman. You've given graphic examples, and I thank
you. But very quickly, if you had to name the five worst managed
agencies, you just named two, what would they be in the Federal
Government? DOD, IRS, what else?

Mr. Doparo. That’s always a difficult question. The only more
difficult question is what are the top five best managed agencies.

Mr. DESEVE. Mrs. Maloney, can we get you a copy of the high
risk list, because I think it has them ranked, in a sense, on it?

Mrs. MALoney. OK. And then you mentioned that you had five
agencies for your pilot project reports.

Mr. DESEVE. Right.

Mrs. MALONEY. What are those five agencies?

Mr. DESEVE. We're talking right now—we don’t know who’s
going to come out. We don’t know if we’re going to get all five right
now.

Mrs. MALONEY. Are you going to try to get well-managed agen-
cies to begin with?

Mr. DESEVE. Yes, we are. Well-managed in the sense that
they’ve been able to give audited financial statements a high prior-
ity, and have been producing good audited financial statements
over time. We're going to be looking at VA; we’re going to be look-
ing at SSA. The Social Security Administration is a leader in this
area. It may have other problems, but audited financials are not
among them. Veterans Affairs, Treasury, Nuclear Regulatory Com-
mission—I think that’s five.

Mr. Horn. Let me just ask one question, following up on Mrs.
Maloney’s opening there, which is very helpful, before I yield to Mr.
Flanagan. I want to get it straight. I heard the figure $19 billion,
and I thought I—

Mr. DESEVE. I was trying to give Mr. Hamry—Gene may be clos-
er to it than I am.

Mr. Horn. This is a recent story in the paper——


16

shed more light on the government's financial condition,
including substantial problems of uncollected revenues and tens
of billions of dollars of unrecognized liabilities and potential

losses not previously fully disclosed.

However, I can report that financial reporting and information is
a work in progress and 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 annual financial statements and have them
audited. Second, an audited governmentwide financial statement
is required to be produced starting for fiscal year 1997. Since
1976, the Department of the Treasury has annually published
"prototype" consolidated financial statements of the federal
government. These statements, however, have not been auditable
since they are based on agency accounting systems which audits
have shown to have serious weaknesses that limit their ability to
produce accurate financial data. Third, FASAB is recommending
new federal accounting standards that will yield more useful and

relevant financial statements and information.

In 1990, the CFO Act first required annual financial statement
audits for a select group of agencies on a pilot basis, with
their continuation subject to evaluations of their cost and

benefits. Such audits highlighted problems of uncollected


99

the Congress and the President, are frustrated by the limits that check book budgeting places on their
ability to change federal program priorities, propose new economic policies, and propound their philosophy
of the role of government

A further complication is that federal check book budgeting -- with it’s convoluted rules, procedures, and
requirements -- is often not understood by many members of Congress, federal managers, and Presidential
executives that are charged with running our government

Check book budgeting has failed!

Today's federal check book budgeting is modeled on the unified budget proposed by the President's
Commission on Budget Concepts in October 1967. The unified budget first adopted by the President for
Fiscal Year 1969° was intended to present the total financial plan for the federal government,

The current federal budget and financial plan have many inadequacies. They

* under represent the true yearly deficit by over $100 billion per year

* do not indicate the massive yearly increase in federal liabilities by over $1 trillion per year

* use cash rather than accrual basis for the presentation of most receipts and expenditures‘

* focus on incremental increases in outlays and budget authority rather than on program outcomes

and results

* provide inadequate tools for implementing fiscal policy

* fail to match assets, including the power to tax, with liabilities (promises)

* do not recognize massive risks ~ interest rate, management, operation, credit, or political

* lack the ability to identify waste and duplication within and among programs

* are not comprehensive, in that billions of dolfars have been moved “off-budget”

* allow offsetting calculations to remove over $100 billion from on-budget decisions

* impose a paperwork “blizzard” on federal managers

* use “numerous and dissimilar program categories” that make it difficult to track actions, to
evaluate how well the federal programs are working, and set priorities

