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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

     ARE THE FINANCIAL RECORDS OF THE FEDERAL GOVERNMENT RELIABLE?

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      INFORMATION, AND TECHNOLOGY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 31, 2000

                               __________

                           Serial No. 106-182

                               __________

       Printed for the use of the Committee on Government Reform

  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform

                    U.S. GOVERNMENT PRINTING OFFICE
69-820 DTP                  WASHINGTON : 2001
_______________________________________________________________________
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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH-HAGE, Idaho              (Independent)
DAVID VITTER, Louisiana

                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                    Lisa Smith Arafune, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

   Subcommittee on Government Management, Information, and Technology

                   STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois               JIM TURNER, Texas
THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
DOUG OSE, California                 PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin                 CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
                Bonnie Heald, Director of Communications
                           Bryan Sisk, Clerk
                    Trey Henderson, Minority Counsel

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 31, 2000...................................     1
Statement of:
    Gotbaum, Joshua, Controller, Executive Associate Director, 
      Office of Management and Budget; and Donald V. Hammond, 
      Fiscal Assistant Secretary, Department of the Treasury.....    12
    Walker, David M., Comptroller General of the United States, 
      General Accounting Office, accompanied by Jeff Steinhoff, 
      Acting Assistant Comptroller General for Accounting 
      Information Management Division; and Bob Dacey, Director of 
      the Consolidated Financial Audit...........................     5
Letters, statements, et cetera, submitted for the record by:
    Gotbaum, Joshua, Controller, Executive Associate Director, 
      Office of Management and Budget, prepared statement of.....    16
    Hammond, Donald V., Fiscal Assistant Secretary, Department of 
      the Treasury, prepared statement of........................    28
    Turner, Hon. Jim, a Representative in Congress from the State 
      of Texas, prepared statement of............................     3

 
     ARE THE FINANCIAL RECORDS OF THE FEDERAL GOVERNMENT RELIABLE?

                              ----------                              

                         FRIDAY, MARCH 31, 2000

                  House of Representatives,
Subcommittee on Government Management, Information, 
                                    and Technology,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn and Kanjorski.
    Staff present: J. Russell George, staff director and chief 
counsel; Louise DiBenedetto, GAO detailee, Bonnie Heald, 
director of communications; Bryan Sisk, clerk; Ryan McKee, 
staff assistant; Trey Henderson, minority counsel; and Jean 
Gosa, minority clerk.
    Mr. Horn. The Subcommittee on Government Management, 
Information, and Technology will come to order. Today the 
Department of the Treasury is releasing its third financial 
report of the U.S. Government's fiscal affairs. This report, 
which covers fiscal year 1999, is required by the Government 
Management Reform Act of 1994. The law specified that no later 
than March 31st of each year, the Secretary of the Treasury in 
coordination with the Director of the President's Office of 
Management and Budget annually prepares and submits to the 
President and Congress an audited financial statement for the 
preceding fiscal year. After this year, the statutory deadline 
has been met.
    I commend the Treasury Department, the General Accounting 
Office, AND the Office of Management and Budget for meeting 
this deadline of undoubtedly a lot of hard work and personal 
effort that went into this endeavor. I believe that all parties 
agree that some progress has been made.
    However, I am disheartened but not surprised that 
significant accounting discrepancies and financial weaknesses 
have again prevented the Comptroller General of the United 
States from issuing a clean opinion on the government's 
financial statements. In subcommittee hearings on individual 
agencies over the last few years, we have had at least two 
executive branch departments acknowledge that they spent 
billions of dollars in inappropriate overpayments. For example, 
auditors of the Health Care Financing Administration, which 
administers the Medicare and Medicaid programs, estimated that 
in 1999, the agency overpaid Medicare claims by $13.5 billion. 
This massive amount represents nearly 8 percent of all Medicare 
fee for service benefits paid out that year.
    The stewards of our tax revenues, the Internal Revenue 
Service, has its own problems. Auditors examining the agency's 
1999 books found one instance in which the IRS issued a $15,000 
tax refund even though the individual had been identified as 
owing nearly $350,000 in outstanding taxes. With such loose 
financial controls, is it any wonder that taxpayers have little 
confidence that their hard earned money is being well spent?
    Despite laws some nearly a decade old that require agencies 
to be financially accountable, the General Accounting Office 
continues to warn us about the potential for fraud, waste, and 
misuse of billions of dollars of taxpayer provided dollars.
    Today the subcommittee is issuing a third report card 
grading the 24 largest executive branch departments and 
agencies on the quality of their 1999 financial statements. 
Again, the grades are dominated with Ds and Fs. Only 22 of the 
24 agencies submitted the required financial reports. As of 
yesterday, neither the Department of the Interior nor the 
Department of State had submitted their 1999 financial 
statements, which were due on March 1, 6 months after the end 
of the fiscal year. Obviously they both received Fs. On the 
other hand, the Social Security Administration, which is also a 
large and complex agency, managed to complete its financial 
statements 6 weeks after the end of the fiscal year. Perhaps 
the Office of Management and Budget, which oversees financial 
management as well as budgets in the executive branch, can 
explain the disparity in accountability.
    Based on this year's consolidated audit report, the 
subcommittee has determined that overall the Federal Government 
earned a D-plus. Although 13 agencies received clean audited 
opinions, they have still missed the most important goal, which 
is to maintain financial systems that will allow them to 
produce accurate, reliable financial information on a day-to-
day basis.
    On a related matter, we are also concerned that the Social 
Security-Medicare boards of trustees have again released their 
latest projections on the solvency of these vital programs only 
1 day before the consolidated audit report is due. These 
program projections which are included in today's audit report 
are now already outdated. I understand that by law the trustees 
must release the new projections by April 1, but surely the law 
does not preclude them from providing this new information 
early enough to include it in the government's audited 
financial report. Such poorly timed data creates confusion 
about the financial status of two very important programs. It 
also raises serious questions about the Government's ability 
and commitment to report accurately on its finances.
    We will be looking very carefully at this issue. We have 
many questions for our witnesses, all of which hold key roles 
in determining the credibility of the Government's financial 
management. We welcome each of you and look forward to your 
testimony.
    [The prepared statement of Hon. Jim Turner follows:]
    [GRAPHIC] [TIFF OMITTED] T9820.001
    
    [GRAPHIC] [TIFF OMITTED] T9820.002
    
    Mr. Horn. We will now start with panel one, the Comptroller 
General of the United States, the Honorable David Walker. If 
you will rise, General, and raise your right hand.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note that the oath has been 
affirmed, and we welcome you here and you are into your second 
year now, I guess. It seems like just yesterday when you 
started.
    Mr. Walker. Seventeen months on the calendar. Three years 
on the clock and a lot of frequent flier miles, Mr. Chairman.
    Mr. Horn. You're doing a great job.

STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED 
    STATES, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY JEFF 
STEINHOFF, ACTING ASSISTANT COMPTROLLER GENERAL FOR ACCOUNTING 
INFORMATION MANAGEMENT DIVISION; AND BOB DACEY, DIRECTOR OF THE 
                  CONSOLIDATED FINANCIAL AUDIT

