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67–257 PDF 2011

A LOOK AT THE FISCAL YEAR 2010

CONSOLIDATED FINANCIAL REPORT OF THE

U.S. GOVERNMENT

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT ORGANIZATION,

EFFICIENCY AND FINANCIAL MANAGEMENT

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

MARCH 9, 2011

Serial No. 112–7

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

(

Available via the World Wide Web: http://www.fdsys.gov

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT ORGANIZATION, EFFICIENCY AND FINANCIAL

MANAGEMENT

TODD RUSSELL PLATTS, Pennsylvania, Chairman

CONNIE MACK, Florida, Vice Chairman

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

PAUL A. GOSAR, Arizona

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

EDOLPHUS TOWNS, New York, Ranking

Minority Member

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

ELEANOR HOLMES NORTON, District of

Columbia

(III)

C O N T E N T S

Page

Hearing held on March 9, 2011 .............................................................................. 1

Statement of:

Dodaro, Gene L., Comptroller General of the United States, U.S. Government Accountability Office; Daniel I. Werfel, Controller, Office of Management and Budget; and Richard L. Gregg, Fiscal Assistant Secretary,

U.S. Department of the Treasury ................................................................ 4

Dodaro, Gene L. ......................................................................................... 4

Gregg, Richard L. ...................................................................................... 34

Werfel, Daniel I. ........................................................................................ 26

Letters, statements, etc., submitted for the record by:

Dodaro, Gene L., Comptroller General of the United States, U.S. Government Accountability Office, prepared statement of .................................... 6

Gregg, Richard L., Fiscal Assistant Secretary, U.S. Department of the

Treasury, prepared statement of ................................................................. 36

Werfel, Daniel I., Controller, Office of Management and Budget, prepared

statement of ................................................................................................... 28

(1)

A LOOK AT THE FISCAL YEAR 2010 CONSOLIDATED FINANCIAL REPORT OF THE U.S.

GOVERNMENT

WEDNESDAY, MARCH 9, 2011

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT ORGANIZATION,

EFFICIENCY AND FINANCIAL MANAGEMENT,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 9:30 a.m., in room

2247, Rayburn House Office Building, Hon. Todd Russell Platts

(chairman of the subcommittee) presiding.

Present: Representatives Platts, Lankford, Gosar, Farenthold,

Issa, Towns, Cooper, Connolly, and Norton.

Staff present: Ali Ahmad, deputy press secretary; Robert Borden,

general counsel; Sharon Casey, senior assistant clerk; John

Cuaderes, deputy staff director; Linda Good, chief clerk; Frederick

Hill, director of communications; Christopher Hixon, deputy chief

counsel, oversight; Sery E. Kim, counsel; Tabetha C. Mueller, professional staff member; Cheyenne Steel, press assistant; Ronald

Allen, minority staff assistant; and Beverly Britton Fraser, minority counsel.

Mr. PLATTS. The committee will come to order.

I apologize, one, for keeping both my colleagues and our witnesses waiting. I am coming from a breakfast meeting I was

hosting for Pennsylvania National Guard and it was, while focused

on maybe military issues, related to our discussion here today in

that one of the takeaway points from the acting Adjutant General

of the Pennsylvania Guard, General Craig, was the bargain, when

we talk about trying to rein in spending and defense spending that

the Army National Guard costs 5 percent of the total budget for the

military, yet is 40 percent of the Army combat resources, and on

the Air Guard 7 percent of the budget and about a third of the Air

Force resources.

In other words, what a good bargain the Guard is when we try

to wrestle with spending, how to deal with the out of control spending that we currently have. So a different issue, but related to what

we are going to talk about here today.

The Subcommittee on Government Organization, Efficiency and

Financial Management is gathered here today to talk a look at the

fiscal year 2010 Consolidated Financial Report of the U.S. Government, prepared annually by the Office of Management and Budget

and Treasury, in conjunction with each other, and audited by the

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Government Accountability Office. This hearing will set the stage

for our oversight of executive branch financial management systems throughout the 112th Congress, examining both Governmentwide accountability issues and the fiscal implications of program

spending decisions.

The financial statements in the accompanying audit present two

separate but equally important issues of concern for the subcommittee. First is the story told by the numbers themselves, what

the statements reveal about our fiscal future. Second is a process

by which those numbers are derived, what the audit shows in

terms of how well the Government keeps the books and demonstrates accountability.

Unfortunately, we have another disclaimer of opinion for 2010,

which has been the case since the Government-wide audit was first

required. When I was chairman of this subcommittee from 2003 to

2006, we looked at this report every year, and the issues seem to

be almost the same 5 to 8 years later, and the challenges we are

dealing with.

We would like to make some progress over the next 2 years, particularly in the area of improving internal controls, so that we can

address the root causes of the problems that we are facing on the

financial front. We would also like to bring more attention to financial management issues.

At our first hearing we were pleased to hear from members of

the task force assembled by the Federal Accounting Standards Advisory Board to look at ways to improve the Consolidated Financial

Report. Today we are honored to have the auditor of the report, as

well as the authors. We have with us the Honorable Gene Dodaro,

Comptroller General of the United States, with the Government

Accountability Office, which is responsible for conducting the audit

and for establishing governmentwide auditing standards and

standards for internal control.

General Dodaro, we are delighted to have you with us. Always

great to have a fellow Pennsylvanian here with us.

Also, we have the Honorable Daniel Werfel, Controller and Director of the Office of Federal Financial Management, Office of Management and Budget. This office oversees financial management

practices at Federal agencies and prescribes the form and content

of agency financial statements.

Finally, the Honorable Richard Gregg, First Assistant Secretary

of the Department of the Treasury. Mr. Gregg’s office is responsible

for compiling the Consolidated Financial Report.

Certainly, thank each of you for being here today and, most importantly, your written testimony you provided and gave us a

chance to look at ahead of time, and your oral testimony here

today, as well as being willing to take questions. The insights that

each and all of you have are so important to this subcommittee’s

work, and we are not just glad to have you here today, but look

forward to partnering with you as we go forward over the next 2

years of this session and really doing our utmost to have the Federal Government be more accountable, more transparent, more efficient in how we use the resources of the American people. So

thanks for your testimony.

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With that, I would like to recognize the distinguished ranking

member, former chairman of this subcommittee as well as the full

committee, Mr. Towns, for an opening statement.

Mr. TOWNS. Thank you very much, Mr. Chairman.

This hearing on the issue of the Federal Government’s financial

report for fiscal year 2010 is very timely and important, particularly as the body is working to finalize the Nation’s budget. I thank

you for holding it, Mr. Chairman and I noticed that some of the

things that we are talking about and dealing with, we had when

I was chairman, then had them when I was ranking, then had

them when you were chairman. Now I hope that we can get rid of

while I am ranking, because when I come back and I am chairman,

I want these things to be gone.

Two weeks ago we held a hearing on how best to present the information contained in the Consolidated Financial Report so that

it is clear and usable by Congress and the public. Today we get into

the details of what the financial reports actually say about the financial conditions of this country.

For 14 years in a row, GAO has been unable to give an opinion

on the audit of the Government’s financial statements. As we have

seen in the past, there are still serious financial management problems at the Department of Defense. There is a continuing problem

with government agencies not reconciling their balance sheets for

transactions they do with each other. And GAO is telling us that

the process of preparing the Government’s financial statement is

ineffective. GAO has been reporting the same problems to Congress

year in and year out for more than a decade.

Treasury reports that government agencies have greatly improved accounting for the transactions they do with each other.

Happy to hear it. Mr. Gregg’s written testimony says that the balance sheet difference fell from $102 billion in fiscal year 2009 to

$40 billion in fiscal year 2010. This is encouraging and we are looking for continued improvement.

I am also aware that some government agencies have made substantial improvements in preparing their financial statements. It is

commendable that 31 out of 35 of the largest government agencies

have received clean audit opinions from GAO. Others, it seems,

have stood still, didn’t move. The DOD still needs to invest significant time and personnel resources in improving its financial statements. It is good to note that OMB and Treasury are working with

DOD to resolve some of its more serious accounting weaknesses.

I have been hearing constant references to the shrinking window

of opportunity for making policy changes to meet our ongoing challenges in producing credible financial reports. We still have too

much work to do. I hope that the window is not closed by now.