* Sce The Budget of the United States Government, Fiscal Year 1969,” Special Analysis A Comparison of New and Old
Budget Concepts”, pages 464 - 472, (House Document No. 225, Part |, 90th Congress, 2nd Session]

“* Note that accrual accounting was adopted in 1990, as Title 5 of the Congressional Budget and Impoundment Control Act,
for the identification of federal loan subsidies including the capitalization of the interest subsidies at the time the loan is
disbursed. The use of accrual basis was recommended by the President's Commission on Budget Concepts on October
to1967

=This Plan i an updated version of the outline proposed by the President's Commission on Budget Concepts in October 1967
An important part of CBR’s proposal is that budget and financial data should be collected and updated on a daily basis,
organized by the categories noted below, with appropriate cross walks between authorization line items, Appropriations line
items by subcommittee, functions and subfunctions, budget accounts, “programs”, and departments and agencies. Instant
tleatnic acess should be provided to czens federal manager, medi, Congres, and he President's exces,

4


21

Because of its simplicity, it is readily understandable by
policymakers and the public. Cash-based budgeting also reflects
the current borrowing needs of the federal government. For most
federal programs, cash provides adequate information on and
control over the government spending commitments. For example,
for activities such as salaries or grant payments, costs recorded
on a cash basis do not differ appreciably from accrual-based

costs.

However, GAO and others have reported that 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. As a general matter,
accrual-based reporting may improve budgetary decision-making in
cases where the cash consequences of current decisions are not
realized in the budget year but become evident in future years.
In these cases, 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. Financial
statements based on FASAB standards will include accrual-based

information for these kinds of programs.

Beginning in fiscal year 1992, accrual budgeting principles were
applied to loans and loan guarantee programs with the

implementation of credit reform. This recognized that the cash

10


50

Accounting Standards in Process

FASAB is currently developing separate SFFAS's covering:
Liabilities, Property and Equipment, Revenue, and Stewardship.
Work on these standards is expected to be completed before the
end of the fiscal year with issuance by OMB expected by late
fall. when these standards are complete, the Federal Government
will have, for the first time, a comprehensive set of basic
accounting standards. These standards in process are expected to
be effective for reporting periods that end on or after September

30, 1997. Earlier application is encouraged.

¢ Liabilities -- This proposed statement will provide a
definition and general principles for the recognition of
liabilities. The statement includes specific standards for
the recognition and measurement of liabilities for:
contingencies, insurance and guarantee programs (other than
loans), pensions, other retirement benefits, other post

employment benefits, federal debt, and capital leases.


95

modified and expanded to include a comprehensive Federal budget,
balance sheet and financial plan. The comprehensive Federal bai-
ance sheet, Federal budget and financial plan should be used for
improving budget information accessibility, comparability and con-
sistency, risk assessment, efficiency effectiveness, and measuring
outcome and results.

I’ve also added recommendations in terms of subject areas by
budget, by liabilities, assets, asset liability strategy, and balance
sheet. And I won’t burden you with those, but hopefully it will be
reprinted in the record. Now, let me take just a minute——

Mr. Horn. All of those items will be put in the record, if they
have not already been submitted. This is the one titled, “Citizens
Budget,” your testimony.

Mr. Fox. That’s right. Let me move to my demonstration.

Mr. Horn. Are you going to turn that one around so we can see
it?

Mr. Fox. It will be up on the wall here.

Mr. Horn. Oh, OK. Do you need the lights dimmed?

Mr. Fox. Well, just 1 second, let me get this turned on.

Mr. Horn. I wondered why Andrew was back there. Now I know.

Mr. Fox. OK, I think we can go ahead and move on. It will just
take a second for this to wind up. Let me just say that what we've
done is we've taken the accounting records of the General Account-
ing Office—I’m sorry, the Office of Management and Budget, and
these records are only available now in three places in the world.
They're available in the CBO, Congressional Budget Office; at the
OMB; and on this little laptop here.