    Mr. Walker. Thank you. It's a pleasure to be before this 
subcommittee again, Mr. Chairman. I'd also like to note at the 
outset that several GAO personnel have accompanied me, in 
particular Jeff Steinhoff, who is sitting right behind me, the 
Acting Assistant Comptroller General for the Accounting 
Information Management Division, and Bob Dacey, who is the 
Director of the Consolidated Financial Statement Audit. I point 
out that they are here and, if necessary, are available to this 
committee for detailed questions.
    I'm pleased to be here today to discuss our report on the 
U.S. Government's financial statements for the year 1999. 
Today's hearing comes at an especially appropriate juncture. 
First, we're nearing the 10th anniversary of the Chief 
Financial Officers Act's passage, which has provided the 
underpinning for financial management reform necessary to help 
improve the economy, efficiency, and effectiveness of the 
Federal Government. A critical financial management reform 
component established by the Congress entails requirements for 
annual audited financial statements for the 24 major Federal 
departments and agencies beginning in fiscal 1996. We have seen 
steady increase in the number of vacancies that have obtained 
unqualified opinions on their financial statements and 
agencies' timeliness in issuing them has also improved.
    In addition, and importantly, in October 1999, the American 
Institute of Certified Public Accountants recognized the 
Financial Accounting Standards Advisory Board as an 
authoritative standard setting body. As a result, we now will 
be able to say and other auditors in accordance with generally 
accepted accounting principles, which is very important because 
that is a term which the public is accustomed to and therefore 
can serve to enhance credibility of financial management 
reporting.
    At the same time several major departments are not yet able 
to produce audited financial statements on a consistent basis. 
The most significant in this regard is the Department of 
Defense, which represents a large percentage of the 
Government's assets, liabilities, and net cost. None of the 
military services of the department as a whole has yet been 
able to produce auditable financial statements. For the last 2 
years, we reported that because of serious deficiencies in the 
Government's systems, recordkeeping, documentation, financial 
reporting, and controls, amounts reported in the U.S. 
Government's consolidated financial statements and related 
notes may not provide a reliable source of information for 
decisionmaking by the Government or the public.
    In other words, Mr. Chairman, we unfortunately have had to 
disclaim an opinion. The executive branch recognizes that 
because of the extent and severity of financial management 
deficiencies addressing them will require concerted improvement 
efforts across government. Annual financial audits represent an 
important means to assure continued progress in connection with 
improving Federal financial management.
    Further, the President has designated Federal financial 
management improvement as a priority management objective and 
efforts are under way across government to address pervasive, 
generally long-standing financial management problems.
    However, while clean opinions are essential to providing an 
annual public scorecard, they do not guarantee that agencies 
have financial statements needed to dependently produce 
reliable financial information on a timely basis. As you said, 
Mr. Chairman, while obtaining a clean opinion, it's an 
important and objective milestone and a true accomplishment. It 
is not the end game.
    The purpose of Federal financial management is to assure 
that there is timely, accurate, and useful information 
available day to day to make informed management decisions. And 
in addition, it's critically important that there be effective, 
internal controls and in addition, it's also critically 
important that there be systems in place to assure compliance 
with applicable laws and regulations.
    Agency financial systems are in poor condition in many 
cases and they do not provide adequate information to 
effectively manage day-to-day government operations and to hold 
managers accountable. Over the longer term, improving financial 
systems will involve harnessing technology and applying the 
information technology management framework outlined in the 
Clinger-Cohen act.
    Another integral part of financial management reform is 
revamping human capital practices to build greater capacity, to 
implementing change management, and to achieve the discipline 
needed to follow sound financial management and reporting 
practices.
    Mr. Chairman, the remainder of my testimony will focus on 
matters and findings in our report on the consolidated 
financial statements of the U.S. Government for fiscal year 
1999. But before I do give that bottom line summary, I would 
first like to address an important financial information topic 
that you touched on in your opening remarks, and that is the 
issue of Social Security and Medicare.
    The Government's fiscal year 1999 financial report and 
therefore our report on the audit of these financial statements 
includes certain information concerning the Social Security and 
Medicare Part A trust funds, such as projected contributions 
and expenses, dates where expenditures are expected to exceed 
contributions and dates when such funds are expected to be 
exhausted. Such information is as of January 1, 1999 for Social 
Security and as of September 30, 1999 for Medicare Part A. This 
was the most recent information publicly reported by the 
Government and made available to the GAO.
    Yesterday, as you noted, the trustees issued updated 
information on these two important Federal programs as of 
January 1, 2000. The Government's issuance of dated information 
in this financial report at about the same time that it issues 
more current information may cause confusion to the Congress 
and the public. This can serve to reduce the confidence in and 
the credibility of the Government's annual financial report. 
This is especially true when there are significant differences 
in the trustees' new projections and those contained in the 
annual report, which is the case this time, which was the case 
last year as well.
    Given the importance of this information, steps should be 
taken in future years to assure that the Government's financial 
report contains up-to-date information as of no earlier than 
the end of the most recent fiscal year in these important 
Federal programs. Because the current information on the 
solvency of Social Security-Medicare is critical to assessing 
the financial condition of the Nation, aging and budget 
deliberations--aiding in budget deliberations and fostering 
public debate, we will include the updated information on these 
two important Federal programs in our report on the audit as a 
supplement when we issue it within the next couple of weeks.
    I might note, Mr. Chairman, that the new numbers are on 
page 1 of the Washington Post. They are also in the New York 
Times. I hope we get page 1 tomorrow but I doubt very seriously 
we will. So this serves to reinforce how important this 
information is to the public and to other parties and it is 
critically important that the annual financial report include 
up-to-date information.
    In addition, Mr. Chairman, I might note that at present, 
this critical information is not subject to audit. I think that 
needs to be reviewed as well given the importance of this 
topic.
    Mr. Horn. On that point, I might say you bring a particular 
perspective to this because you served on one of those trustee 
boards. Which one was it?
    Mr. Walker. I served on all of them, Mr. Chairman. I served 
on the Social Security and Medicare Board of Trustees for 5 
years, 1990 to 1995. I think it's critically important that the 
trustees be able to go through their process and that they be 
able to announce what their conclusions are with regard to 
these projections. At the same point in time, I think it's 
critically important that it be done in a manner that will 
allow for inclusion and a timing that will allow for inclusion 
of the most up-to-date information in this annual consolidated 
financial statement audit because this is a subset of the 
overall audit. So it is important that the overall audit 
include up-to-date information.
    Mr. Horn. Is this a problem of a law that needs to be 
changed so that the trustees would be in synchronization with 
the rest of the Government?
    Mr. Walker. Mr. Chairman, I think that while the trustees 
have a statutory responsibility to report by April 1, 
theoretically they can report before that. In my opinion, I 
think one of the things that we need to look at is first work 
together with the trustees to try to accelerate their 
reporting. And it may also make sense to accelerate the 
statutory due date for their report.
    In addition, I might note for the record that the trustees 
have for a number of years conducted their projections as of 
January 1 or, in other words, the calendar year rather than the 
end of the fiscal year. If they were to conduct their 
projections as of the end of the fiscal year, September 30, 
which is the same date as the financial statements, that change 
in and of itself ought to be able to accelerate their reporting 
date by 3 months. So I think this is something that, one, we 
have already talked to OMB about and the Treasury Department 
and I think it's something we will continue to work with you 
and the Congress on what, if any, changes might be appropriate 
here.
    Mr. Horn. What are the options the trustees would have in 
terms of a particular set of numbers when we're talking about 
reform in both political parties, of Social Security, Medicare, 
where we know there's been a lot of waste in Medicare and 
everybody admits it and we've got to help them focus in on 
that? What kind of game plan could be the result of either not 
having those numbers tied in with the rest of the whole 
government or with putting them in, say, the day before the 
hearing?
    Mr. Walker. Well, I think first merely by what has happened 
in the last 2 years where new numbers have been released in 
this particular case a day before the consolidated financial 
statements, last year a day after the consolidated financial 
statements, I think frankly it makes government look foolish. 
These numbers are the largest numbers in the financial 
statements. These numbers are arguably probably the most 
important numbers in the financial statements and yet within a 
24-hour period either before or after the issuance of this 
report, we have whole new numbers coming out.
    You know as well as I do, Mr. Chairman, how important these 
programs are to Americans. You know that there are current 
debates ongoing with regard to whether and to what extent these 
programs should be reformed and how they ought to be reformed, 
and I think not having consistent information in both these 
reports serves to undermine credibility and confidence in this 
report and I think that's inappropriate.
    Mr. Horn. These are 70-year projections, right?
    Mr. Walker. Seventy-five years.
    Mr. Horn. Now, over the history of those projections, have 
