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76–938 PDF 2002

ARE THE FINANCIAL RECORDS OF THE FEDERAL

GOVERNMENT RELIABLE?

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,

FINANCIAL MANAGEMENT AND

INTERGOVERNMENTAL RELATIONS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MARCH 30, 2001

Serial No. 107–31

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

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

——— ———

——— ———

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL MANAGEMENT AND

INTERGOVERNMENTAL RELATIONS

STEPHEN HORN, California, Chairman

RON LEWIS, Kentucky

DAN MILLER, Florida

DOUG OSE, California

ADAM H. PUTNAM, Florida

JANICE D. SCHAKOWSKY, Illinois

MAJOR R. OWENS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. RUSSELL GEORGE, Staff Director and Chief Counsel

EARL PIERCE, Professional Staff Member

GRANT NEWMAN, Assistant

MARK STEPHENSON, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on March 30, 2001 ............................................................................ 1

Statement of:

Daniels, Mitch, Director, Office of Management and Budget ....................... 60

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

Accounting Office; and Donald V. Hammond, Acting Undersecretary

for Domestic Finance, Department of the Treasury .................................. 3

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

Burton, Hon. Dan, a Representative in Congress from the State of Indiana, prepared statement of .......................................................................... 75

Daniels, Mitch, Director, Office of Management and Budget, prepared

statement of ................................................................................................... 62

Hammond, Donald V., Acting Undersecretary for Domestic Finance, Department of the Treasury, prepared statement of ...................................... 42

O’Neill, Paul, Secretary of the Treasury, prepared statement of ................. 79

Schakowsky, Hon. Janice D., a Representative in Congress from the

State of Illinois, prepared statement of ...................................................... 77

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

Accounting Office, prepared statement of ................................................... 8

(1)

ARE THE FINANCIAL RECORDS OF THE

FEDERAL GOVERNMENT RELIABLE?

FRIDAY, MARCH 30, 2001

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL

MANAGEMENT AND INTERGOVERNMENTAL RELATIONS, 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 Putnam.

Staff present: J. Russell George, staff director and chief counsel;

Dianne Guensberg, detailee; Bonnie Heald, director of communications; Earl Pierce, professional staff member; Matthew Ebert, policy advisor; Grant Newman, assistant to the committee; Brian

Homm, intern; Mark Stephenson, minority professional staff member; and Jean Gosa, minority clerk.

Mr. HORN. The first hearing of the Subcommittee on Government

Efficiency, Financial Management and Intergovernmental Relations will come to order.

We are here today to examine the executive branch of the Federal Government’s progress in accounting for the billions of taxpayer dollars it spends each year. Those billions now add up to trillions of taxpayer dollars.

For the record, it should be clear that the previous President and

Cabinet are responsible for the balance sheets that are before us.

The General Accounting Office and the subcommittee staff have reviewed all of the audits.

Throughout the past decade, Congress has sought ways to make

the executive branch of the Federal Government financially accountable to the Nation’s taxpayers. In 1990, Congress approved,

and the President signed into law the Chief Financial Officers Act.

This law established the position of chief financial officer in each

of the 24 major executive branch departments and agencies. Similar to chief financial officers in the private sector, the government’s

chief financial officers are responsible for the overall financial management of their respective agencies.

In 1997, the Chief Financial Officers Act was amended to require

the 24 major Federal agencies to prepare annual audited financial

statements by March 1st following the end of the government’s fiscal year on September 30th. In addition, the amended law requires

the Department of the Treasury to prepare annual consolidated

governmentwide financial statements.

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The General Accounting Office is headed by the very able Comptroller General of the United States, Mr. Walker. It audits and reports on these statements by March 31st.

The General Accounting Office’s most recent report for fiscal year

2000 is being released today. Based on the GAO report, the General Accounting Office and agency auditors’ findings, the subcommittee is also releasing its report card today grading the 24

agencies on their progress in improving their financial management. The ultimate goal is to provide reliable information on program costs and benefits. This will allow decisionmakers to determine accurately the value of Federal programs and whether they

are worth the cost to the taxpayers.

The first step in the process, of course, is to know the cost. Although agencies have made progress since their first attempt to

prepare financial statements in 1998, we are still a long way from

achieving that basic goal. Each year an increasing number of agencies have been able to produce clean auditable financial statements. This progress was often achieved through very difficult efforts.

This year, for the first time, all 24 agencies managed to file these

statements by the March 1st deadline. Also, this year the number

of agencies receiving clean audit opinions has risen. Nevertheless,

the government earned a grade of C-minus for fiscal year 2000.

Three agencies received A’s, which is one more than last year.