I thank our panel of witnesses for their testimony and look forward to their observations of what further policy changes we can

make and how we can improve the process of producing reliable financial statements.

Thank you, Mr. Chairman. On that note, I yield back.

Mr. PLATTS. Thank you, Mr. Towns.

Would any of the other Members like to make an opening statement?

[No response.]

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Mr. PLATTS. The record will be kept open for 7 days if there is

anything you want to submit in writing. If not——

Mr. CONNOLLY. Mr. Chairman, I just have an opening statement

to insert in the record.

Mr. PLATTS. OK, without objection.

Mr. CONNOLLY. I thank the Chair.

Mr. PLATTS. With that, General Dodaro, if you would like to

begin.

Actually, if we could have each of you rise for the oath.

Raise your right hands.

[Witnesses sworn.]

Mr. PLATTS. Thank you. Sorry about that.

General Dodaro.

STATEMENTS OF GENE L. DODARO, COMPTROLLER GENERAL

OF THE UNITED STATES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; DANIEL I. WERFEL, CONTROLLER, OFFICE OF

MANAGEMENT AND BUDGET; AND RICHARD L. GREGG, FISCAL ASSISTANT SECRETARY, U.S. DEPARTMENT OF THE

TREASURY

STATEMENT OF GENE L. DODARO

Mr. DODARO. Good morning, Mr. Chairman, Ranking Member

Towns, Congressman Cooper, Connolly, and Gosar. It is very much

of a privilege to be with you this morning to discuss the results of

our audit of the 2010 financial statements of the U.S. Government.

I commend you, Mr. Chairman, and this subcommittee for having

this hearing. It is very important to make sure that there is sustained attention to look at the status of the outcomes of the financial audits across the Federal Government every year.

Now, this past year, as was mentioned in the opening statements, again, at the governmentwide Consolidated Financial Statement level, GAO was unable to give an opinion on the accrualbased financial statements of the U.S. Government. There are

three main reasons for that: serious financial management problems at the Department of Defense; the inability of Federal agencies to properly account for intragovernmental activity and reconcile balances between agencies; and, last, an ineffective process

for preparing the Consolidated Financial Statements.

We have made many recommendations to Treasury and OMB.

They have implemented many; they are in the process of implementing others. So we are hopeful that there is continued progress

in addressing these weaknesses.

Also, I would note in the 2010 statements we were unable to give

an opinion on the statement of social insurance, which in the prior

2 years we were able to. This was due to management disclosures

of significant uncertainties underlying the assumptions in preparing those statements.

Also, 2010 was the unveiling of a new statement of sustainability

which shows the Federal Government’s fiscal path over a long period of time. This is something that is a very good development and

should aid the Congress and the citizens in understanding a longterm path. Now, this report and statement disclosed, similar to

what was disclosed in GAO and CBO long-range simulations, that

5

the Federal Government is on an unsustainable fiscal path over a

long period of time.

So we think this new statement of sustainability, along with the

citizens guide that has been prepared now for a while, will be

added education tools that can be used to help illustrate the serious financial challenges facing the Federal Government.

Now, if you go down from the governmentwide to the agency financial statements, the picture there is a big more encouraging.

Twenty of the 24 largest Federal departments and agencies in the

Federal Government were able to obtain an unqualified opinion.

That is up from six in fiscal year 1996, which was the first year

that all departments and agencies across the Federal Government

were actually required to prepare financial statements and to have

them audited. They have also been able to produce these statements on an accelerated timeframe and have moved now to being

able to produce them 45 days after the close of the fiscal year,

which is a good development as well.

Now, in addition, our report points out a couple of material

weaknesses across the Federal Government. One is the problem of

improper payments. The current estimate in the report is $125 billion. I am very encouraged, however, to report that by actions by

the administration and the Congress, and this committee’s support

through passage of the Improper Payments Elimination and Recovery Act last year, there are efforts under way to tackle this problem.

But it is probably going to get worse before it gets better because

not all agencies and programs are reporting right now any improper payments. But targets are being set, accountability is being

fixed, and I think this is a very important endeavor, particularly

given the serious challenges we have facing our Federal Government and from fiscal pressures. In addition, you have a $290 billion

tax gap between taxes owed and taxes collected. So these areas are

important for the Federal Government to tackle going forward.

So, in summary, Mr. Chairman, I think that it is very important

for sustained attention to be made by the Congress. I would encourage this committee to have continuing hearings on these subjects. We just updated our high-risk list and testified before the full

committee. A couple areas came off the list, but the lesson learned

is through high level attention by departments and agencies, with

sustained congressional oversight, progress is possible, it is needed,

and given the fiscal pressure facing our Nation going forward, I believe financial management needs to be a top priority of the administration and the Congress.

I thank you for your time and attention. I would be happy to answer questions at the appropriate time.

[The prepared statement of Mr. Dodaro follows:]

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Mr. PLATTS. Thank you, General Dodaro.

Mr. Werfel.

STATEMENT OF DANIEL I. WERFEL

Mr. WERFEL. Thank you, Chairman Platts, Ranking Member

Towns, Congressman Cooper, Congressman Connolly, and Congressman Gosar, and other members of the subcommittee for the

invitation to be here today to discuss the Consolidated Financial

Report of the United States and Federal financial management.

Improvements in financial management are paramount to the effectiveness stewardship of taxpayer dollars. The annual results of

agency financial statement audits are an important indicator of

progress in carrying out our stewardship responsibilities effectively.

For the past several years, the vast majority of Federal agencies

have achieved an unqualified or clean opinion on their annual financial statements, and auditor-identified weaknesses across the

Government have been steadily declining.

As Mr. Dodaro just pointed out, fiscal year 2010 was somewhat

of a high watermark for us in terms of 20 of the 24 major CFO Act

agencies achieving a clean opinion. Also worth noting that we reported 31 auditor-identified material weaknesses across government. When you compare that to the 61 material weaknesses that

were reported in 2000, you see that steady progress was made

across the last decade.

Mr. Dodaro also pointed out that all major agencies are meeting

the 45-day deadline for producing audited financial statements, a

timeframe that actually exceeds the official statutory deadline of

reporting by more than 100 days.

Of course, although we are making great progress, not all of our

financial audit goals have been met. In particular, four agencies

did not achieve a clean opinion in fiscal year 2010, which in part

led to the disclaimer on the Government-wide financial statement.

Our office is committed to working with those agencies to make the

necessary improvements in financial reporting practices so that all

agencies achieve acceptable results on their annual audits.

While audit results signal financial management success in many

areas, there are critical financial management objectives not currently evaluated or addressed through standard financial statement audit activities. Informed by recent discussions surrounding

the 20-year anniversary of the CFO Act and my experience as the

day-to-day leader of Federal financial management efforts across

government, I believe there are three improvements to our financial reporting model that represent the greatest opportunity to

drive bottom-line results for taxpayers: first, improving reporting

on where Federal taxpayer dollars are spent; second, instituting

stronger internal controls to mitigate government waste and error;

and, third, increasing access to reliable information on the cost of

agency operations.

As highlighted in my written testimony, while the current financial audit process does not address these issues directly or comprehensively, the administration and the Federal financial management community are focused on improving results in these areas.

In particular, through the Accountable Government Initiative

launched by this administration, we are preventing and increasing

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the recoveries of improper payments, eliminating unneeded real estate, turning around underperforming technology modernization

projects, creating performance benchmarks for improved financial

operations, and providing unprecedented transparency into Federal

spending.

Important early results are being achieved. I thank Mr. Dodaro

for recognizing the efforts that the executive branch is undertaking

to attack the improper payments problem. In fiscal year 2010 we

saw a decrease in the overall governmentwide improper payment

rate, and that decrease helped prevent $3.8 billion in improper payments that would have otherwise been made. Also, Federal agencies recaptured $687 million in improper payments made to contractors and vendors. That is a 300 percent increase in recoveries

from the prior year, fiscal year 2009.

Despite this progress, more work and tools are needed to address

improper payments. I think it is important for me to note that the

President’s 2012 budget recognizes this and includes in that budget

a suite of program integrity proposals that, if enacted, would result

in over $160 billion in savings over 10 years.

I would like to also mention that the President’s budget includes

a bold new proposal related to civilian real estate. In 2010, the

President directed agencies to accelerate efforts to realign civilian

real property and save $3 billion by fiscal year 2010. The President’s new proposal builds on the success so far and expands that

savings opportunity to $15 billion. This is achieved through the creation of an independent board that will make recommendations for

up or down vote by Congress on the elimination or consolidation of

excess Federal civilian assets, including realignment and streamlining of agency field offices.