we ever had someone go back and say, well, what were the 
projections in the late 30's, the 40's, the 50's, the 60's, and 
how accurate were they?
    Mr. Walker. That does get done and in fact in the report, 
in the longer report, there is data dealing with some 
historical projections. I think we have to realize that there 
can be significant differences from year to year. In fact, in 
the Medicare program alone, there has been a 22-year 
improvement in the last 3 years in the estimated date of 
exhaustion for Medicare. That's a dramatic change in Medicare.
    There are many reasons for that. In some cases it's because 
of improved economy. In some cases it's because the trustees or 
actuaries believe that the recent changes in health care cost, 
the lowering of those costs are likely to continue. I think 
that's debatable. But the fact of the matter is the first issue 
is we ought to have consistent information so we're not 
confusing the public and so we don't inadvertently undermine 
credibility but, second, I think the second issue that needs to 
be focused on is whether and to what extent this information 
should be subject to audit.
    Mr. Horn. Well, I would think one of the options is people 
could say, well, look, we're in a very healthy shape, why do we 
have to reform anything? And is that one option that comes out 
of this with the numbers in this situation so that people just 
give up on it and say we don't need to touch it anymore?
    Mr. Walker. One of the concerns that we had, Mr. Chairman, 
is it decreases the sense of urgency. Second, it may also 
increase the momentum to expand benefits in a program that 
already has $2.9 trillion in unfunded promises that eventually 
we're going to have to come to grips with. But that's a policy 
decision the Congress will have to make. But I think each of 
the quotes that are in the Washington Post paper today from 
several Senators and other Members note that it's a double-
edged sword, these new projections, because we know we're going 
to have to reform these programs. There's no debate about that. 
It's a matter of when and how that gets accomplished.
    Would you like me to complete, Mr. Chairman?
    Mr. Horn. Just to round this one out, are those numbers 
audited by the trustees? Do they have that authority to bring 
in people or how does that work?
    Mr. Walker. Mr. Chairman, the way it works right now is the 
trustees ultimately must approve the assumptions, the key 
demographic assumptions, the key economic assumptions, and the 
key assumption in the case of Medicare, which is the health 
care cost trend rate, what they call the market basket rate, 
what's going to happen with health care costs going forward. 
They rely to a great extent, as is understandable, on the 
recommendations and the advice and counsel of the Social 
Security actuary and HCFA actuary who are very capable 
individuals. At times it may take supplemental efforts to try 
to reach outside that to try to draw upon other experts, as we 
did when I and Stan Ross were trustees.
    So ultimately they have to buy off on the assumptions and 
the actuaries of Social Security Medicare do issue an actuarial 
opinion to say that the projections have been done in 
accordance with generally accepted actuarial methods and that 
the assumptions are reasonable in their opinion, but they are 
not subject to separate independent audit. And in fact, 
comparable sets of numbers to the extent that you can say they 
are comparable, pension projections, health and welfare 
projections in the State and local government arena as well as 
in the private sector would be subject to audit and they are 
not at the present point in time at the Federal level.
    Mr. Horn. Will that take a law to provide that?
    Mr. Walker. Mr. Chairman, no, I don't believe it will. I 
think that what we would have to do is--I frankly need to 
converse with my colleagues, the Director of OMB in particular, 
to talk about this. As you know, the Financial Accounting 
Standards Advisory Board sets accounting and reporting 
standards but they don't set auditing standards. We might be 
able to accomplish this administratively. Obviously a law would 
assure that it would happen, but I think we can try to proceed 
and see whether or not it's possible to do it administratively.
    Mr. Horn. Social Security and Medicare are really the only 
group within the Federal Government where they have this 
particular situation of special trustees, actuarial agreement 
and all that. No other agency does it and maybe HUD does. I 
don't know. There would be something there in terms of 
projections.
    Mr. Walker. Nothing of the significance and magnitude that 
we're dealing with here, Mr. Chairman. Right now, as you know, 
the information with regard to Social Security and Medicare is 
provided in a required supplemental stewardship statement. And 
those statements aren't currently subject to audit. There's 
more than just these two statements, but what I'm really 
focusing on right now quite frankly is the information with 
regard to these two programs. I mean, this just reinforces the 
importance of this information and please don't--I don't want 
anybody to misunderstand that I think it's important the 
trustees be able to continue what they are doing. I think it's 
important that they continue to be able to release this 
information and the fact that it's not audited shouldn't be 
drawing an inference one way or the other as to the reliability 
of their projections. I just think it's important that we do it 
in a coordinated manner and I think serious consideration needs 
to be given as to whether or not they ought to be audited in 
order to further enhance public confidence, especially given 
the magnitude of these numbers.
    Mr. Horn. I know you have a lot more in your statement and 
what we are going to do when you get done with the big thrust 
of the statement, we'll get panel two up and if you could stay, 
we'll have a dialog then between the three of you.
    Mr. Walker. I'd be happy to, Mr. Chairman. Let me see if I 
can just summarize the major points in our audit. Our audit on 
the U.S. Government's financial statements for fiscal year 1999 
states that certain significant financial system weaknesses, 
problems with fundamental recordkeeping and financial 
reporting, incomplete documentation, and weak internal control, 
including computer controls, continue to prevent the Government 
from accurately reporting a significant portion of its assets, 
liabilities, and cost.
    Major challenges include in the Federal Government, in this 
area relate to, first, the inability to properly account for 
and report material amounts of properly--materials and 
supplies, certain stewardship assets primarily at the 
Department of Defense; to properly estimate the cost of certain 
major Federal credit programs and the related loans receivable 
and loan guarantee liabilities primarily at the Department of 
Agriculture; to estimate and reliably report material amounts 
of environmental and disposal liabilities and related costs 
primarily at the Department of Defense; to determine the proper 
amount of various reported liabilities, including post 
retirement health benefits for military employees and accounts 
payable and other liabilities for certain agencies; to 
accurately report major portions of net cost government 
operations; to ensure that all disbursements are properly 
recorded and to properly prepare the financial--government's 
consolidated financial statements, including balancing the 
statements, accounting for substantial amounts of transactions 
between governmental entities, and reconciling the results of 
operations to budget results.
    Mr. Chairman, we also pointed out several material internal 
control weaknesses, deficiencies dealing with such things as 
improper payments, the Government's tax collection activities. 
I would like to reinforce, Mr. Chairman, that while a clean 
opinion on the financial statements is an important milestone 
and it's one the public understands and it's one that should be 
deemed to be an accomplishment, that it is not the end game and 
it is not enough and in fact it can be misleading because there 
are certain departments and agencies that have undertaken 
heroic efforts and spent a lot of money in order to be able to 
get in a position where auditors can express a clean opinion 
and yet they don't have effective controls and they don't have 
the type of systems in place to be able to have information to 
make informed decisions every day, and I would say that having 
effective controls and having--and being in compliance with 
FFMIA and related statutes are equally important as just 
getting a clean opinion on the financial statements, especially 
if that clean opinion is obtained 6 months or in some cases up 
to a year after the end of the year which is being examined.
    In summary, Mr. Chairman, progress has been made. It is 
fair to say that progress has been made every year in this area 
and as one knows, for the Federal Government unfortunately it 
has been a lag indicator in financial management. The private 
sector has had to have its act together for years. State and 
local governments have been ahead of us, although State and 
local governments many times took a number of years to come 
around to comply as well.
    I think it's critically important that this continue to be 
a top priority. I think we have to look beyond clean opinions 
and also look at internal controls and also look at effective 
systems to have timely, accurate, useful information every day. 
And I would like to commend you, Mr. Chairman, and this 
subcommittee for your continued diligence and efforts in 
placing attention on this important matter and we look forward 
to continuing to work with you and making further progress in 
the years ahead and I hope, Mr. Chairman, that during my 15-
year tenure that I will be able to at some point in time 
express an unqualified or clean opinion on the financial 
statements of the U.S. Government.
    Thank you, Mr. Chairman.
    Mr. Horn. We share in that hope. The question is next year, 
2 years, 10 years, and I think with you in there with your 15 
years, you're very conscious of getting the things done soon. 
So I would hope the executive branch would get that regardless 
of who is in control of the executive branch.
    Mr. Walker. I think it very well may be possible, Mr. 
Chairman, that we get to the point of having some qualified 
opinion before we get to the point of having a clean opinion, 
as has been the case with a number of the different departments 
and agencies that you've noted.
    Mr. Horn. Well, we will now have panel two join panel one. 
We have Joshua Gotbaum, the Controller, Executive Associate 
Director, Office of Management and Budget, and Donald V. 
Hammond, the Fiscal Assistant Secretary, Department of the 
Treasury. If you gentlemen will stand and raise your right 
hands. And anybody that's also going to help you with that from 
the staff, please have them stand so we don't have to swear 
them in. Do you have anybody behind you?
    Mr. Gotbaum. No.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note that both have affirmed the 
oath and we will now start with Mr. Gotbaum, who's had a very 
rich career in government.