And we have all the information from those records, about 10
megabytes worth of records—very extensive and very useful when
you start looking at them. In fact, lots of things that you wouldn’t
imagine you might have access to. Now, let me bring up the soft-
ware package that we're developing. What we have is a number of
different ways of looking at the system. And this is going to be put
in a Windows environment.

Today, we're just looking at it in a strictly punch and shoot envi-
ronment. But let me just bring up the appropriations piece, and
give you an idea of the kinds of things that we might be able to—
now, what we can do is, using this information, we can come down
and we've been talking quite a bit about Defense. Why don’t we go
into the Defense piece.

You’re going to be looking at the various sub-accounts in De-
fense. Now, one thing that we found when we show this to Mem-
bers, they get real excited that you can all of a sudden begin to get
all this account information in great detail. What needs to be done,
though, is tying the account information to the program inferma-
tion. And once that’s done, and that can be done, I think, in a fairly
short period of time.

Then you would have the details of what’s going on, and you also
could tie in the benchmarks, et cetera. So what you have here is—
let me try one more detail. We'll go down into the detail of an ac-
count—you can look at the various accounts and you can project it
out any way you want to. What we're proposing is that the user
be provided with a great deal of flexibility and the ability to be able
to import this into spreadsheets like most corporations do today.


33

as well. Such projections could be prepared and presented in the
President's budget document as well as in congressional budget

documents.

The President's budget as well as congressional budget
resolutions might also explicitly discuss how budget proposals
would address long-term issues disclosed both by these
projections and other financial information. At the very least,
such a discussion could encourage a public dialogue focussed on
the long-term outlook and might engender pressures for

programmatic reform and fiscal changes.

HOW CAN WE COMMUNICATE THE ESSENTIALS TO THE PUBLIC?

The public will benefit from these changes in financial and
budgetary reporting and management. Improved accountability for
tax dollars and more informed decisions mindful of total costs
may help raise the confidence of the public in the federal

government.

The public can also benefit from a reporting mechanism that
regularly provides them with information about how their federal
taxes are spent and managed. To date, this information is
Provided as part of the tax forms, in special reports prepared by
interest groups and the media, and most extensively, in the

President's annual budget. Although the budget contains

22


133

pable of doing these things fairly quickly. We have the PCs which
are fabulously easy to work with, and they're able to generate in-
formation very quickly for us. And my feeling is that you would
just need a leader or two to stand up and say, we'll do it.

I am appealing to you and to your colleagues, to say, “let’s just
do it and get it done” and do it fairly quickly. I appreciate the op-
portunity to testify, and look forward to working with you in the

ture.

Mr. Horn. I think the ranking minority member has a question.

Ms. MALONEY. No.

Mr. Horn. OK. We appreciate both of you coming; it’s been very
helpful. Now let me ask Mr. Brecht, are you going to do that on
an annual basis, or do you want us to try and integrate these ideas
into the congressional Bloodstream; in which case, we have a lot of
people in the stream. And the question is, will they take the risk,
as was suggested? What are your plans with your own statement
that you’ve prepared?

Mr. BRECHT. My hope is to be able to continue to work on the
idea part of it, to keep pushing the envelope, so to speak. I really
don’t have the personal funds to continue to publish this on my
own.

Mr. Horn. Well, it’s an excellent example. I would hope that we
can do something on the floor, frankly, with both of these docu-
ments. So perhaps you could work with staff. I'd like to do that.
Last year we simply made a few remarks and put it in the record.
At this time, I'd like to get out with a few charts and show people
what we're talking about.

Mr. BRECHT. That would be great.

Mr. Horn. Good. So if you could work with the staff, I’d appre-
ciate that, and we'll get some presentation boards and what best
illustrates what we gain in information that can be put to intel-
Iigent decisionmaking that we don’t gain by the current process.

ir. BRECHT, That’s great.

Mr. Horn. We need to get that out, and you have to keep after
it. As the Speaker says, when you're tired off hearing it, you’ve just
begun to get through to somebody.