In sum, we have built a foundation of strong accounting practices, internal controls and reporting processes that are leading to

better audit results. This has positioned us to achieve better bottom line results in terms of error reduction and cost efficiencies.

But our work is not done and I am confident it will continue to

drive critical improvements in all areas of Federal financial management.

Thank you for inviting me to testify today. I look forward to answering your questions.

[The prepared statement of Mr. Werfel follows:]

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Mr. PLATTS. Thank you, Mr. Werfel.

Before I go to Mr. Gregg, we are delighted and honored to be

joined with the full committee chairman, Mr. Issa.

Mr. Gregg.

STATEMENT OF RICHARD L. GREGG

Mr. GREGG. Thank you, Chairman Platts, Ranking Member

Towns, members of the subcommittee, for inviting me to testify

today on the financial report for fiscal year 2010 and the audit.

Your interest in improving financial management is greatly appreciated.

The financial report is prepared from all the financial statements

of the 35 largest Federal agencies and other information provided

by more than 100 smaller independent agencies. In fiscal year

2010, 31 of the largest agencies earned unqualified or clean audit

opinions on their financial statements.

For fiscal year 2010, as Gene had mentioned, the GAO was again

unable to express an opinion on the governmentwide financial

statements, including the statement of social insurance. The disclaimer on the remainder of the statements stems from three longstanding material weaknesses: first, serious financial reporting

issues at the Department of Defense; second, the Government’s inability to adequately account for and reconcile intragovernmental

activity and balances between agencies; and, third, the Government’s deficiencies in the process for preparing the consolidated financial statements.

I will cover a few key issues included in the financial report and,

following that, I will talk about some of the financial management

improvements we are working on with OMB and other agencies.

As noted in the financial report, the Government’s budget deficit for fiscal year September 30, 2010, decreased slightly, from $1.4

trillion to $1.3 trillion. On an accrual basis, the Government net

operating costs for fiscal year 2010 increased from $1.3 trillion to

$2.1 trillion, due primarily to substantial increases in estimated actuarial costs for veteran benefits and Government employee programs, which are not reflected in the budget deficit. The Government’s recorded total assets of $2.7 trillion and total liabilities of

$16 trillion, comprised largely of $9 trillion in debt held by the public and $5.7 trillion in Federal employee and veteran liabilities.

The financial report also discusses the long-term fiscal challenges

of funding Social Security, Medicare, and other social insurance

programs. The Government’s financial statements currently project

a social insurance shortfall of $31 trillion over 75 years. The important message conveyed in this year’s report is consistent with previous years that the sooner action is taken to resolve these shortfalls, the smaller the revenue increases and/or spending decreases

necessary to return the Nation to a fiscally sustainable path.

The Department of Treasury, in cooperation with GAO and OMB,

issues a annual citizens guide, and this 10-page document utilizes

user-friendly graphs and charts to provide a summary of the financial report’s key information to the public.

I would like to now talk about a number of initiatives that were

taken over the past year to improve this report and financial management in general.

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We have reduced differences in transactions between agencies in fiscal 2010 from $102 billion to $40 billion on an absolute value

basis. We have reduced the number of GAO audit findings from

over 150 to 52 in fiscal year 2009. OMB, Treasury, and DOD are

focusing on a few key areas to resolve DOD accounting and processes. We will then move on and broaden the scope of the work of

DOD.

Another issue we are working on is creating a general fund, and

this fund will provide dual entry accounting for some of the central

government activities. This was not included in the accounting system that we have developed over the years; this has been a gap,

in my view, of the accounting process, and we are in the process

of filling that gap.

Treasury is also expanding the governmentwide electronic invoice portal that will enable Government agencies and vendors to

improve control, streamline purchases, and reduce costs. We are

also working with OMB and agencies to develop a system and process that will resolve longstanding differences in transactions when

one agency does business with another. Also, Treasury has, in the

last 6 months or so, expanded the use of electronic transactions for

payments, savings bonds, and tax collections. These three initiatives, when fully implemented, will save $600 million over the first

5 years.

We have also taken steps to sharply increase the debt collection within Treasury. We are looking to expand that to at least $5 billion over the next 10 years. In a couple days you will have a hearing with Commissioner Lebryk on debt collection.

Finally, Treasury is supporting OMB to reduce improper payments by establishing and supporting the administration’s

VerifiedPayment.gov portal to prevent ineligible recipients from receiving payments from the Federal Government.

Treasury looks forward to continuing its good working relationship with OMB and GAO and the agencies to make further improvements in financial management reporting and financial management in general.

That concludes my statement. Thank you very much.

[The prepared statement of Mr. Gregg follows:]

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Mr. PLATTS. Thank you, Mr. Gregg. And we do look forward to

our hearing on Friday on debt collection and working closely with

Treasury and your recommendations of changes in law that may be

necessary to strengthen debt collection efforts.

We will begin a questioning round, 5 minutes each, and hopefully

we will have time to come back around for a second time.

I am going to begin with the big picture and the issue of sustainability and the statement of sustainability, kind of a new addition

here to the CFR, and the very stark statement, General Dodaro,

that you included in your written statement, that we cannot sustain the level of public debt that we are taking on driven by a number of issues, demographics and medical costs in particular.

In the big picture—and I think I know the answer you are going

to give, but I don’t want to put words in your mouth—when we

look at that issue of sustainability, the direction we are heading

and the amount of debt we have and are taking on without significant changes, what would be the No. 1 recommendation that you

think we as a Congress should be looking at to change that trend,

that debt level trend to get us back onto a sustainable level? What

category spending or area? What is your most important recommendation?

Mr. DODARO. The size of this problem is so large that the Government has to look at entitlement spending, revenues, and discretionary spending. Everything needs to be looked at in the Federal

budget and dealt with in order to bring this problem under control.

And I think it is being driven largely by rising spending and health

care costs and demographic changes, as you point out. Those are

the primary drivers, but the solution is something that needs to be

holistically looked at across the spectrum of the Federal Government’s activities. If that is not done, this will not be solved.

Mr. PLATTS. Is it accurate for me to say, though, and I agree with

everything has to be on the table and looked at to be more responsible in our spending, but the specific issue of entitlements, that

given that they are now roughly two-thirds of our expenditures,

that while we can make improvements in discretionary across the

board, including defense, unless we get our hands around entitlements and specifically Medicare spending, that everything else will

almost be for naught if we don’t deal with that issue?

Mr. DODARO. That is correct. Entitlement spending has to be

dealt with in order to deal with this problem; that is the primary

driver behind the cost increases and needs to be an effective part

of the solution if there is going to be a material change in this

path.

Mr. PLATTS. Given the importance of entitlements, and a question actually to all three of the witnesses, one of the other significant concerns I have with the consolidated financial reports is the

disclaimer on the statement of social insurance. Given how important getting our hands around entitlement spending is to fiscal

sanity, that we have a statement of social insurance that really, I

think we all agree, is not an accurate reflection of the cost of Medicare in particular because of assumptions that were made regarding Medicare costs going down in response to the health care bill

passed just over a year ago.

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If all three of you could address that and how you look at those

assumptions and the accuracy of inaccuracy of the assumptions

made in the statement of social insurance.

Mr. DODARO. Basically, we start with reviewing the report by the

Social Security-Medicare trustees, and in that report the trustees

disclosed a number of uncertainties with regard to the cost assumptions, particularly in the Medicare area; this isn’t quite true

in Social Security. And the uncertainties settled on a couple of key

factors: one being whether or not the scheduled reductions in cutting back the payments for Medicare providers was going to take

place as scheduled over the period of time, it was about a 30 percent reduction over a 30-year period was assumed.

And, of course, as we know, Congress, last year, deferred that

scheduled payment reduction by the first year, during the first

year. Second, there are assumptions in the estimates about productivity gains that would be enhanced by other providers in the system, and there is real uncertainty as to whether or not those productivity improvements would be realized at the size they are estimated and, more importantly, sustained over a period of time.

So given those uncertainties, the auditors for HHS, which originally looked at the statement of social insurance, disclaimed an

opinion and we agreed with that decision and sustained that on our

statements.

Mr. PLATTS. Mr. Werfel.