 STATEMENTS OF JOSHUA GOTBAUM, CONTROLLER, EXECUTIVE ASSOCIATE 
   DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET; AND DONALD V. 
HAMMOND, FISCAL ASSISTANT SECRETARY, DEPARTMENT OF THE TREASURY

    Mr. Gotbaum. Mr. Chairman, thank you very much. I 
appreciate the opportunity to be here today. Mr. Chairman, I 
have been Controller since the end of November and before I 
start, and I realize my time is limited but I just wanted to 
pay an individual note of thanks to the folks in the Office of 
Federal Financial Management with whom I have worked now for 4 
or 5 months. When I was confirmed, Sheila Conley, who had just 
been promoted to a Branch Chief at OMB, a management position, 
was the Acting Controller, the Acting Deputy Controller, and 
the Branch Chief. She had a lot of work to do. I'm joined here 
by Joe Kull, who we just appointed as Deputy Controller, and 
James Short, Dave Zavada, Kim Geier, Karen Shaffer. I just 
wanted to say and to put on the record the appreciation I have 
for these incredibly hard-working, very professional people.
    I also want to say before I get to the formal testimony 
that I thought General Walker's characterization of the state 
of Federal financial management, which is what we do want to 
talk about today, was accurate.
    We have made very substantial progress. We're proud of it. 
It was the result of a lot of effort. We also have a heck of a 
long way to go. I thought, Mr. Chairman, that the most useful 
thing I could do to start is to talk about where we've come 
because 10 years ago when Congress passed the CFO Act, no 
agencies prepared financial statements. The Federal Government 
as a whole couldn't produce consolidated financial statements, 
let alone audited financial statements. Now agencies issue 
those statements annually and the Federal Government, and my 
colleague Don Hammond will talk about it, has produced its 
third governmentwide financial statement. We have plenty to do 
but the fact is we've come a long way.
    In 1990, the Federal Government did not have a set of 
governmentwide accounting standards. We buckled down. We 
created the Federal Accounting Standards Advisory Board and 
over the years they have produced a set of standards. This past 
year we have accomplished something of which we are quite 
proud: the AICPA has recognized FASAB standards as generally 
accepted accounting principles. So we've created a set of 
standards and they have been recognized by the international 
standard setting community as ``generally accepted accounting 
principles.''
    Financial management systems, such as they were, did not 
keep standard accounts, couldn't communicate with each other, 
and couldn't provide accurate, timely or meaningful 
information. Let's be clear, Mr. Chairman, many of those 
challenges remain today. General Walker was entirely accurate 
in that regard. But we are making progress.
    We have developed standards for these systems. We've 
established a program jointly with the GAO, the Joint Financial 
Management Improvement Program Office for comprehensive testing 
of these systems, and we've said to government agencies 
``Unless the financial systems you buy pass muster in these 
tests, you can't buy them.''
    Mr. Chairman, there's plenty yet to achieve but the 
community has made real strides. This is the result of a lot of 
work by thousands of people. They track down financial 
information that the Federal Government had never before kept. 
They recorded that information in standardized accounts using 
standards we didn't before have. They developed new computer 
systems to maintain those accounts. They created financial 
reports that we never before made and they had those reports 
independently audited. I lay all this out, Mr. Chairman, 
because I think it is important we all recognize that this is 
an extraordinarily complicated and difficult endeavor.
    Let me turn to the 1999 financial statements for the 
agencies. Thanks to the miracle also of modern technology and 
thanks to your staff, if you look at the chart, we have, as 
General Walker said, made progress in the agency reports each 
year. Within the last year, we have improved in timeliness 
because obviously one of the most important things about 
financial information is: it's got to be timely to be used. 
Last year 15 of the 24 CFO Act agencies came in by the 
deadline. This year we got 19. I will tell you Mr. Chairman, we 
would have had one more, but one agency that had achieved a 
clean opinion wanted to take the time to talk with the GAO and 
convince themselves that they were all doing the right thing, 
so they held off a few days to have that conversation. So from 
my perspective I think it would actually have been 20.
    Also, Mr. Chairman, the quality of those statements has 
been improved. Last year by this time there was an issue of 
both timeliness and cleanliness. We had 8 of the 24 CFO Act 
agencies that had clean opinions. Ultimately 12 made it. This 
year we have already received 13 clean opinions. The two 
agencies that have not yet reported did achieve clean opinions 
last year, so we're hopeful that number might even go up, and 
might be as much as 15.
    Within those numbers, Mr. Chairman, I think it's important 
to recognize some real progress. The Departments of Commerce 
and Transportation, which last year had disclaimers, because 
their accounts were in such shape that their auditors couldn't 
express an opinion at all, this year got a clean opinion. The 
FAA got a clean opinion. The Departments of Health and Human 
Services, Energy, Veterans Affairs, and the Health Care 
Financing Administration within the Department of Health and 
Human Services moved from qualified opinions to clean opinions. 
This is real progress, Mr. Chairman.
    Now, we should also be frank that we had hoped to do 
better. Even as late as January of this year, all of the 24 CFO 
Act agencies expected that they would be able to meet the March 
1 deadline and 18 of them expected that they would be able to 
achieve clean opinions. Over the course of the first several 
months of this year as those agencies worked with their own 
financial information and worked with their auditors, a number 
of them found that their accounts did not meet standards. In 
some cases they could not reconcile new systems with old 
systems or they could not reconcile accounts from one part of 
their agency with accounts from another part of an agency. For 
a variety of different reasons, they discovered issues that 
made their financial reports incapable of meeting these 
standards. In some of those cases those issues could not be 
resolved by the March 1 deadline. In two of those cases the 
agencies slipped from last year.
    What are we going to do about it? We're going to do what we 
have been doing: OMB, the Treasury, and GAO are jointly working 
with all of those agencies that are not clean, with all of 
those agencies that are not timely. We are working on both 
their statements and their systems to make sure that they 
continue to progress and that next year we see continued 
progress.
    I want to make a second point: despite the fact there has 
been undeniable progress, there's a lot to do. This committee, 
Mr. Chairman, was intimately involved in the Government's 
involvements in Y2K. You know the level of effort, the 
difficulty, and the complexity that is involved any time you 
talk about changing a system. Upgrading and improving the 
Federal Government's financial systems is, if anything, an even 
more complicated task. There are hundreds of computer systems 
in the Federal Government. Many of them were designed before 
there were financial standards. Many of them were designed 
without financial accountability in mind. As a result the task 
of upgrading them, modernizing them, improving them, which is 
absolutely essential as General Walker said, to being able to 
produce reliable timely statements, it's a huge and enormous 
task. Congress helped by passing the Federal Financial 
Management Improvement Act and giving the force of law to this 
obvious and clear need, and we are working to do so.
    The only thing I want to say beyond that on this subject, 
Mr. Chairman, is that as in Y2K, we think it is quite important 
that there be a recognition of the difficulty of the task and 
continued pressure as to the importance of the task.
    I realize time is short but I did not want to pass by, 
since I know this committee has a range of concerns about 
financial management, without at least mentioning some of the 
other financial management issues that we do pay attention to, 
that we are working on. I will leave it to you as to whether 
you want to deal with them in questions, but we are working to 
implement the Debt Collection Improvement Act and improve the 
way the Federal Government handles its financial portfolios.
    We've set up a priority management objective--I know you're 
familiar with the PMOs--to work on this issue. We've set up a 
priority management objective to deal with the issue of 
verifying that the right person gets the right benefit, to deal 
with these issues of reducing erroneous or improper payments. 
We have set up a priority management objective to deal with the 
issues in computer security and we have done one as well for 
capital planning and systems because we think the mandate that 
the Congress laid out in Clinger-Cohen is essential to be 
implemented and to be implemented assiduously.
    In closing, Mr. Chairman, I just want to lay out a 
comparison. We think this job is important and difficult and I 
think it's important to recognize that the progress is very 
real. It might be useful for the committee to consider a 
comparison, which is State governments.
    State governments, as General Walker mentioned, were ahead 
of the Federal Government in developing modern financial 
reporting. They began in the 1970's to develop audited 
financial statements. In 1980, Standard & Poors--you'll forgive 
me, Mr. Chairman, I'm a former investment banker so as a 
result, I look to the Standard & Poors for some benchmark. In 
1980, Standard & Poors said to the States, ``if you don't have 
financial statements audited in accordance with GAAP on a 
timely basis, we are going to downgrade you. We are going to 
affect your rating.''
    So that was 1980. Ten years later, Mr. Chairman, 10 years 
later, 43 States of the 50 issued GAAP based statements, and 
half of them had clean opinions, half. The Federal Government 
has been issuing agency financial statements for 4 years and 
this year, Mr. Chairman, fiscal year 1999, more than half of 
them will be clean. So we have in the Federal Government done 
in 4 years what State governments took more than a decade to 
do.
    We're going to continue these efforts. We think they are 
extremely important. We think the continued support and 
sponsorship of the Congress is essential and the reason we're 
going to do so again, to take a lead from my colleague and 
friend General Walker, is because we view these financial 
reports as an essential tool in implementing GPRA, in 
integrating management and resource decisions to financial 
information and, taking a lead from my friend again, to provide 
accountability people expect and deserve from their government.
    Thank you.
    [The prepared statement of Mr. Gotbaum follows:]
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    Mr. Horn. Thank you. I just have one question before I call 
on Mr. Hammond, but that relates directly to OMB. Last year the 
administration set a goal of receiving a clean audit on the 
Government's 1999 consolidated financial statements. Now, in 
July 1999, you projected that 21 agencies would receive clean 
opinions but last month you revised the number to 18. Now we 
have 13 with clean opinions. What's the story on that?
    Mr. Gotbaum. As I mentioned in my testimony, Mr. Chairman, 
we think it's important to set goals and to be ambitious in our 
expectations for the agencies. This is an important effort and 
it's one we take very seriously. The agencies have been working 
and we, all of us, GAO, Treasury, and OMB, have been working 
with them to get their financial accounts in order. As recently 
as early January, all of the agencies thought they could meet 
the March 1 deadline and 18 of them thought they would be able 
to produce financial reports on which they would be able to get 
a clean opinion in some cases their auditors are GAO, in some 