Mr. BRECHT. That’s right.

Mr. Horn. So keep at it, we'll do that.

Mr. Fox. We appreciate your support and oe, commitment
through the years. Unfortunately, we haven’t had that many Mem-
bers eviny support to these kinds of efforts, but it’s growing. And
I think with your leadership, we'll go quite a ways.

Mr. Horn. Well, I thank you. We can’t do it without creative peo-
ple spending a little time and risking their own fortunes in trying
to show us how to do the right thing. So good luck, and thanks for
coming.

Mr. BRECHT. Thank you, Mr. Chairman.

Mr. Fox. Thank you.

Mr. Horn. Let me thank the various people that have been in-
volved with this hearing. First, Mark Brasher, who’s the profes-
sional staff member for the committee in this area, sitting to my
left and your right; Anna Young, professional staff member; sub-
committee staff director, Russell George; and our clerk, Andrew
Richardson.


WwW

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.
In our view, the audits bring 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 and Reform Act, to

all major agencies.

In the same act, the Congress also mandated a consolidated set of
governmentwide financial statements--to be audited by GAO--for
fiscal year 1997. These types of statements will provide an
overview of the government's overall costs of operations. It
will also provide information on the government's assets and
contribution to long-term economic growth. The report's data on
liabilities and potential future costs of current policies will
give policymakers and the public valuable information to assess

the sustainability of federal commitments.

Financial accounting standards currently being developed by FASAB
will help ensure that these financial statements address issues
in terms that are relevant to the federal environment. As you
know, FASAB was established in 1990 to develop and recommend
accounting principles for the federal government. The standards
FASAB is now recommending will provide a sound foundation for

federal financial statements that are relevant to both the budget


61
GOVERNMENT-WIDE AUDITED FINANCIAL STATEMENTS

The Congress and this Administration saw the need for an
audited government-wide financial statement that would provide
the Congress and the American public with a complete picture of
where its government stands financially. our Federal Government
is the world's largest financial operation. Yet, it operates
without ever knowing its overall financial status, a situation
that would be short-lived in State and local governments or the
private sector. The National Performance Review recommended an
audited consolidated annual report on the finances of the Federal
Government and the Congress took steps to make the recommendation
a reality by including a provision in the GMRA of 1994 requiring
a government-wide audited financial statement. The first
governnent-wide audited financial statement is to cover fiscal
year 1997 activity and is due by March 31, 1998, and each year

thereafter.

OMB, Treasury, and GAO have been working closely with agency
CFos and Inspectors General to develop a strategy and a plan for
preparing and auditing the first ever consolidated financial

statement of the U.S. Government.

20


130

anointed them with a diploma. I once said to an entering class at
the university, I feel like we should give you your Bachelor of Arts
degree when you enter; that would please your parents, please soci-
ety, and then ask who wants to stay around for an education. We
could then have the students that are serious about it.

Mr. BRECHT. No, the point I was making that you'd have to look
at every single specific investment that was made to determine it
was really producing economic value or not, and not relying on the
fact that, oh, well, this is an education item so therefore it’s a cap-
ital budget item; or a road, automatically a capital budget item. If
you're using the definition, the conceptual meaning of that, it
means that it produces economic value.

There would have to be some feedback mechanism to tell you
whether or not you actually produced economic value from that in-
vestment, as opposed to a definitional, ah, education, therefore al-
ways——

Mr. Horn. It’s a good, you're saying.

Mr. BRECHT. Yes, it’s sort of like good intent produces results. So
you've got a problem there. Also, there’s an issue in the sense,
again, if you’re really using the concept the way it’s intended to be
used—or at least conceptually it’s been used in the past—is that
you have to be willing to write off that amount of the investment
if it doesn’t produce economic benefits.