Mr. WERFEL. Chairman, thank you for the question. The first

thing I want to point out in response is that I would argue that

historically accounting and the process that we have gone through

has looked back on the previous year or years and the effort is to

capture the transactions, capture the value of our assets, the value

of our liabilities.

What we are entering into now with things like the statement of

social insurance and the statement of fiscal sustainability is forward-looking accounting, where we are doing projections. And some

of the projections here, as noted, are 75 years into the horizon, and

that creates additional elements of uncertainty when you are looking to establish metrics and measures looking out over a 75-year

horizon.

So I think that it is to be expected that as the trustees or HHS

or others look to assess these values, that they are going to have

qualifying statements and concerns about some of those uncertainties. And when you apply the auditors’ scrutiny to that, what typically is looking backward at whether the books are kept to looking

forward to a 75-year projection, I believe there are going to be

times where those uncertainties are going to cross a threshold and

create a discomfort level for the auditor in order to render opinion,

and there will be times where those uncertainties will not cross

that threshold.

I think the last 2 years the uncertainties did not cross that

threshold, and what that tells me is that the process that we have,

the process that HHS and Social Security and the other agencies

undergo to develop their tables, to develop their numbers, to report

this information is generally sound, but there will be moments in

time where those uncertainties exceed a threshold by which the

auditors don’t feel comfortable rendering an opinion.

42

I would urge that the values that are reported still have value,

and they still should be looked at closely and considered by Congress. But I think that we have to recognize that when you get into

the business of auditing statements that are projecting 75 years

into the future, you are going to run into situations where issues

of uncertainty affect the audit opinion.

Mr. PLATTS. Mr Gregg.

Mr. GREGG. Mr. Chairman, I think we have pointed out a number of times in the fiscal sustainability area that they were not projections, they were really mathematical extrapolations. I think it is

important to keep that in mind. I think that is what they are, and

they are based on the math, not saying this is what we think is

going to happen.

On the trustee report, I think a couple of things there that I

would just add to what Danny said. First of all, the huge piece of

legislation and trying to figure out what is going to happen 75

years out is very difficult and, second, I think as a result of when

it was passed, it was not as much time as the actuaries normally

have to assess that sort of thing. I think those were factors.

Having said that, it does look like that the HHS actuary did another illustrative sample of what the costs might be and, looking

at that, the savings are still very considerable. And just to reiterate

what Danny said, I think the process that the Medicare and Social

Security trustees go through in having accurate data has been

there for several years and I think that we will get back, at least

I hope we will get back to a clean opinion for that report in the

years ahead.

Mr. PLATTS. Thank you, Mr. Gregg.

Before I yield to the ranking member, the one aspect of that, and

I appreciate when you are talking 75 years in projections or extrapolations, but a key part of those assumptions were a 30 percent

reduction in provider reimbursements, which we have never done,

and every year, historically, the record shows, we won’t do that, as

we did not in the very first year. We didn’t even make it 1 year

without reversing that legislation.

Given that reversal, my hope is that when the statement of social

insurance is issued for 2012, a year from now or less than a year

from now, that HHS is going to look at what did occur and that

those savings were not achieved in those provider reimbursements

and are not likely to ever be achieved, so that we get a more realistic understanding of where Medicare stands. Because unless we are

realistic and honest about Medicare, we will never be honest about

our fiscal picture and truly getting our hands around this challenge.

I am way over my time. General Dodaro.

Mr. DODARO. I just want to add that while there are various alternative assessments and projections, if you will, or simulations,

over any scenario over the long range it is not sustainable, and I

think we shouldn’t overlook that point while we debate the numbers and timing.

Mr. PLATTS. Exactly.

Mr. Towns.

Mr. TOWNS. Mr. Chairman, I am prepared to yield to the—oh, he

is no longer here. OK. I was getting ready to yield to the chairman

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of the full committee, but he disappeared. OK. Because I am sensitive to that chairmanship thing, you know. [Laughter.]

Let me begin.

First of all, I want to thank all of you for being here. The Federal Government made $125 billion in improper payments in fiscal year

2010. Some of these payments were overpayments and some were

underpayments. Some were made without sufficient documentation

to support them and some should not have been made at all.

In recent years, Federal agencies have been given more tools to

deal with improper payments and, of course, Congress passed the

Improper Payment Elimination and Recovery Act in 2010. OMB

has issued guidance as well. Even though not all improper payments are an indication that fraud has taken place, the potential

for fraud, waste, and abuse remains extremely high.

Mr. Gregg, with the law on your side and all the guidance, why

have the improper payments continued to increase every year?

Mr. GREGG. I will give my answer and defer to OMB to some extent. We are making, just Treasury alone makes a billion payments

a year on behalf of agencies, and the pressure to get everything

done accurately and timely is tremendous on the agencies and

Treasury.

At the same time, I think we can and we are doing a lot more.

Until fairly recently, under the direction of OMB, we really hadn’t

had agencies starting doing business intelligence assessments of

going into the payment files and looking for potential problems before the payments reached Treasury, and I think that is a very important step.

There are tools out there that we just haven’t been using fully,

and I think that we are working on that with OMB to get those

tools in place to go work with the agencies to do pilots to say what

are the potentials here, some of it may be fraud; some of it is also

just errors. But being able to identify those through sophisticated

analytic tools.

The other thing we are doing that Dave Lebryk will talk about

on Friday is on the debt collection side we are looking to do the

same thing, we are looking at the debt portfolio that we have and

trying to identify how best to find those debtors and go out and collect the money even though the payments have already been out

and the debt is there.

We are looking for ways to use better tools that we now have

available to find people who owe the Government money, to determine whether or not someone is who they—we may have a file

from an agency that says someone’s name is John McDonald and

our debt file may say Jack McDonald. We now have tools that will

help us identify whether or not that is the same person. We obviously don’t want to try to collect a debt that isn’t owed by someone,

but through those tools we are going to be able to really hone in

and say, yes, that is in fact the same person.

So I think there is a lot going on, and I would defer to Danny

Werfel for more on the improper payments.

Mr. TOWNS. Thank you very much.

Mr. Werfel.

Mr. WERFEL. Thank you, Mr. Gregg and thank you, Congressman Towns. I would start by saying that progress is being made.

44

The error rates in key programs are going down and they are going

down at the governmentwide level. But the challenge and the

mathematical reality is as outlays outpace those error rate reductions, the error total grows. So we are up to $125 billion, but we are up to $125 billion in

an environment where the Medicare error rate went down, the

Medicaid error rate went down, the key Social Security program

error rate went down, and the list goes on. So one of the things to

reflect is to understand, I think, that important mathematical nuance to understand the progress that is being made.

But also it raises how important this is, because as more money

goes out the door, it raises the stakes for how important it is to

get these payments right, because a 1 percent error when $100 is

going out is very different than a 1 percent error when $1,000 is

going out. And that is the situation we have right now; more

money is going out the door even though the error rates are declining, improper payment amount goes up.

Why is this happening? We are doing, I think, a better and better job of understanding what makes up our errors. In some situations you still have agencies making basic mistakes. It is within

their direct control and they should, in the immediate term, be able

to take steps to better address the errors; whether the payments

are going to clearly ineligible individuals, whether they have been

suspended or debarred, or something that is very basic.

But in many situations, Congressman, the effort to identify

whether someone is eligible for a payment is extraordinarily complicated and involves a variety of different factors, and when you

go down and audit that payment, you find that mistakes are made.

I think a good example of that is in the earned income tax credit,

which has the highest error rate of any program.

The eligibility characteristics for someone to be eligible for the

earned income tax credit are very challenging. For example, an individual has to have lived with their dependent child for more than

6 months. We don’t have a global childhood residency data base to

validate that, and we find a lot of improper payments occur when

we go down an audit and find they didn’t live with their dependent

child for more than 3 months, or something of that kind.

So part of the challenge is finding those third-party data sources

and figuring out better ways to validate eligibility. That is really,

if I could boil it down in one bullet or one phrase, the real challenge we have, is how can we do a better job than we are doing

today validating eligibility when those eligibility assessments are

very complex.

Mr. TOWNS. Let me just ask this, Mr. Chairman. You can sort

of understand, in terms of dealing with the public and private sector, but when government agencies deal with each other, it seems

to me that we should be able to correct this and be able to move

forward. Is there anything else that we need to do? I am talking

about the Congress.