cases their auditors are IGs, and in some cases they are 
private financial firms. In the process of developing their 
financial reports, a number of agencies found that they could 
not get clean opinions for a range of reasons. I'll give you 
just some examples so you get a sense of this, sir.
    One agency did something that we think is absolutely 
essential: they installed a new financial management system. We 
think automated reports matter. One of the things that you must 
do when you install a new financial management system is you 
need to reconcile it to your old one. You need to transfer your 
data and make sure your accounts reconcile. That proved to be 
an enormous task and they couldn't finish it by March 1. They 
asked their auditor if they could keep going and their auditor 
said ``no, I don't think this is something that can be resolved 
in a couple of weeks,'' and so that agency got a disclaimer 
whereas before they had gotten a clean opinion.
    Other agencies found that when they were trying to 
reconcile information from their bureaus, that they didn't 
match the central accounts. This is again a little like Y2K, 
Mr. Chairman. When you find something that doesn't match, you 
then need to go back and figure out why these two things don't 
reconcile. And what happened is a number of agencies just 
couldn't do so.
    We think two things are important. One is that we encourage 
progress and we continue to encourage progress and we continue 
to hold people accountable, to steal a phrase from my friend 
here again. We also think it's important to recognize when 
there is progress. My message here, Mr. Chairman, is that 
although we are a long way from the promised land, we've made 
very real progress.
    Mr. Horn. Well, let me just followup with that. I noted in 
the earlier data that in 1999, July 1999, you projected 21 
agencies that would receive clean opinions. Then last month you 
revised that number to 18 and now we presumably have 13 clean 
opinions; is that right?
    Mr. Gotbaum. We have 13 so far, Mr. Chairman.
    Mr. Horn. As I understand it, when you released some data 
from your office on March 27, that was 18 agencies met your 
goal of receiving clean opinions. So I'm just trying to get it 
straight as to what your goals are going to be in a number next 
year. Are you saying everybody or are we saying 20. Are we 
saying 30, what?
    Mr. Gotbaum. In the budget, Mr. Chairman, when we put it 
together last fall we canvassed the agencies and even as late 
as January when we published the budget, 18 thought they could 
get clean opinions and we listed that as a goal. It is a goal. 
And for the reasons that I described, not all the agencies met 
their goal. We intend to keep pushing both to get clean 
opinions and to follow on the other point that both you and 
General Walker made, which is to make sure that we have the 
basis, we have the financial systems, et cetera, to continue to 
meet these goals on a reliable basis. That's really how we view 
our job.
    Mr. Horn. Thank you.
    Mr. Hammond, you have a rich background in government. When 
did you join the Treasury?
    Mr. Hammond. 1980. February 1980.
    Mr. Horn. I remember when I first came to this town as a 
young congressional fellow in 1950's the regard for Treasury 
and its career service there was the highest of any government 
agency and department. So I thought you might well have come up 
through that route and I noticed you now have a very awesome 
job, which is to be the Fiscal Assistant Secretary, and we 
welcome you and I know you've been before us before on loans 
and other things dear to my heart.
    Thank you. We're glad to have you here.
    Mr. Hammond. It's my pleasure.
    Mr. Chairman, I'm pleased to appear today to discuss the 
matters involving the third annual financial report of the U.S. 
Government that we've issued in accordance with the Government 
Management and Reform Act. First, I'd like to thank you, Mr. 
Chairman, for your continued focus on the priority need to 
improve financial accountability and reporting in the Federal 
Government. And on a more personal note, I want to express my 
sincere appreciation for the outstanding effort and long hours 
of countless members of Treasury staff, especially at the 
Financial Management Service, GAO, and OMB, in making this 
report possible. A large number of the audience today is made 
up with professionals from Treasury and Financial Management 
Service who literally have spent an incredible couple of weeks 
making sure we met our timeliness objective, and I want to 
thank them very much.
    While we have made steady progress and improvements over 
the last few years, significant challenges must be met before 
we can produce entirely reliable financial statements of the 
highest quality for the U.S. Government. The Department of the 
Treasury has been and continues to be a strong proponent of the 
development of financial statements for government agencies and 
for consolidated financial statements for the Government as a 
whole. Timeliness of reporting is an important first step in 
this process and it's one we always intend to meet.
    The financial report is prepared based on the accrual basis 
of accounting as promulgated by the FASAB, which was this year 
designated as generally accepted accounting principles by the 
American Institute of Certified Public Accountants. We are 
extremely pleased and proud of this accomplishment and believe 
that GAAP recognition will improve the professionalism and 
public perception of our reports.
    I think it's also interesting to note that the Federal 
Accounting Standards Advisory Board was formed, as my 
colleagues have pointed out, in 1980 through the joint efforts 
of GAO, OMB, and Treasury. I think what you've seen is 10 years 
of three agencies working hard together for a common purpose 
and that's a great example of the type of work that's been 
done.
    Given the daunting challenges that faced us when we began 
this process just over 3 years ago, we have made substantial 
incremental progress this year. The preparation and audit 
processes are a rigorous one which must be completed subject to 
severe time constraints. It involves collecting and analyzing 
data from over 70 Federal entities. Since issuing the first 
consolidated financial statements, we have been working in 
close cooperation with OMB, GAO, and the program agencies to 
improve the quality of the report.
    This past year we continued to focus much of our attention 
in three critically important areas: Consistency of financial 
information, elimination of intergovernmental transactions, and 
reconciliation of fund balances. I am pleased to report that we 
have made substantial progress in each of these three areas, 
because it is essential that the information provided by the 
agencies to Treasury for inclusion in the financial report be 
consistent with the information in the individual agency level 
financial statements. The agency level financial statements are 
audited separately and the audit of the governmentwide 
financial statements relies in large measure on the audits 
conducted of the agency level financial reports.
    During the past year, OMB, Treasury, and GAO have worked 
diligently to dramatically improve the consistency of the 
financial information. We convened an interagency working group 
to identify barriers to consistency and to recommend solutions 
which resulted in a new verification process. This procedure I 
might point out is based on the U.S. Government's Standard 
General ledger, or SGL, which is required to be used in all 
agency financial systems by FFMIA. In addition, Treasury worked 
with each agency to reconcile their fiscal year 1998 ending net 
position. This reconciliation effort has improved significantly 
the opening balances for this year's report with the ultimate 
goal of having Treasury's opening balance agree with each of 
the agencies' opening balances.
    The new process we're using to ensure consistency is a 
considerably more rigorous one. We are now in a position to 
review the data and do analyses to improve its consistency. 
However, this process is constrained by tight timeframes, 
dictated by the report's due date. We expect continued 
improvement in this area as the agencies become more 
comfortable with the reporting requirements. We feel 
comfortable that progress is being made although the 
consistency problem has not yet been resolved.
    The audits have also disclosed that the agencies continue 
to be ineffective in identifying transactions with each other 
so that transactions can be reconciled or eliminated in the 
preparation of the governmentwide statements. If these 
transactions are not properly eliminated, total government 
assets, liabilities, revenues and expenses will be misstated by 
the net amount of these transactions. Starting 2 years ago, we 
provided two-digit identification codes for agencies to use in 
identifying their governmental transaction partners. The 
consistent use of these codes is critical to our ability to 
eliminate these intragovernmental transactions. During fiscal 
year 1999, trading partner data was distributed to agencies so 
that they could review and analyze the information and I might 
note that this year we received over 99 percent of the 
financial dollar value of transactions identified with those 
codes.
    This past year we continued to focus also on resolving the 
intergovernmental elimination areas for the transactions 
between program agencies in either the Bureau or the Public 
Debt of the Federal Financing Bank, both Treasury entities. We 
instituted a new policy requiring program agencies to confirm 
and reconcile their end of fiscal year investment and borrowing 
balances with these entities. I can report for this year's 
activity the unexplained difference issue for these types of 
transactions has been resolved. Our progress in this area is 
evident when one recognizes that gross intragovernmental 
investments and borrowings not including annual activity amount 
to more than $2 trillion.
    During fiscal year 1999, Treasury also put in place new 
procedures for reconciling transactions with the Department of 
Labor relating to the Federal Employees Compensation Act and 
transactions with the Office of Personnel Management relating 
to employee benefits.
    Regarding buying and selling transactions between Federal 
agencies, we issued elimination guidance to all agencies 
covering accounting and reconciling procedures for fiscal year 
1999 reporting. The requirements for reconciliation with agency 
trading partners on a regular basis are more detailed and 
formalized than in previous years and are designed to create a 
disciplined routine approach to these transactions.
    Treasury has also made significant efforts to assist 
agencies in reconciling their fund balance amount with the 
amount reported to them by Treasury. The fund balance amount is 
an agency level asset account and it reflects the available 
budget spending authority for that agency. We regularly notify 
agencies of their discrepancies in their fund balances and work 
with them to help them resolve them in a timely fashion.
    During this past year, Treasury issued policy and detailed 
procedural guidelines for reconciling the fund balances and 
offered numerous education programs. These differences are for 
the most part timing differences and most are now quickly 
resolved. As an example of that, when you review those 
differences greater than 5 months old, in explanation, in three 
key areas, deposits, disbursements, and checks issued, the 
differences governmentwide are $91 million, $58 million, and 
$251 million respectively. We do, however, agree that further 
improvements in this area need to be made. Reconciliation of 
fund balances needs to be a routine, ongoing accounting 
function that is done on a timely basis. Agencies have made 
significant strides to institutionalize the process and we 
expect more progress this year.
    Despite the substantial progress in the past year, the 
current state of Federal financial reporting requires 
significant improvements in a number of areas. I am confident 
that with the coordinated, committed effort of Treasury, OMB, 
the CFO council, and the GAO these improvements will be 
achieved. In the short term, we will continue to make those 
changes necessary to improve the preparation of our report. In 
the long term, as I announced last year, we are embarking on a 