The question I would have is, if this is pushed down to the pro-
gram level, do we have Federal program managers out there that
are willing to take a big hit on their annual budget by writing off
a capital item that is no longer useful? In business, if you invest
in a plant that is technologically obsolete, you write it off—you just
don’t leave it hung out there—to give the manager some feed back
of whether they made a good decision or not to fund that in the
first place; or to reflect current conditions, current reality.

So the question I would have—and I’ve never seen any conversa-
tion about that in any of the discussion documents that I’ve read
on capital budgeting. It’s always been an accounting trick tech-
nique that was ing applied, but only halfway. And I’m concerned
about that. One of the positive aspects that I like about the concept.
of capital budgeting is that what the Federal Government spends
money on is tremendously important.

Much of the history of our country is Federal Government fund-
ing things that no none else would be willing to fund at the time,
and creating huge industries and creating wealth for this great Na-
tion, because the Federal Government stepped in and took a risk.

Mr. Horn. Some Members fought it all the way, and said, this
is pork _barreling. You know, the transcontinental railroad—there
was a fight every step of the way. Three month expeditions to the
West, Lewis and Clark, that whole history of the 19th century that
changed America.

Mr. BRECHT. It’s going on today, too.

Mr. Horn. There were people here that didn’t want to spend a
dime. There are people here now that don’t want to spend a dime.

Mr. BRECHT. And there needs to be some way to have those con-
versations so that we can recognize that the Federal Government
really is a generator of wealth for our entire country. One of the
things that I, for example, did with my report is, as I started think-


114

Testimony of Lyle A. Brecht to the Subcommittee on
Government Mafagement, Information & Technology
11 July 1995

work at this purpose day-in and day-out

If the Congress chooses to produce a report for citizens, wrestling with these issues should be the
meat of the report. This is much more important than trying to worry financial accounting
numbers into intelligibility. The financial numbers themselves have little value without a shared
meaning.

This shared meaning only can result from a shared vision of where we are going, what purpose or
mission the federal government should play, and what core values we will use to get there, This is
‘what the shareholders of the business of the federal government want to know more than anything
else.

Some Ideas for the Report to Citizens

1. Get away from negative statements and treating “citizens as taxpayers." Negative visions
don't inspire citizens. Focus on citizens as taxpayers implies enforced compliance and
passivity - in a country where it should be deemed a privilege to be a citizen

We commonly use the term "welfare" to describe transfer payments to one group of
citizens and "entitlements" to describe transfer payments to another group of citizens.
Congress needs to look for positive metaphors and positive missions. I adopted the
metaphor of citizens as shareholders in the business of the federal government, who
“invest” capital in the business each year.

2, Make all those big numbers more meaningful. I calculated budgetary expenditures in
terms of dollars per household, which became a placeholder for how much a family might
be “investing” each year in that activity. This feature alone was viewed as a major
innovation by knowledgeable individuals both in and outside of the government.

3. Make the report short (32 pages) so as to not waste the readers’ time.
4. Make the report interesting and pretty. If Im receiving a shareholders’ report on the

largest, most important organization on earth, shouldn't the report be at least as interesting
1s an annual report put out by The Coca Cola Company?


116

Testimony of Lyle A. Brecht to the Subcommittee on
Government Management, Information & Technology

11 July 1995
externalities where taken into account. AmericaReport suggests that this may also
be the case for the U.S. economy.
© Members of the House who remain "unconvinced that the budget deficit is a

problem or should be a priority for Congressional action." Why do they believe
that the budget deficit does not present a problem to the U.S. economy?

Congress needs to address each of these divergent opinions explicitly and take a stand
Again, to quote Albert Einstein, "the significant problems we face cannot be solved at the
same level of thinking we were at when we created them.”

8 Take responsibility. Any report to citizens must be connected to those responsible for
setting the priorities of government. Come up with some meaningful way of measuring the
performance of each Member. I chose the number of extra minutes each day citizens
would need to work to pay for the programs recommended by that Member of Congress.
Find a better measure, but include this information in the report

If "the government is us" as Theodore Roosevelt claims - we created the problems that we face in
‘America today. There is no us versus them. The people need a Report to Citizens that informs and
involves all of us in the process of governing and making decisions that create a future worth
living in

Mr. Chairman, Members of the Subcommittee, thank you for listening to my testimony and thank
you for your time this afternoon. I would be happy to entertain any questions you may have for
‘me and T'l do my best to answer them.