Mr. WERFEL. Well, first, if I could just jump back to improper

payments. I mentioned in my testimony, in my oral and both my

written, that in the President’s budget we have a suite of proposals

that relate to driving down improper payments in key programs, in

Social Security, HHS, IRS, and Labor, that, if enacted, we believe

45

would save $160 billion over 10 years. So the first thing would be

to call your attention to those provisions and ask for help in getting

them enacted.

In terms of the intragovernmental transactions, I think that the

process that we have today for accountability has driven us to be

on the precipice of a solution; it is a chronic material weakness

that GAO has identified as a key source of our disclaimed opinion.

We have had fits and starts over the years in defining a solution,

but, with Mr. Gregg’s leadership, solutions are emerging right now

for improvements on intragovernmental transactions.

So what I would ask of the Congress is to continue to call us before you and hold us accountable. I am telling you now that I believe we are on the precipice of a solution that is going to drive significant improvements, and call me back and hold me to that commitment.

Mr. TOWNS. Right.

Mr. GREGG. Congressman Towns, I just would add to Mr.

Werfel’s statement that I think one of the issues on the

intragovernmental—and I was here when we did the first audited

financial statement a number of years ago.

Mr. TOWNS. I was here too.

Mr. GREGG. Then went away. But I think we, in Treasury, felt

that it should be able to correct itself with the agencies, and I came

to the realization with my staff last year that it is not. So I made

a commitment that someone needs to take responsibility for this to

develop a system and a process and a small team of accountants

to work with the agencies when there are differences. If we can’t

solve this, we ought to pack up our bags and go home, because this

is, as the saying goes, not rocket science. It is not easy, but it certainly is not rocket science, and we should get this fixed.

Mr. TOWNS. I agree with you, Mr. Gregg.

On that note, I yield back, Mr .Chairman.

Mr. PLATTS. Thank you, Mr. Towns.

Dr. Gosar.

Mr. GOSAR. Mr. Werfel, you referenced the percentage of

mispayments and fraud. I actually question the accuracy of those

numbers, because these are self-reported numbers and, as a businessman, I understand how those things can be skewed, particularly the statistics and accuracy of those numbers.

So I also believe in a checks and balances system, especially

when we are grasping accurate numbers for policy assumptions.

Were entities like Congress, the American people, the CBO misled,

when calculating the cost of PPACA or Obamacare, as we know it,

by using bad accounting methods?

Mr. WERFEL. I am sorry, I am not sure what your question is.

Mr. GOSAR. Let me reiterate. Were entities like Congress, the

American people, and the CBO misled when calculating the cost of

PPACA, which is Obamacare, utilizing bad accounting methods?

Mr. WERFEL. No, I don’t think they were misled. I think one of

the important things that we do when we report our financial reports and our estimates is we report with that all the assumptions

that were made, and those assumptions can be challenged. This is

somewhat of a thick book and it is thick because there are footnotes and alternative analyses and alternative presentations; and

46

I think that what we have empowered is a situation where academics, think tanks, Members of Congress and GAO can debate these

numbers and have a healthy dialog about whether the estimates

and the projections and the extrapolations that are being reported

are valid.

And hopefully if there is enough information to challenge these

numbers, then that debate will come to the fore. That is really our

job and I consider that my mission at OMB, to make sure that

whatever we are reporting, that our assumptions, our underlying

assumptions are clear so that experts and others can fairly criticize

them and hold them under a light and debate their reliability.

Mr. GOSAR. Well, it really becomes a he said, she said without

an authority in the middle. So, with that said, how do you do the

accountability for the new 68 nebulous discretionary grants as described in HHS policy?

Mr. WERFEL. I need a clarification on the question. How do we

do the accounting of what——

Mr. GOSAR. How do you do accounting on the new 68 nebulously

written discretionary grants as described in Health and Human

Services policy in that bill? How do you account for that?

Mr. WERFEL. Well, it depends on what you are asking about

those dollars. Are you asking about if the discretionary grants

are——

Mr. GOSAR. Well, let’s go further.

Mr. WERFEL. The appropriation should be clear in terms of what

its amounts are. The question then becomes what information

about those dollars are you interested in understanding, and then

I can talk more about how they might be accounted for and supported.

Mr. GOSAR. Well, let me be more specific. It says can use such

sums as necessary. How do you do accounting for that?

Mr. WERFEL. Well, the accounting statements that we are reporting on today, for the most part, look backward at what the agencies

spent. So we have financial systems, automated systems that help

us track which money from HHS goes to which grantee, and we

can tell you almost to a daily basis exactly how much money has

gone out the door.

If you are asking how much would be spent in the future by a

particular grantee, that is not something that we estimate in the

financial statements; they are considered an appropriation that

would be looked at in the budget, but predicting how much of that

appropriation would be spent is not something that I am aware we

put a report out on.

Mr. GOSAR. So you couldn’t score it.

Mr. WERFEL. Well, if it is an appropriated amount, you could certainly understand what the limit is. You can’t go above the appropriated amount. So you would know the ceiling, but you might not

know where you might fall under that ceiling.

Mr. GOSAR. But by definition it says such sums necessary. I want

to take it down to the provider level. You know, you can skew numbers any which way. For example, in dialysis. We are actually

withholding payment from dialysis patients to show better numbers on self-reporting numbers. This is where the fraud is, and we

can’t even get a grip on this.

47

What we need to be able to do is have numbers that are apples

to apples for comparison. And if Congress can’t get this, neither

can the American people. And we can’t even look at what agencies

look at, and this is just the tip of the iceberg. So I question even

the reality of what these numbers actually are.

Do you understand my frustration here?

Mr. WERFEL. In the area of Medicare fraud and improper payments, I could not agree with you more; we have a significant problem, an estimate that exceeds $60 billion, and it is unacceptable.

I can sit here today and tell you that the error rates are trending

down, but I can’t say that we are at an acceptable level. So I completely agree with your frustration.

Mr. GOSAR. And it is not just those mispayments; it is also misuse from the agency itself in not paying out providers and hospitals

and patients. It is on the same aspects. It is not just mispayments;

it is withholding of payments.

Mr. WERFEL. Now you are venturing into a programmatic area

that I don’t have familiarity with, so I apologize.

Mr. GOSAR. Thank you.

Mr. PLATTS. Thank you, Dr. Gosar.

Mr. Cooper.

Mr. COOPER. Thank you, Mr. Chairman.

I thank the witnesses for being here.

At a time when record numbers of Americans are questioning the

Federal Government’s ability to manage its own affairs. It is kind

of amazing, this hearing is in one of the smallest, hardest to find

rooms on Capitol Hill, is not even covered by C–SPAN 3. This is

a missed opportunity for anyone who is concerned about the future

of the Federal Government, because what you gentlemen are discussing is, in my opinion, the most comprehensive report on how

the Federal Government is doing. It is the only one that uses real

business accounting, so-called accrual accounting. That is not cruel,

it just tries to take into account what is on the Government credit

card, which Lord knows every family, every business, every government needs to focus on.

So it is amazing to me, when people are concerned not only about

government finances, but their own personal finances, and people

worry about the stocks that they are holding in the stock market

and they look at the annual report they get from a company, and

here you gentlemen have worked hard to present a report to the

American people, even with its own handy citizens guide to make

it extra easy for people to understand. People are getting their favorite companies’ annual report. Somehow they don’t even know

their favorite country’s annual report exists.

What we are discussing here today is one of the best kept secrets

in America. To my knowledge, there is not one businessman I have

ever met who knows this report exists. There is not one business

lobby that makes this a priority to focus on this. There is not one

newspaper in America that regularly uses accrual accounting to describe the situation we are in.

And this is an amazing, well, it is a missed opportunity for my

friends in the other party, because the first plank of the Republican

contract with America was no more congressional hypocrisy. We

should play by the same rules we require of the regular citizens,

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and regular businesses of any size have to use real accounting. But

not the Federal Government? So why aren’t we holding ourselves

up to the private sector standard?

So you gentlemen know this already because you are accounting

experts, and it is hard for you sometimes to translate your knowledge to average members, but in response to Dr. Gosar’s question,

I would urge him to look at the conclusion section of the citizens

guide, handy citizens guide, which says two very helpful sentences

here: The United States took a potentially significant step toward

fiscal sustainability in 2010 by enacting the ACA, what he chooses

to call Obamacare.