project to make fundamental changes in the way we do Federal 
accounting.
    Our most significant short-term challenges in addition to 
fund balance reconciliations continue to be in three specific 
areas and they come as no surprise: Consistency of agency data, 
eliminating intragovernmental transactions, and providing a 
complete reconciliation of the budget results with the 
financial statements. Regarding consistency in April we will 
meet with GAO and OMB to jointly evaluate the new process that 
we just implemented and formulate further improvements in 
procedures, guidance, and analysis.
    Regarding the elimination of intragovernmental 
transactions, most of our efforts will be to identify and put 
in place additional processes to improve reconciliations with 
Labor and OPM as well as to reconcile buying and selling 
transactions between Federal agencies. We will be successful 
when we have accomplished this completely.
    Regarding reconciliation of the budget results, we have 
developed a data model to systematically reconcile the majority 
of the necessary transactions. We will be testing this model 
this summer. We have pilot agencies and, working with GAO, we 
hope to be able to make significant progress in this area this 
year.
    A further challenge for us in improving the reliability and 
accuracy of financial information is the need to increase the 
use of the SGL in agency accounting systems. As agencies move 
closer to full compliance with FFMIA and more importantly use 
SGL base data as the basis for statements, financial reporting 
at every level will be considerably improved.
    For the future, I'd like to close with just a couple of 
thoughts of where we're going. The preparation of this report 
has highlighted that our current systems for reporting budget 
execution information also need to be improved. In conjunction 
with the changes being made, Treasury working through its 
governmentwide accounting modernization initiative at the 
Financial Management Service will improve the processes 
associated with the reporting of budget information as well as 
associated with maintaining each fund account balance with 
Treasury. This project will fundamentally change the processes 
that program agencies use to report financial data to the 
central agencies and provide program agencies with more useful 
and timely presentation also of their data and improve the 
reliability of governmentwide totals published by OMB and 
Treasury.
    On a short term basis we intend to make improvements using 
Web based technology to allow information from our Legacy 
systems to be accessed. In the longer term, we intend to make 
fundamental changes to the overall processes to streamline 
reporting, eliminate reconciliation burdens and further improve 
access to accounting data. The major objectives are to provide 
program agencies with one stop shopping using Internet 
technology to retrieve information provided to Treasury and to 
greatly reduce the reporting and reconciliation burdens on the 
agencies.
    In closing, improving financial management and 
accountability has been and remains an important Treasury 
priority. We have taken and will continue to take actions to 
correct weaknesses and address problems in the preparation of 
the governmentwide financial statements and will continue to 
take a leadership role in providing guidance and assistance and 
support to agencies in their ongoing efforts. Our ultimate 
success will be achieved when we can reliably report on the 
disparate financial activities of the many components of 
government seamlessly, as if they were a single entity.
    Thank you, Mr. Chairman. That concludes my formal remarks 
this morning.
    Mr. Horn. I thank you. We appreciate the complexity to 
which you went.
    [The prepared statement of Mr. Hammond follows:]
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    Mr. Horn. Let me ask you this question.
    Under the Government Management Reform Act, agencies are 
required to submit audited financial statements by March 1 
following the end of the fiscal year. In your testimony, a 
number of you have noted that five agencies did not meet the 
March 1 deadline, and OMB noted two still have not reported. 
Social Security, on the other hand, managed to have audited 
financial statements 6 weeks after the end of fiscal year. 
Obviously, my query to the administration is, why is there a 
disparity in agency reporting performance and what prevented 
the five agencies from meeting the March 1 deadline?
    Mr. Gotbaum. Probably I should take a crack at that, Mr. 
Chairman.
    Mr. Horn. Yes.
    Mr. Gotbaum. The reason that different agencies have 
different performance is because some agencies started earlier 
than others.
    The Social Security Administration, for example, very 
admirably a long time ago instituted the requirement that they 
report and began developing the automated computer systems that 
permit them to do so reliably and quickly. That is precisely 
the goal Don talked about that we aim for for the government as 
a whole.
    Most other Federal agencies are in a different 
circumstance. They are simultaneously having to develop the 
account structure, because they don't all use the standard 
general ledger, and develop the computer systems to use that 
account structure, to integrate their various enterprises. And 
different agencies are at different levels of the process.
    Mr. Horn. Is there a penalty that the executive branch has 
on any of the agencies that are laggards?
    Mr. Gotbaum. We are active with the agencies and as a 
group--GAO, Treasury, and OMB--we meet with the agencies. We 
met with them in the fall. We have talked with them continually 
during the audit process, and we will continue doing that.
    Mr. Horn. The answer to the question is--the penalty is 
talking to GAO, OMB, and Treasury? What do you do? If you have 
constantly some agencies that don't get it, what can you do 
with them?
    Mr. Gotbaum. Mr. Chairman, when we both testified before 
House Rules a week or so ago, I made a point that some of the 
activities that we do in the course of management internally at 
the executive branch are what I will characterize as ``private 
criticism.'' I think it behooves us not to say we affected 
people's budgets, affected personnel decisions, etc. But I 
think it is important and entirely appropriate for the 
committee to ask.
    I think it is important that the committee should know that 
OMB is involved in the budgetmaking process actively for each 
of these agencies. And we are--courtesy of you, we are also 
involved in the personnel decisions. Without getting into 
individual cases, I wanted to say that we work on it case by 
case, agency by agency, and their circumstances are different.
    Mr. Hammond. If I might add, as we focus more and more on 
resolving the issues on a governmentwide basis, timeliness has 
a key factor in playing into that. So it receives a lot of 
attention with regard to their individual statements but also 
in solving the governmentwide reporting issues.
    Mr. Walker. Mr. Chairman, if I can reiterate a couple of 
things.
    First, Social Security, as an example, voluntarily prepared 
financial statements, voluntarily decided to have an external 
audit before it was required to do so; and I think Social 
Security in many ways has been a model in a variety of ways 
with regard to management. They had commitment from the top and 
got their systems together, and the result of that is that they 
have not only gotten clean opinions for a number of years, but 
they have been able to issue their financial statements 6 weeks 
after the end of the year.
    Just to reiterate what I said before, it is important to 
get these clean opinions. That is an objective milestone, but 
in many cases I think too much emphasis gets placed on that 
such that people think that after they have gotten a clean 
opinion the ball game is over. They have won. They have hit the 
milestone. And, in many cases, they are just getting started.
    Mr. Gotbaum. Mr. Chairman, one further point. General 
Walker is exactly right. We put a lot of emphasis on the fact 
that we are getting an increasing number of clean reports, but, 
frankly, I take as much pride from that last set of lines on 
the chart, which is that the number of agencies whose accounts 
were in such shape that no opinion could be expressed at all, 
disclaimers, has gone from 13 in fiscal year 1996 to 5 in 
fiscal year 1999. So General Walker is exactly right. There is 
more to this game than just clean opinions, but we think that 
we are working agency by agency and making very real progress.
    Mr. Horn. I am delighted to have Mr. Kanjorski for the 
ranking member today. He may take such time as he wishes to ask 
all of the questions that he wants.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Walker, when they arrive with that clean bill of 
health, they do not carry on and keep an accounting system 
ongoing, is that the problem that you are facing?
    Mr. Walker. The issue really is that it is not just getting 
a clean opinion on your financial statements as of a date, 6 
months after the end of the year. It is making sure that you 
have sound internal controls throughout the year, and it is 
making sure that you have timely, accurate financial and 
management information throughout the year such that you can 
make informed decisions to maximize performance and ensure 
accountability.
    I think what we are seeing, quite frankly, is that there 
has been such a change in the world with the advent of 
technology that, while getting clean opinions on historical 
financial statements is important and it is something that 
ought to be demanded, the fact of the matter is that of 
increasing importance are things about internal controls, 
things about basic systems, things about projections looking 
forward, things about results and what type of results are 
generated for the dollars that have been provided. And so I 
think we have to recognize that getting a clean opinion is 
important, but a lot of times these agencies will get clean 
opinions but they don't have their act together for day-to-day 
decisions.
    Mr. Kanjorski. Have we provided the funds consistent with 
getting their accounts together?
    Mr. Walker. There are circumstances under which we are 
going to have additional targeted investments in order to get 
where we need to be.
    For example, if you look at the clean opinions, there is no 
doubt that there has been progress, and if you look at the 
number of disclaimers, that is great, but if we look at 
compliance with the Federal Financial Management Improvement 
Act, an overwhelming majority are not in compliance with the 
act and an overwhelming majority are not in compliance with 
that act because of computer security and other systems 
problems and because of these legacy systems.
    I think it is critically important that we recognize that 
not just for financial management but for accountability and 
performance management reasons we have to look at whether or 
not there is being enough invested to get those to where they 
need to be to ensure that we have a results-oriented 
government.
    Mr. Kanjorski. There is a movement on the Hill among a lot 
of Members seriously now looking at a 2-year budgeting cycle. 
Would that be helpful in the process of management of the 
executive branch of government?
    Mr. Gotbaum. Coming from the Office of Management and 
Budget, I should say that it is our view, Mr. Kanjorski, since 
we are intimately involved in the management and budgeting 
process, we have thought that it did make sense to consider a 
2-year budgeting cycle for two separate reasons. One is that 
over the past several years what we have found is that the 
decisionmaking process, both internal to the executive branch 
and the appropriation and budgeting process in the Congress, 
has begun to overlap. It has become more involved, it has 
become more time-consuming, and so we are getting to the point 
where we are in the process of spending a lot of time, 
sometimes in the same day, negotiating one fiscal year's budget 
while attempting to put together the next year's. So we think 
that there is some benefit from working on a 2-year process 
rather than one.
    The other reason is that it would also permit the 
opportunity for both us and for the Congress in the off year, 
whatever it is, to focus on oversight and management and to 