THANK YOU!


‘The CFO Act and the FASAB were specific tools provided by Congress to strengthen
the budget process, Have they been implemented as intended? Can we demonstrate measurable
results in terms of improved accountability and budget integrity? Have agencies used these
tools to better depict their financial condition, priorities, assets and liabilities? Are there
additional criteria for effective financial controls and management the CFO Act and the FASAB
do not consider? I appreciate the hard work of our private sector witnesses in developing
alternatives to current practices and welcome their views on these issues as well.

Chairman Hom, this Subcommittee’s oversight and evaluation of the budget and
accounting practices of the Federal government is critical to ensuring responsible stewardship
‘of increasingly scarce public resources and assets. Equally important, this oversight can
Imeaningflly progress Congressional action toward balancing the budget, T join you in
welcoming today’s witnesses and look forward to a constructive discussion of our priorities and
ideals for improving financial controls and reporting in the Federal government.


93

on a cash basis until far in the future; and how did the FASAB
handle this issue?

So we'd be interested in responses to all of those. There might
be a few more that we have. Reluctantly, we're going to have to
close this portion of the hearing. We thank you for your time. I
think it’s been tremendously helpful. You’ve all had something that.
is very pertinent to the needs of the committee. So thank you for
spending this sunny afternoon up here.

Mrs. MALONEY. Could I just add a note, that I enjoyed very much
your testimony, and that I have never voted to cut appropriations
for your agencies. I think you're doing a great job, and you bring
a lot of accountability. I did my own study recently on what was
owed the Federal Government. And I found out $50 billion was
owed to the Federal Government. Why don’t we have a central col-
lections office that comes forward with goals and manages it? It
seems like that would make sense.

Mr. DESEVE. There is legislation that will be coming to you
shortly, if it hasn’t already come to you, to centralize debt collection
within the Treasury Department, for that purpose. So we think
that’s a start. It’s not as comprehensive as you might like it, but
it’s a real beginning.

Mrs. MALONEY. OK. Thank you very much.

Mr. Horn. Thank you, and we'll recess for about 15 minutes.

[Recess.]

Mr. Horn. The subcommittee will resume its hearing, and we
have with us today, on panel two, which is leading generally to a
complete financial statement with the Federal Government, Mr.
Harrison W. Fox, Jr., the president of Citizens for Budget Reform;
Mr. Lyle A. Brecht, publisher of AmericaReport. Gentlemen, you
know our tradition on the committee. If you wouldn’t mind raising
your right hand.

[Witnesses sworn.]

Mr. Horn. I might say, usually the witnesses start out violating
their oath—it’s a pleasure to serve before the subcommittee. But
we welcome you, and Mr. Fox, we'll have you first, followed by Mr.

recht.

STATEMENTS OF HARRISON W. FOX, JR., PRESIDENT, CITI-
ZENS FOR BUDGET REFORM; AND LYLE BRECHT, PUB-
LISHER, AMERICAREPORT

Mr. Fox. Thank you, Mr. Chairman, for the opportunity to
present my views about a citizens budget. First of all, I'd like to
submit a number of documents that we developed for the record.
I'd like to present our USA Annual Shareholders Report; a Bench-
mark Mission, Goals, and Objectives Study we've done for the De-
partment of Defense—a prototype that we hope will be adopted,

rhaps, throughout Government; a Federal Reporting System Out-
line; a Government Productivity Report; a summary of rec-
ommendations from my testimony; and a Federal Information and
Regulatory Survey Proposal, which we think is important to take
a look at.

Mr. Horn. Without objection, all those items will be put in the
record at this point.


38
gress as part of the process of formulating and executing the budg-
et.