It also says the legislative changes for Medicare and Medicaid

and other parts of the health care system hold the prospect of lowering the long-term growth trend for health care costs and significantly reducing the long-term fiscal gap. That should be our primary job here on the Hill, to lower the fiscal gap.

Now, accounting will never be perfect; it is just an approximation

of what goes on. But this is the best report we have, and very few

people know about it. So I look forward to the first lobbying group

in Washington celebrating and spreading this report. I look forward

to the average Rotarian back home being able to access and know

about this report. It is true it is available on the Web, but nobody

knows when they are reading the Wall Street Journal everyday, as

I did this morning, that they are reporting cash numbers only. So

they really don’t know what is on the national credit card, and I

think they are entitled to know that.

There are many things we could go into into the details of your

report. I am thankful that you gentlemen prepared this report, and

you sometimes get grief and misunderstanding when you do it.

Let’s work on improving the mistake in payments; let’s reduce that

to the bare minimum. You gentlemen are working hard on that already.

But the key thing is not to miss the big picture: that this is a

more important look at the Federal Government than probably any

other document, and if you were to poll Members of Congress, most

of them have never read it, have never heard of it, and don’t know

its significance, even though they guard their investments pretty

carefully and care about which stocks they invest in.

Well, this is our only country, and we need to make sure that the

American people are aware of this because, in simple terms, the

deficit, if you want to call it—of course, the proper term here is net

operating cost—is much higher than the cash number, and it is

higher for some very specific reasons and reasons that aren’t necessarily fun to go into, because a lot of that discrepancy has to do

with veteran spending and military retiree spending and civil service spending and things like that, using traditional cash measures,

we are keeping up with. We are not admitting what is on our credit

card.

So I hope we can work together to increase the prominence of

this report, increase its accuracy, and let’s make this even more of

a gold standard than it is already today.

I see my time has expired, Mr. Chairman.

Mr. PLATTS. Thank you, Mr. Cooper. Appreciate your attention to

the time.

49

If I could briefly respond. One is your statements, I think, about

the importance of this report are right on point, and maybe jointly,

in a bipartisan way, to offer to Treasury I think this past year the

report was issued on December 21st with little fanfare, no press release, just issued, I believe, is that this subcommittee would gladly

partner with Treasury come this December to do a joint announcement of this report to start the process of getting more people

aware of it and aware of its importance, and to set the stage for

that in what would be going forward.

So, Mr. Gregg, if you don’t mind taking that back to Treasury as

a formal request, that as we prepare next year’s report, that we

look at partnering with this subcommittee for the release of it and,

again, raising awareness.

Also, Mr. Cooper, I know in the past you have introduced legislation regarding accrual accounting, and I share with you today that

I would like to work with you this session on the possibility of reintroducing that legislation, because I think we need to hold ourselves to the same standards that are we holding State and local

governments and the private sector to.

Yield to Mr. Lankford for questions.

Mr. LANKFORD. Thank you very much. I do want to just be able

to followup with the conversation with Mr. Werfel earlier about a

lot of focus looking forward in the next 75 years, and it is a challenge to be able to look back and try to do both simultaneous on

that. I will continue to emphasize the importance of being able to

look back for the accountability side of that is a very big deal, while

we are busy looking forward to seeing what is happening next,

which is important for all of us. Accountability, we have to know

what was just behind us so we are able to be able to do our task

as well and to learn the lessons that we have seen behind us.

Your report is very good in being able to mention several items

that are up. I don’t know if we have mentioned before the real

property comments that you made in it. Extrapolate a little more

on what you anticipate as far as the release of some of these properties, the jobs that are related to those and how we begin to transition from a piece of property that is underutilized or not utilized

at all to having that then gone. What do you see as the process?

Mr. WERFEL. Thank you for the question, Congressman

Lankford. There are many areas of inefficiency and waste in government that we are looking to attack, and the real estate holdings

of the Federal Government are one of them.

We have 14,000 properties that agencies have identified as excess, but there are an additional 55,000 assets beyond that have

been classified as underutilized by agencies but have not yet been

placed in excess and, therefore, are not in the cue to be gotten rid

of. And then I have concerns that beyond that 55,000 there are additional assets that have not been scrubbed closely and looked at

for realignment opportunities.

The process that we have today is somewhat bureaucratic.

Mr. LANKFORD. There is a surprise.

Mr. WERFEL. Yes. There are three problems with our process for

getting rid of a property. The first is red tape. Unfortunately, every

property, whether it is a warehouse in a rural location or an office

building in a downtown location that is no longer needed, needs to

50

go through the very same process, which, depending on how good

the agency is at doing it, could take anywhere from a year to 2

years, which is unacceptable in terms of the more critical needs we

have to not be maintaining these assets at a cost to taxpayers.

The second reason is incentives and financing. It costs money to

relocate; it costs up-front money to get an asset ready for sale, and

often we allow these short-term costs to be a barrier to long-term

and broader savings. So we need to think about how to address

that.

And the third area is politics. We have found it, in many case,

to be difficult to remove the Federal presence from an asset that

is underutilized because local officials or congressional delegations

rally around keeping that Federal presence there, even if there is

an opportunity for realignment and consolidation.

We looked at different ways of addressing these three areas, and

one area that we have had some success is in the Defense Department’s base realignment and closure program, whereby vesting the

process in an independent commission and giving them the flexibility and empowering them to make decisions on bundled opportunities, a lot has been done.

Mr. LANKFORD. I saw that in your report as well. Who are the

individuals that you are currently recommending and what is the

process to try to pull that together?

Mr. WERFEL. Ever since the President’s budget came out and we

had this proposal in there, we have been getting contacted by commercial real estate experts and other community development experts around the country who would like to participate. We need

legislation for this to occur. BRAC was put in place by legislation.

This civilian realignment proposal would be the same.

The moment we get it enacted, and I hope we get it enacted soon,

we will begin putting together this commission. We propose a seven

member commission or seven member board, and we are already

starting to gather names for that. But I think it would be premature to get started before Congress acts.

Mr. LANKFORD. Let me just reaffirm that, to continue to push on

both us and for you to be able to think through this as well. It is

a big issue for us to have this many properties that are sitting idle,

underutilized or not utilized at all, while we are dealing with a

budget deficit. That is a low hanging fruit piece. We should be

pushing on and continue to move forward to get those things into

the private sector.

I would encourage you, as well, to continue to push on your

55,000 number. I am skeptical with you that is all we have. Based

on the fact that you can look at—I am in Oklahoma. If you look

to the west of Oklahoma, almost all the country is owned or controlled by the Federal Government. When you look west, there are

a lot of properties and pieces that are sitting out there that should

be available to the public sector that are now very tightly controlled by the Federal Government, so whether that is a building

or whether that is property, we need to look at that.

And as far as your red tape, I completely concur. I am a freshman this year, and when I walked in my district office, there is an

IBM Selectric typewriter that is sitting there that has apparently

been there for a very long time that they are trying to work out

51

of inventory, and it has taken forever to get a typewriter out. I can

only imagine what it is going to take to get a building out. So press

on and we will try to help where we can.

Mr. WERFEL. Thank you.

Mr. PLATTS. Thank you, Mr. Lankford.

Mr. Connolly.

Mr. CONNOLLY. Thank you, Mr. Chairman, and thank you for

these hearings. And let me echo what my colleague, Mr. Cooper

said. I think this actually is one of the most important hearings we

could have if you want to get a handle on the fiscal situation of the

Federal Government, and I want to express my shock at learning

that C–SPAN 3 is not here. [Laughter.]

But let me just pick up on the last point that our colleague, Mr.

Lankford, was making on property, because I have had experience,

actually, in my jurisdiction of acquiring excess Federal property,

and one of the concerns I guess I would have is the valuation of

that property. I think you mentioned, Mr. Dodaro, a figure of something like $21⁄2 trillion estimated assets held by the Federal Government. Whatever the number is, in local government we value

property based on highest best use.

So it is one thing to say X property is excess, and if we decide

that is going to go to Oklahoma City as a park, that has one value.

If, on the other hand, we decide, no, we are going to actually develop it as a research park with office buildings and lots of workers, well, that has a very different value. And I guess I would be

concerned about how we value property and when we dispose of excess property.