give a stage, if you will, for these issues which we think are 
very important, but which necessarily compete in your 
decisionmaking and in our decisionmaking for time. So we think 
that there is a benefit, and we hope the Congress will consider 
it.
    Mr. Horn. I might add that we--at least I agree with you, 
and I so testified before the Rules Committee, that the 
appropriations subcommittees ought to do a better job, and we 
think that they could with at least a pilot experiment and see 
what happens.
    Mr. Kanjorski. My experience in the last 15 years of 
Congress is that the organizational structure is woefully 
inadequate in terms of who has jurisdiction over what. For 
instance, I am involved in examining new technology of--
nanotechnology. I look through the departments and bureaus, and 
there is no individual who has responsibility over that. It is 
scattered throughout. Four or five departments have programs in 
this. It seems to me that it is an extraordinary staffing cost, 
and it tends to be a jurisdictional dispute. Who has more 
troops in the field and who has the largest segment of the 
budget so they are bigger than the other guy?
    Over the last several years I have been coming to the 
thought that when the Congress tries to legitimately inquire 
into the functioning of the executive branch, we don't do a 
very good job because of the mismatch of jurisdiction and 
function within the government.
    Now the question is, all of that is a prelude. Do you think 
that it is time in the beginning of the 21st century with the 
advantage of having five living Presidents as of January 21, 
former Presidents, to ask and maybe form on the executive 
branch something similar to the Hoover Commission for 
reorganization of the executive branch but simultaneously to 
study and reorganize the legislative branch to make them more 
synergistic in relationship and jurisdiction?
    If we did that, how long would it take to establish the 
plan and how long would it take to implement the study?
    Mr. Walker. Mr. Kanjorski, 2 days ago, I testified before 
the Senate Governmental Affairs Committee on the issue of 
management challenges in the 21st century. That testimony was 
directly relevant to your question.
    One of the things that we used as a basis for that 
testimony was our new strategic plan which summarizes the major 
challenges facing our country and Nation for the next 6 years 
in accordance with GPRA's strategic planning horizon. It is 
clear when you look at that plan that there are major 
challenges both in the legislative branch as to how it is 
organized and whether it can effectively address those 
challenges as well as the executive branch. Because, in many 
cases, what we find is that the organizational structure was 
set up years ago, and that more and more we are having issues 
that require a multiplicity of skills and entities to get 
involved in order to solve it.
    And so we do believe at the GAO that the time has come for 
government to step back and look forward rather than back and 
ask ourselves about whether or not we are focusing on the right 
things and whether we are organized in the right manner in 
order to maximize performance and assure accountability.
    We also issued a report 2 days ago at that same hearing 
noting a tremendous number of duplications and overlaps in 
areas like food safety, anti-terrorism, etc, where in food 
safety you have 6 different entities involved and anti-
terrorism, you have 40, and in some cases you don't have 
anybody in charge. Yes, the time is right. A commission is one 
possible option.
    There were two Hoover commissions. One was more successful 
than the other, and I think we ought to learn from the ones 
that are more successful versus the ones that are not. We would 
be happy to work with Congress to try to provide additional 
information as to what has and hasn't worked in that regard.
    Mr. Kanjorski. Do you have any idea as to how long it would 
take to draw the plan? If Congress were to act in the latter 
part of this session, how long would it take to send something 
up on how it would function?
    Mr. Walker. Senator Thompson and Senator Lieberman 
introduced a bill which focused more on the executive branch. 
The legislative branch issue did come up in the hearing, but I 
don't think that it is the subject of the bill. I think they 
were talking about a period of 1\1/2\ to 2 years. I wouldn't 
want to comment whether that is adequate or not.
    Mr. Kanjorski. Is that a defined plan or was it to go 
through the study?
    Mr. Walker. That would be for the commission to report. 
That is, I think, potentially ambitious. I think their thought 
was to try to get it authorized and get it--the commission 
started and to end within one Congress. Now that is ideal. It 
may or may not be possible.
    Mr. Kanjorski. We have been working diligently for the last 
25 years on campaign finance reform and have a tendency to run 
into difficulties. One of the thought processes I have been 
going through is that seems to me to be as a result of its 
immediate effect on the political advantages or disadvantages 
of the majority, the minority, and the various party structure.
    Would it be possible to do executive reorganization and 
legislative reorganization and take maybe 8 or 10 years for it 
to be actually triggered so that those of us who make the 
decision will not be interfering with whatever our relative 
positions are in government and will probably be out of 
government by the time it is implemented and, therefore, it is 
not a threat to the personalities involved, either in the 
executive branch or the legislative branch?
    Mr. Walker. It is not uncommon when one is engaging in a 
major restructuring that there be a phase-in with regard to 
those restructurings. From a practical standpoint, for a 
commission to be successful, part of the issue is that it has 
to be focused on what I would call a theme of good government 
which inherently is nonpartisan or nontheological. It is not 
what government is going to do, per se, but how can government 
best go about attacking the issues, that there has already been 
decisions regarding what government ought to be doing, so how 
best can we go about it.
    I think that has the greatest degree of hope of being able 
to accomplish and being done on a bipartisan basis. When you 
get into the issue of what government ought to be doing, and 
there is a legitimate need to talk about that, too, at the dawn 
of the 21st century, that is inherently important, but it is 
inherently more difficult.
    Mr. Kanjorski. The financial statements and the progress 
that you have made over the last several years, are they 
structured in such a way that they would be helpful in that 
process so there is better understanding and accountability? Is 
this system able to be utilized for the next step, if you will?
    Mr. Hammond. I will take a stab at that.
    I think the governmentwide financial statement, as it is 
currently organized, does allow you to get--once the data 
behind it is reliable, to get an accurate picture of the scope 
of government operations in a nonagency-specific fashion. It 
tends to present the information by program or core function of 
government and consolidates and brings in the pieces from each 
of the agencies that would flow into those various components. 
That is one of the reasons that it is so difficult to put it 
together, is to try to piece the pieces out of this agency and 
that agency that flow together in a particular format.
    I think it would be somewhat helpful in giving at least the 
financial understanding of the scope of the government's 
operations and where its resources are most heavily devoted, 
but sometimes that can be deceptive. Certainly Social Security 
payments are a huge portion of the government's outlays but as 
a practical matter represent a very small portion of the 
government's operations from a personnel standpoint, for 
example.
    Mr. Kanjorski. You can say off accounting and off the 
organizational structure. Even though there are large segments, 
we are talking about the operating portion of government?
    Mr. Hammond. Right.
    Mr. Walker. Mr. Kanjorski, for the record, I think it is 
important to note that we at GAO, which is an entity, as you 
know, that has a broad view of the government, we get involved 
in everything that the government is doing. We are using the 
strategic plan that I mentioned earlier as a basis to 
reorganize and realign ourselves to be better positioned for 
the future. And I might commend to you and the chairman this 
accountability report that we just issued last week, which is 
our accountability report for fiscal year 1999 which includes 
our financial statements and our performance report but also a 
one-pager on our strategic plan which, frankly, might be 
helpful with regard to the issue that you are talking about.
    Mr. Kanjorski. I don't know whether I should ask you a real 
subjective question, but we used to have an office around the 
Hill that served the Congress with technical assistance. I 
think the Contract with America shot that down, and we seem 
less prepared than ever to have an understanding of the 
technical side of what government is dealing with. Is there any 
way that we can find a new institution of that nature to 
substitute for the role that it used to play?
    Mr. Walker. Mr. Kanjorski, I don't have intimate 
familiarity with what happened to that entity, but you have the 
General Accounting Office. I think the amount of knowledge that 
exists within that agency----
    Mr. Kanjorski. Mr. Walker, I appreciate your agency; but, 
quite frankly, the time between the question and the answer, 
three wars could be fought and resolved. Our problem is for 
Members, when we get things that are far out of our realm of 
understanding, to act and decide intelligently, we need a 
faster response than is generally available.
    Mr. Walker. I am glad you mentioned that. Because one of 
the things that we are doing right now is looking forward and 
trying to reinvent ourselves. We are looking at our portfolio 
of products and services, and you are probably talking about 
our blue cover reports, and it does take a considerable amount 
of time to get those out. We will always do those, but it is 
clear to me that our products and services need to be modified 
in the future in order to provide more technical assistance and 
quick turnaround assistance. There needs to be a more strategic 
partnership between the committees and the GAO to really focus 
on the most important issues where we can make a difference, 
and I think the Government Reform Committee is uniquely 
positioned in the House to deal with the range of cross-cutting 
issues that have to be focused on.
    Mr. Kanjorski. Let me give you an example.
    We had a hearing in the Banking Committee last week on 
reexamining the nature of regulation of government service 
enterprises. There was suggested new ways of doing things. One 
thing involved a very small authority that the Congress had 
given to the Federal Home Loan Banks, the right to have a 
super-lien capacity. It is in order to save time of placing 
liens in the Federal Home Loan Bank system that they always 
have a priority and they don't have to go through the normal 
processes in the 50 States to perfect their liens. It was 
thought that would be done away with, and they would have to 
follow the same order to perfect their liens.
    Just a brief analysis. It seemed to suggest that it would 
cost something like $50 million to implement that little 
process, when in fact all of the regulators' costs, looking at 
the new mission, was $46 million.
    I know--it was an unintended consequence. We are often 
coming up with what we think are smart solutions but are 
terribly expensive and, quite frankly, reregulating to an 
extent and not taking advantage of modern technology. That 
would be less apt to follow, but the result of that hearing was 
very interesting, too.
    Just by raising the question, it affected the markets to 
the extent that the securities being sold that day went up 
about 14 basis points; and on one small issue of $5 million of 
certificates, it cost the agency or the GSE $50 million of 
additional cost and, as a result, drove up the interest rate on 
mortgages from that agency long term for all consumers in 
America a 16th of a point or something like that. We have a 