New technologies are making the storage, transmission and re-
trieval of data easier and less expensive. At the same time, depart-
ments in central agencies must labor hard against the Tower of
Babel effect that comes from the lack of financial and data stand-
ards. Three initiatives are currently underway to enhance these
standards. First, the standard general ledger. Under the guidance
of the Interagency Standard General Ledger Board, the SGL is
being designed as the basic framework for recording accounting
transaction information on a common basis across the Government.

The standardization simplifies systems implementation and data
transmission within and across agencies. The second is the Federal
Accounting Standards Board, which Mr. Chapin has already talked
about. The overall lack of accounting standards for the Federal
Government has hampered attempts to ensure accountability for fi-
nancial resources. By the fall of this year, FASAB will have rec-
ommended a framework for financial reporting, and the basic
standards needed to carry it out.

FASAB, as you know, was created by the Treasury, GAO and
OMB working together. And at that point, OMB’s work begins, in
a sense. And we expect to issue the standards in formal guidance
by the end of the year, and to revise form and contents by the end
of fiscal year 1996 so that the standards will not only be issued,
but will be operational throughout the Federal Government, at
least in the executive branch.

The third initiative is managerial cost accounting. Using the
statement of financial accounting standards No. 4, managerial cost
accounting, the Joint Financial Management Improvement Pro-
gram, another tri-partite group—and it’s kind of nice today to be
with my friends from GAO, because a lot of the work we’ve done
in FASAB and JFMIP has very much been a work of joint develop-
ment. JFMIP is currently preparing detailed guidance for agencies
on how they might collect cost information to support budget and
performance reporting.

In the systems area, the concept of the single integrated agency
financial management system was first formally promulgated in
July 1993, with the issuance of the revised OMB Circular A-127
financial management systems. This clearly defines the relation-
ship of financial programs in mixed systems, and sets a standard
for a single data entry that is extremely important in rationalizing
the current systems environment in agencies.

To extend the scope of A127, and to provide practical guidance,
the framework for Federal financial management systems was is-
sued by JFMIP in January 1995. We have extra copies for the com-
mittee, if they would like them; and there is even an overview doc-
ument, which is capable of being put in your vest pocket if you’d
like to carry it around with you—I recommend it, as a matter of
fact.

The implementation of agency systems has also been signifi-
cantly aided by the creation of the General Services Administration
schedule of commercial off-the-shelf software, which qualifies mul-
tiple vendors with systems capable of meeting JFMIP core require-
ments. The schedule, which has been ‘updated recently, allows


125

gives you a truer indication of true cost of Government programs
and promises. The bottom line is that the Congress and the Presi-
dent and the Federal Government have made a lot of promises
which they are not goirig to be able to keep.

And I think people in the country, as you're well aware in talking
to your constituents and many others, are well aware of this. An
what they're telling Members of Congress and the President and
others in the Federal Government is, we want this straightened
out. And I think that’s one of the reasons why we had the election
on November 8th. They're saying, there’s something wrong, we
want it straightened out.

Mr. Horn. They can’t put their finger on it, but they know it’s
wrong.

Mr. Fox. That’s right. What I’m saying is, you will not be able
to straighten it out unless you have information. And we need to
start with this basic information. Once we get the basic informa-
tion, then you build your data base in terms of performance and
outcomes and programs. And you're very right—we need to maybe
Move away, or continue to develop information about programs.

But we need to first of all get our financial information together,
program descriptions and so forth together, so we can begin to see

(ow many programs we have. We don’t know how many Federal
pro ams there are. We don’t know how many people work for the

‘ederal Government. We know virtually nothing, in gross detail,
about what happens in the Federal Government or what’s going on
here on a daily basis. It’s just outrageous. And when you talk to
individual citizens, they just go nuts when you start describing
this.

Mr. Horn. Yes. Recently, as you know, the House of Representa-
tives looked at the number of employee training programs.

Mr. Fox. Yes.