Talk about politics. From the Federal Government’s point of

view, if we really mean it about the fiscal situation and addressing

it, we want to sell it or dispose of it for the highest best use, not

the lowest use, and that, I assure you, is not so easy. With the best

of intentions it is not so easy. Would that not be correct, Mr.

Werfel?

Mr. WERFEL. It is. In fact, one of the questions that I sometimes

get when I raise this issue of why politics can prevent the assets

is if you have an asset that is mostly empty, why would the local

jurisdiction have concerns? And it is really about what happens to

the property afterwards; it is the competing stakeholder interests

that emerge, whether someone wants it for a park or someone

wants to develop it commercially or sometime wants it gifted to a

local university for education purposes. All noble objectives. The

problem is those competing interests come into play and there isn’t

a rational process to reconcile them.

Mr. CONNOLLY. Right.

Mr. WERFEL. That is why this independent board, we believe, is

the correct solution, because it would be empowered to move quickly to determine what the right impact is for the community, for the

taxpayer, and reconcile those issues in a condensed period of time

and reach a decision.

Mr. CONNOLLY. Thank you.

Mr. Dodaro and/or Mr. Gregg, improper payments in terms of $125 billion a year, estimated, right? What is the scale or the ratio

between military, Pentagon, improper payments and civilian agency improper payments?

52

Mr. DODARO. I believe most of the $125 billion are civilian agency payments, half of which are in Medicare and Medicaid, although

in Medicare the Part D prescription drug program does not yet

have an estimate, so that will have to be added in the future. The

DOD one is relatively low.

Mr. CONNOLLY. Of the $125 billion?

Mr. DODARO. I believe so.

Mr. CONNOLLY. Let me ask about the 75 year projection. I was

just thinking 75 years ago was 1936. The idea that we can project

75 years into the future with any accuracy and anticipating actions

by a Congress, by a series of presidents, by the public, technology.

I mean, think back 75 years and ask oneself how accurate would

we have been in 1936 in predicting 2011. So I guess I would ask

you to comment on how valuable is a 75-year time horizon really.

Mr. DODARO. Well, I think it is very important, recognizing there

are a lot of uncertainties and inherent difficulties in doing it, for

the Government to have a longer term view of some of its policy

decisions at the time. One of the concerns that we have had is if

you look at just the next budget year, or even 5 years out, you really don’t understand comprehensively the long-term consequences of

policy decisions. So I think some things have to be there.

In some of these areas we know the population is already here

and will turn a certain age at a certain period of time, so there is

relative certainty to some of the assumptions in the estimates. Now

whether it is 75 years, 30 years, 20 years, the importance is to

have a longer term perspective of it.

Mr. CONNOLLY. General Dodaro, I would agree with you, but I

would suggest 75 years may be so long as to be meaningless. Very

misleading in terms—I mean, if you look at, for example, demographics. If you looked at a 75-year horizon, I assure you demographic projections were profoundly inaccurate in terms of population estimates and fertility rates and human behavior and spacing of families, for example. So I just think that, yes, I agree with

you we need a longer time horizon, but 75 may be not the tool we

hope it to be.

Thank you, Mr. Chairman. My time is up.

Mr. PLATTS. Thank you, Mr. Connolly.

Ms. Norton.

Ms. NORTON. Thank you very much, Mr. Chairman.

I would just like to add to what my colleague said about 75

years. I think 75 years is dangerous. When it comes to things like

Social Security and Medicare population-based, perhaps, there will

be people here who fasten upon such a figure as if it were the

Bible, because that is what numbers can do to people. It makes you

look like fortunetellers.

And I think the reason your report has credibility is that it is,

so far as you can humanly do, science-based. The configurations,

even the best of you say 5 years out, even 10 years out, are wildly

off base, so I would like to also see a spike put in 75 years, as if

that is something anyone could rely upon, except for populationbased notions, which turn out to be more accurate than perhaps

some others.

I note on page 12 of the GAO report it talks about the notion of

the Government’s return on some of its investments. At page 12 it

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says in December 2007 the United States entered into what has

turned out to be the deepest recession since the end of World War

II. Gross domestic product fell 4.1 percent from the beginning of

the recession through the second quarter 2009. Then you note that

GDP has grown slowly; unemployment remains at a high level.

In the second paragraph you note the economic recovery that the

Government’s actions to stabilize the financial markets and to promote economic recovery resulted in assets of $400 billion, which is

a net of about $75 billion in valuation losses.

Now, this is a very little talked about notion. We always hear

about what, of course, is most prominent, and that is what the

Government loses. Would you elaborate on this recovery of some of

these assets? Break them down. Many would be surprised, perhaps

in a short period of time than anticipated.

Mr. DODARO. This is in the——

Ms. NORTON. GAO report?

Mr. DODARO. No, it is in the management discussion analysis

that is prepared by Treasury and OMB, it is not our report.

Ms. NORTON. Well, whoever wants to discuss it, be my guest.

Mr. DODARO. OK.

Mr. WERFEL. Congresswoman, I will share at a very high level.

I think we are going to have to get back to you on some of the specific breakdowns of the assets. I happen to know that the Federal

Government has purchased, according to our report, $225 billion in

mortgage-backed securities; we have $75 billion back in principle

and interest; we have made $378 billion in TARP disbursements

and been repaid $204 billion.

I think the important point here is that some of the investments,

in particular that the Treasury made as part of our Economic Recovery Act, either through the HERA legislation or the Issa legislation, were set out with an expectation of a return, where money is

paid back to us or investments that we are made provide value to

us that improve the bottom line associated with these financial

statements.

And I would agree that it is a point that sometimes gets lost.

When the TARP bill was passed, it was widely reported $700 billion were authorized, and I think there was a notion at that high

level that $700 billion was gone.

But, as it turns out, and as it is playing out and as is reported

here, that $700 billion is not the cost of that legislation, and it is

remarkably lower than that. And part of that is due to the fact of

being repaid and part of that is due to the fact that investments

that were made by the United States continue to have value and,

in some cases, the Government and the taxpayer actually have

made a profit on those investments.

Mr. GREGG. We can get back to you with a more full description,

but yesterday Treasury announced that they had a repayment from

AIG of $6.9 billion, and right now we have 70 percent of the

amount that we have gone out in investments have been repaid,

and the quote is that we are looking to have little or no money actually for those types of investments actually cost the taxpayers

anything. So the money has been coming back through those investments, AIG and other entities that we have had under manageVerDate 11-MAY-2000 13:47 Jul 29, 2011 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67257.TXT KATIE PsN: KATIE
54

ment, and it is a continuing process, but good progress has been

made.

Ms. NORTON. Well, I must say I think it is a disservice not to

report to the American people, who were very concerned, and rightly so, that the Government had to lay out so much money, not to

report every jot and tittle of every cent we have gotten back, every

amount we may have made over what we expected and in what period of time. For those who read deeply into the newspaper, frankly, to get back as much as we have gotten back in so short a period

of time turns out to be a big surprise, and one of the best kept surprises of this recovery.

And I thank you very much, Mr. Chairman.

Mr. PLATTS. I thank the gentlelady. And if the witnesses would

work with the gentlelady for any specifics, additional information

that she is looking for.

We need to wrap up in about 8 or 9 minutes. I am going to try

to get through a couple more questions here for those who have.

I am going to kick it off on a specific issue, and this goes to frustration. I hear from constituents often that when we have either

wrongful conduct in the Federal Government or just mismanagement, there is never any consequences. And one of the three major

impediments identified by GAO to a clean opinion was the inability

of so many of our Federal agencies and departments to adequately

account or reconcile intragovernment payments, between agencies.

In General Dodaro’s statement there is referenced that Treasury

and OMB require our 35 largest agencies, our CFOs to quarterly

do that reconciliation. But as the general’s statement says, a significant number of these entities did not adequately perform those

reconciliations for fiscal years 2010 and 2009. I guess one question

is, General Dodaro, I don’t know if you have with you today, but

what is a significant number? How many of those 35 did not adequately do it on a quarterly basis?

And then specifically to our Treasury and OMB witnesses, what,

if any, consequences occurred regarding those CFOs’ failure to comply with your department and agency requirement? Was anyone

disciplined, suspended, fired for not doing what they are required

to do? Because when they don’t do this, as GAO is telling us, this

is one of the major impediments to us fully understanding what is

going on and getting a clean opinion. Yet, we have a significant

number of agencies not complying with OMB and Treasury.