tendency to do these things all of the time and don't realize 
that tipping the ship or standing up in the boat can be very 
dangerous if you don't know the unintended consequences.
    Mr. Walker. I am somewhat familiar with those issues 
because in a prior life I was head of the Pension Benefit 
Guaranty Corporation, and there are certain statutory liens 
associated with that.
    That is an example. You are obviously dealing with a quick 
timeframe. I think that is why you and we and other government 
agencies need to think about what can we do to make sure that 
you have the ability to draw upon the knowledge that we have in 
a timely manner, rather than having to wait on blue cover 
reports or whatever else. It is so-called technical assistance, 
if you will. I expect a much higher percentage of our resources 
at GAO will be dedicated to those types of activities because 
that is what is needed.
    Mr. Kanjorski. Very good. From everything that I hear with 
regard to the financial system that you are structuring, it is 
better than it has ever been, and it is moving forward. I want 
to compliment all of the individuals who have been involved 
with it. We have not reached nirvana, but we are still 
striving. Thank you.
    Mr. Horn. I thank the gentleman for his wise words, and I 
agree with you on what you are trying to do with GAO with 
almost strike squads, because we have a difference of time 
without question here, as opposed to, let's say, to the 
executive branch. You have fundamental documents of state such 
as the budget and the economic adviser's report and that type 
of thing, and they come at certain times and their budget 
process is at certain times in relation to us, but we haven't 
changed much in Congress over time, as you know. We didn't have 
an executive budget until President Harding was finally able to 
get it through Congress. Before that, the Secretary of the 
Treasury simply took everybody's estimates, shipped it up here 
and everybody tore that apart in 13 subcommittees, and the 
House did abolish the whole appropriations committee in the 
late 19th century, and then they found money was going 
everywhere, and then they put the appropriations committee, 
which they started in 1865, they started over again with the 
appropriations committee.
    Of course, with the Hoover Commission, you had two people 
that clicked, and that was President Truman and President 
Hoover. Franklin Roosevelt never even sent a postcard to 
Herbert Hoover. Truman was wiser and knew that there was a lot 
of experience that Mr. Hoover had done. He had been Wilson's 
food administrator in the First World War. He was Secretary of 
Commerce when it reflected every regulatory agency in this 
town. Hoover did that.
    So what happens, I find, if you are going to get reform in 
Washington, it happens with a change of party. In 1946, they 
did a splendid job in terms of the Legislative Reorganization 
Act, the La Follette Act, and the Republicans could implement 
most of it. The Democrats would not implement it. Now that is 
not that there is something wrong with them. It is the fact 
that people are dug in in this place, more so in the Senate, by 
seniority.
    I guess the prize example is little things like railways. 
It should have been with Transportation for the last 40 years. 
It hasn't been. Why? Because the long-serving Member and 
chairman from then West Virginia said, hey, I will only be 
around another couple of terms. Let's leave it with me. So the 
change came, and the gentleman who was next in line was told by 
the Speaker, Tip O'Neill, I think, that we would like to move 
it. And he said, over my dead body. You didn't make the deal 
with me.
    So we didn't get those changed until 1995 when Speaker 
Gingrich started doing all sorts of things around here. And, 
guess what, railroads went with what was then Public Works and 
Transportation, now Transportation and Infrastructure. It was 
just a matter of major barons, be they Republican or Democrat, 
didn't want to change.
    We spent $1 million when I came here in the 103d Congress 
on reform of the House in certain ways. That was a very 
distinguished group. That was Lee Hamilton on the Democratic 
side, David Dreier on the Republican side. They did an 
excellent job. Guess what? It never came to the floor. They 
didn't want reform or change.
    Mr. Walker. Mr. Chairman, two comments.
    One, inside the same report talking about reform, reform 
can take time. There is a quote from Thomas Jefferson in 1802 
where he is talking about the need for financial management 
reform in the U.S. Government. So let's hope on some of these 
things we can be on a little more timely basis.
    Mr. Kanjorski. 198 years ago.
    Mr. Walker. We didn't rush into it, Mr. Kanjorski.
    Second, I would like to add for the record my thanks to the 
GAO team that was involved in this as well as others. Because I 
know, as one example, there were many people involved over many 
months, but I know a lot of people, including a number of our 
people and Treasury people, pulled an all-nighter on Wednesday 
in order to make sure that we hit this deadline, and I think 
everyone should be complimented for that.
    Mr. Horn. My last substantive question relates to human 
capital. Are we getting the type of people that can help us in 
the new Civil Service in the next century that relate to fiscal 
resources and are we losing people? We know on the Y2K thing 
that a lot of fine people in the Federal Government were bought 
off by industry, and localities did the same thing. What are we 
doing to reach out and get top-flight people to help with this 
financial resource problem?
    Mr. Gotbaum. This is an extremely important issue. It is 
one which we in the executive branch look at and take 
seriously.
    If I may talk about a couple of things that we are doing, 
and then I think it is important to let David talk about the 
long-term view.
    Within the Chief Financial Officers' Council for the last 
several years, there has been a concerted effort both to assess 
what our needs are and how we can address them, and they have 
done a variety of things. This is under the leadership of the 
CFO of the Department of Labor. One is, change job descriptions 
to take advantage of the flexibility that we do have but we 
don't always use.
    Second, joint recruiting. Agencies' CFO shops didn't go to 
three or four or five schools to get the best and brightest, 
nor did they develop joint recruiting materials.
    So what we are beginning to do--and this is not to say that 
we have a solution or that we know that this is done, I don't 
want to mislead the committee in that regard--but what we are 
working on now is a variety of fronts to use the skills and the 
people we have and the flexibility we do have to bring in the 
talent we have, bring in the talent we need.
    We are looking at other questions like, do you need job 
designations? Do you need changes in pay scales, etc? And we 
are not at the point where we can say definitely that we don't 
have the current flexibility within the Civil Service system to 
meet this challenge. So I don't want to mislead you and say 
that we don't think that there is an issue there. We think that 
there is an issue there, and it is an issue that we are working 
on using the current authorities and asking whether or not we 
need to come to you for additional authorities.
    Mr. Walker. Mr. Chairman, as I have said on more than one 
occasion, while there have been a number of management reforms 
throughout the 1990's--GPRA, CFO Act, FFMIA, Clinger-Cohen, 
etc--the missing link in performance- oriented government is 
the people link, the human capital link.
    The Federal Government faces an emerging human capital 
crisis of significant proportion. It is smaller. Our human 
capital profile is that we are smaller and we are out of shape, 
and there are major succession planning challenges. This is an 
area likely to be on our high-risk list in January 2000. We are 
placing a lot of time and attention not only within GAO but 
governmentwide.
    I know that the President has made this a PMO, the area of 
human capital. And I also would note for the record that we 
have published at least two recent blue cover documents that 
were done on a much more timely basis, I might add, talking 
about private-sector best practices and human capital as well 
as a self-assessment guide to try to help department agency 
heads help themselves deal with these challenges; and I think 
it is a major issue that this committee needs to be involved 
with.
    Mr. Horn. I agree with you completely. We have a separate 
Civil Service Subcommittee, and that is one situation, but this 
is, as you say, a real crisis as people are starting to retire 
that were hired in, say, the 1960's and 1970's.
    The same with universities across the country. One of my 
reforms, which took me 5 years to persuade various trustees, 
was the flexible pay in the university system for 
administrators. Overnight, it changed things. Because you 
worked out a contract. What are you going to do for the next 6 
months? What goals are you going to achieve? We had 
flexibility, $10,000, got rid of all of the Civil Service bit, 
this little bit; and if you didn't say the magic word like 
Groucho Marx hanging up there, you didn't get an improvement 
and better pay.
    Focus in on the ones where you really need people. 
Acquisition and purchasing, people bought off by private 
industry, what can we do to keep them in the Civil Service?
    Mr. Walker. We need to focus on key skills and competency, 
critical occupations; and we have to end up linking performance 
management systems, meaning performance award systems, with 
strategic plans and performance plans. That's when you'll get a 
situation where you are maximizing performance and ensuring 
accountability, and I think it means in time more flexibility 
in compensation so you can pay people for skills and 
performance.
    Frankly, the American people should support that. If they 
are getting--if they are critical skills and they are getting 
performance, they are getting return on their investment, and 
that is what they care about.
    Mr. Horn. Absolutely.
    Mr. Kanjorski. We may need to study how we can provide some 
educational programs for our staff so they don't have to leave 
to go to graduate school. I probably have lost 10, 15 excellent 
staffers that would have remained for 4 or 5 years more, but 
they had to leave to get a graduate degree and could not come 
back to government because of the cost involved.
    Mr. Horn. We did have a group in the early 1960's, four of 
us that were assistants to the Democratic and Republican Whips 
in both Senate and House, we had money through the American 
Political Science Association to send them off to major 
institutions in the East and West to build their resources, and 
we were able to keep most of those people.
    Mr. Kanjorski. Does that slush fund still exist?
    Mr. Horn. No. But our basic question was, how many books 
have you read recently? And I would hate to say that the 
committee didn't do that well in answering it. We have tried to 
invest in people here, and that is obviously needed, and you 
can at least get them away for 6 months or so. If we went to 
the 2-year cycle, we could help do that in both the executive 
branch and the legislative branch.
    Well, any other questions you would like to ask your 
colleagues for the good of the order since you are all under 
oath? Don't say it is a pleasure to be here either, since you 
are under oath.
    We really appreciate your coming, and we are glad to see 
progress, and we hope our little grading system will get on a 
few Cabinet office doors so they can get the machinery moving.
    I want to thank the legislative people that put this 
hearing together: J. Russell George, staff director and chief 
counsel, on my left, your right; Louise DiBenedetto, GAO 
detailee to us; Bonnie Heald, director of communications; Bryan 
Sisk, clerk; Ryan McKee, staff assistant.
    For Mr. Kanjorski, the minority staff, Trey Henderson, 
counsel, and Jean Gosa, minority clerk.
    And we have had two people as court reporters, and that is 
Laurie Harris and Doreen Dotzler.
    With that, we thank you for the help, and we thank you for 
the testimony.
    [Whereupon, at 11:41 a.m., the subcommittee was adjourned.]

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