Mr. Horn. And the figures had been thrown around that it’s
somewhere between 150 and 160; it was in there somewhere. I
don’t know if they’re still sure they have all of them. But the idea
was to block grant that to give Governors and others a choice
where the jobs are needed or where the skills are needed to take
advantage of moving industry into an area.

Mr. Fox. Exactly,

Mr. Horn. It can’t be done here.

Mr. Fox. Lyle can give you some good explanations and discus-
sions about this very point, in terms of how it affects private indus-
try, because he’s been working with private industry for many
years who go in and start making these consolidations and cuts in-
discriminately. And I'll let Lyle comment a little bit on the implica-
tions for the Federal Government if we just start cutting away in-
discriminately, and the impacts that’s had on private industry in
terms of disasters that have happened. You’ve had to go in and
straighten those out.

Mr. Horn. Mr. Brecht.

Mr. BRECHT. Mr. Chairman, I call that a slash burn mentality.
The idea that—again, it comes back to this idea which you origi-
nally were querying me about. It had to do with capital allocation,
and what that really means.

Mr. Horn. Right, I never finished the sentence. Go ahead.


100

Recommended Federsl Budget, Balance Sheet, and Financial Plan

[Outline/Summary]
1. Congressional and President's Budgets
President's proposed for
~ action by Congress
+ not requiring action by Congress [multiyear no year appropriations and direct’mandatory spending}
Congress” proposed

= by Budget Committees (Budget Resolution}, by authorization committees, by Appropriations
subcommittees, and by Ways and Means and Finance Committees
TL. Budget receipts, expenditures, lending, and recognition of other spending or losses
Receipt - expenditure account
Receipts
Expenditures (excluding net lending)
Expenditure account surplus or deficit
Plus: Loan account:
‘Loan disbursements

Plus: Recognition of full increase of federal debt
Interest on private and non publicly held debt
‘Other increases in federal debt
Plus: Other promises, spending, and losses:
Including emergency expenditures expected during fiscal year
Accruals
Total
Equals: Total budget:
Receipts
Expenditures; net lending; full increase of federal debt; other promises, spending, losses, and accruals
IHL, Means of financing
‘Borrowing from the public
Borrowing from the federal government (i, trust funds)
Reduction of cash balances, sale of asses, ete
‘Total budget financing
V. Outstanding federal liabilities
Federal securities (including Debt and Yearly Surplus (deficit):
Gross amount outstanding
Held by the public
Held by the federat government (i. trust funds)
Federal credit programs:
Direct loans outstanding
‘Guaranteed and insured loans outstanding
Plus: Interest on Debt, Entitlements, Insurance, Sponsored Enterprises, Medical, infrastructure, Facilities/Resoutces,
Environmental, Claims Against Government, Long-term Contracts, Undelivered Orders, Other
‘contingencies
V. Federal assets
Plus: Cash and Monetary Assets, Accounts Receivable, Inventories, Loans Receivable, Property, Plant, and
Equipment, Deferred Retirement Costs, Financial Assets, Advances and Prepayments, and Other Assets
VI. Net federal assets and assetiability strategy
Assets (minus) fiabilities = Net federal assets
VIL. Federat expenditure tracking via “chart of accounts”
+ by departmediVagency for 1,223 budget accounts*
[object class data collected and maintained)

© General Accounting Office, Accounting and Information Management Division Budget Issues Group, “Federal Budget
‘Accounts: Fiscal Year 1996, page 61


41

sults of Federal activities, financial program performance and in-
tegrity information, must be presented on an integrated basis.

his should be done not as an add on to current requirements,
but as a simplification of current work process, both in central
agencies and within the departments. Treasury, OMB, and GAO
are working to produce the first Governmentwide audited financial
statement. As part of this process, they will develop a popular for-
mat for presentation of information. Our job over the next several
years is to focus on the content of agency information, and the
process by which it is produced.

‘o the final product, available to the public, will be one that we
can be proud of and the public can have confidence in. Thank you
very much, Mr. Chairman.

tthe prepared statement of Mr. DeSeve follows:]