So I guess, first, General Dodaro, if you have a number.

Mr. DODARO. I can provide the specific number. Mr. Gregg might

actually know the specific number. But I couldn’t agree with you

more that there ought to be consequences.

Mr. PLATTS. Mr. Gregg, I don’t know if you know, of the 35, how

many agencies, departments of those 35 did not comply with the

quarterly reconciliation.

Mr. GREGG. Well, I don’t know offhand, but the thing that has

been missing, and I alluded to it before, is that what happens is

that agencies do business and one agency may not identify when

a trade comes in that actually what it is, so our job at Treasury,

now that we have taken this on, is to build some kind of system

where we make sure that they can easily identify that they are

talking about the same transaction.

55

And then the role that I have also agreed to take on is that we

are going to be following up with the agencies, and if they don’t get

those reconciled quickly, we are going to be after them and we will

elevate it as high as we need to in the agency to get those taken

care of. We can’t do this once a year and be successful; this has to

be an ongoing process. And it is not just quarterly, it is an ongoing

transaction process that we need to stay on top of, and we haven’t

been doing it, Treasury hasn’t been doing it, no one has been doing

it sitting in the seat of being responsible and holding the agencies

responsible.

Mr. PLATTS. And that is my point here, is accountability. That

is what the American people expect of us. And if we have rules in

place that are to seek that accountability and those requirements

are not then followed through on, there have to be consequences so

that we send that message.

And if this is across all agencies and departments that they understand, the personnel understand that if they don’t do their jobs,

there will be consequences for their failure to do their jobs. It

sounds like we have not had consequences in the past, but Treasury is trying to put in place a system to allow more stringent requirements and consequences to be imposed.

Mr. GREGG. Treasury, the Financial Management Service does

send out a report after each financial report comes in and, in essence, kind of grades the agencies on how they did. The CFOs at

the agencies don’t especially appreciate getting that.

Mr. PLATTS. Is that report given to the head of the agency as

well?

Mr. GREGG. It is given to just the CFO, the highest level.

Mr. PLATTS. If I could make a suggestion that report card, since

it’s the CFO that has this responsibility and you are giving him or

her their own report card, well, as a parent, I want to see my

child’s report card to hold them accountable. Let’s make sure the

agency head sees that report card so they can hold their CFO accountable, because otherwise the fox is guarding the hen house.

So I have great respect for our CFOs in the work, but if they are

not doing a good job their agency head needs to know it. So if you

can followup with me on that request that Treasury look at that

change in how you distribute the information to the agency head.

Mr. GREGG. I will do that.

Mr. DODARO. Mr. Chairman, I would say Treasury is in a difficult position because they are on a peer level. So I think your idea

is exactly right. OMB, on behalf of the President or the President

has to send the direction to the agency heads to get this solved.

Mr. PLATTS. That is a very important point. If we can have

OMB’s engagement on this as well, to partner with Treasury and

this subcommittee, that we really have consequences. Again, this

is one of the three main criteria that is highlighted as why we can’t

get a clean opinion, so I think it has to be one of the issues we are

most serious about going after.

Mr. WERFEL. I agree and I think alerting the agency head of

some of these key metrics is something we are certainly interested

in doing, and we will work with Treasury and you on that.

The other thing I would just add is that I do think there is a

positive development that has occurred over the last 5 years of

56

more and more a demand from OPM for quantifiable metrics in

Federal employee performance evaluations, and in the CFO realm

we have a treasure trove of quantifiable metrics to hold CFOs, not

just the CFOs themselves, but their entire teams.

So I can’t sit here and say that all the right people are seeing

all the right impacts on their performance evaluations due to some

of the weaknesses that we see, but I can tell you that it is getting

better and it is entering into the fray.

Mr. PLATTS. And getting that treasure trove of information to

that CFO’s superior is I think what I am asking in this regard specifically, so that we can do a better job.

I have other questions but I don’t know, Mr. Towns, if you have

anything else.

Mr. TOWNS. I just have a very quick one. How does the IG play

in this? The point is, it seems to me, that they can provide some

technical assistance here that might help us. Do they have a role

anyway?

Mr. WERFEL. Congressman, the IGs have a central role. Ultimately, the IGs are responsible for the financial statement audit

element, the audit element. The IGs often contract with independent audit firms, although they don’t all do that, but the IGs are

overseeing the audits of their agencies and, therefore, are a central

partner in helping figure out what the financial management

weaknesses of the agency are and how to address them.

So they do play a central role, it just so happens that they don’t

always write the audit report; sometimes they hire an independent

auditor to write the audit report for them. But they bless it and

they have to sign off on it.

Mr. TOWNS. Thank you very much. Because I think that is very,

very important.

Thank you.

Mr. PLATTS. Thank you, Mr. Towns.

Dr. Gosar.

Mr. GOSAR. Real quickly, gentlemen. Are the Federal Reserve

numbers accurate, to your understanding, in the terms of the accounting method?

Mr. DODARO. I believe they have an independent audit done and

that the numbers—we don’t have any basis to question the numbers at this point. I would add, though, that due to legislation and

the Wall Street Reform Act, we now have at GAO broader responsibilities to audit the emergency lending facilities at Federal Reserve, and we are doing that now and expect a report by this summer.

Mr. GOSAR. Wonderful. Can I just followup with a real quick

question, then? Do these accounting issues impact monetary policy

like quantitative easing at the Federal Reserve level?

Mr. DODARO. Just to clarify, the Federal Reserve is really not included in the report.

Mr. GOSAR. I understand.

Mr. DODARO. So I would say we at GAO are statutorily prohibited from reviewing monetary policy.

Mr. GOSAR. Thanks.

Mr. DODARO. I would, Mr. Chairman, if I might, add just on the

75-year question that came up earlier, I just want to clarify for the

57

record that the trustees, Social Security and Medicare trustees, are

required by law to use the 75-year number.

Mr. PLATTS. And I am going to close with two quick questions,

just to make sure my understanding is correct, before we adjourn

for the joint session.

On Medicare Part D, when we talk about improper payments,

Medicare and Medicaid, half of that $125 billion number, it is my

understanding that when we look at the Medicare Part D—and,

Mr. Werfel, you referenced that the improper payments rate is

going down—Medicare Part D currently is not part of that number,

that they are not being assessed for what improper payments are,

is that correct?

Mr. WERFEL. That is correct. I was referring to Medicare fee for

service and Medicare Part C. Both of those have separate error

rates and both of those have declined, although they are still at unacceptably high levels. We are in the process of developing an error

measurement for Part D.

Mr. PLATTS. And given the size of Part D, the importance of

that——

Mr. WERFEL. Yes. You can anticipate that given the size of the

outlays, even if we somehow achieve a 1 percent error rate——

Mr. PLATTS. We are talking billions still.

Mr. WERFEL [continuing]. We are still talking big numbers.

Mr. PLATTS. Yes. And on the issue of Medicare Part D, we currently have in law a 30-day payment requirement for Medicare

payments. Is that something that, given a billion transactions that

Treasury is handling and the number that Medicare is handling,

by having that 30-day payment requirement, which we want to pay

providers as quickly as possible, but given the volume, is that too

short to better ensure accuracy and the honesty of the claims we

are paying?

Mr. WERFEL. It is certainly something to look at. One of the goals

of the improper payments legislation is to understand the root

causes of these errors and understand what kind of adjustments

need to be made. And if there is a sense that the timing is too

short to do the necessary due diligence, that should come in HHS’s

financial report and be reported out, and then we would want to

talk to you about those types of statutory changes. But I think we

need to certainly evaluate that as we go forward, in terms of that

timing.

Mr. PLATTS. Thank you. I certainly appreciate all three of you,

your service to our Nation and your expertise in this area. We look

forward to partnering with you as we go forward.

Just one cautionary reminder. If we are talking next year about

this, at least for one more year I believe I will be the chairman;

I don’t know about after that. But if we see as one of those major

impediments being intragovernment payments, I am going to be

asking what did we do with that CFO report card where there

wasn’t adequate compliance on at least a quarterly basis, and that

we are going after that issue. So just to put you on fair notice.

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We will keep the record open for 7 days for any other additional

information from witnesses or for Member statements, and our

thanks to our witnesses for being here. This hearing stands adjourned.

[Whereupon, at 11:04 a.m., the subcommittee was adjourned.]

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