That is progress. Auditors report that the Department of Energy,

the National Aeronautics and Space Administration and the Small

Business Administration have effective financial management. This

is a notable achievement for the Department of Energy and the

Small Business Administration, both of which managed to overcome significant financial management problems reported in the

previous years.

In addition, the Office of Personnel Management admirably

pulled its grade up from an F last year to a B-minus this year. Despite that progress, the failures of a few agencies continue to tarnish the overall record of the executive branch of the Federal Government. In fact, two agencies regressed. The National Science

Foundation fell from an A to a B-plus, and the Department of

Transportation fell from a D-plus to a D-minus.

Most disheartening, however, is the abysmal lack of achievement

by two significant government departments and one agency. For

the 5th consecutive year, the Agency for International Development

and two of the government’s largest departments, the Department

of Defense and the Department of Agriculture, still have major

problems. They again received the unacceptable grade of F.

Now we have a new administration, and hopefully it will focus

close attention on these continuing failures. If we cannot accurately

account for today’s expenditures, how can we plan for future surpluses?

We welcome our witnesses today who are most qualified to discuss this important matter: The Honorable David M. Walker, the

Comptroller General of the United States; the Honorable Mitchell

E. Daniels, Jr., the Bush administration Director of the Office of

Management and Budget; and the Honorable Donald V. Hammond,

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Acting Undersecretary for Domestic Finance for the Department of

Treasury.

Gentleman, we look forward to your testimony, your insights and

your recommendations, which will work to end this intolerable situation in the government’s financial management.

Again, we must say that this is largely due to the actions of the

outgoing President and Cabinet. The new members have reviewed

it, and as best they can, they have put various statements forward.

Looking at your testimony I was very impressed by it, and yesterday I had an opportunity to mention this situation to the Secretary

of the Treasury, and he assured me that next year every single

agency will in a timely way get the financial data that are needed.

I know he means business.

So, we thank the gentleman from Florida, Mr. Putnam, who is

here. Do you have any opening remarks, Mr. Putnam? You are free

to voice them.

Mr. PUTNAM. Thank you, Mr. Chairman.

It is always a pleasure to have our Comptroller General here. I

am, quite honestly, very amazed he finds time to do his job, as

often as he is called up here to testify before committees. It is always a pleasure to have him. His comments are always very important and enlightening.

This is a troubling issue. We have had extensive hearings in the

Shays subcommittee on the defense side of the audit reports. Serving on the Agriculture Committee I am also very concerned about

the improprieties at the USDA. In fact, just before I came to the

committee I was handed a press release from the USDA informing

me that they had just given $1 million to a Kentucky Fried Chicken franchise in my district to preserve two jobs, or some such thing

as that. So, it clearly illustrates we have a long way to go.

I look forward to the gentleman’s testimony.

Mr. WALKER. That sounds like pretty good pay, Mr. Putnam.

Mr. PUTNAM. It beats being in Congress.

Mr. HORN. Let me swear in all the witnesses. As you know, this

is an investigating committee, and we do swear in all the witnesses. Will the Director of the Budget, the Deputy Undersecretary

of the Treasury and the Comptroller General please stand and

raise your right hands, and those that back you up, I might add.

[Witnesses sworn.]

Mr. HORN. It is a pleasure to have you here, Comptroller General.

STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED STATES, GENERAL ACCOUNTING OFFICE; AND DONALD V. HAMMOND, ACTING UNDERSECRETARY FOR DOMESTIC FINANCE, DEPARTMENT OF THE

TREASURY

Mr. WALKER. Thank you. Mr. Chairman, Mr. Putnam, it is a

pleasure to be here to discuss our report on the U.S. Government’s

consolidated financial statements for the fiscal year ending September 30, 2000. The report has been provided to you and is being released to the public today.

In summary, this is the fourth consecutive year in which we have

been unable to express an opinion on the U.S. Government’s conVerDate 11-MAY-2000 10:34 Feb 27, 2002 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\76938.TXT HGOVREF1 PsN: HGOVREF1
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solidated financial statements. Certain material weaknesses, internal control, and accounting and reporting issues resulted in conditions that prevented us from being able to provide the Congress,

and the American people, an opinion as to whether the government’s consolidated financial statements are fairly stated in accordance with U.S. generally accepted accounting principles.

While many of the pervasive and generally long-standing material weaknesses that we have reported in past years remain to be

fully resolved, progress continues to be made in addressing the underlying causes of these problems at a number of agencies such as

significant financial management system weaknesses, problems

with fundamental recordkeeping and financial reporting, incomplete documentation and weak internal controls.

Accelerating the pace of completing ongoing and planned efforts

to implement financial management reform is essential, as reports

of the various inspectors general and their contract auditors indicate that only 3 of 24 of the CFO Act agencies had neither a material control weakness nor an issue involving compliance with applicable laws and regulations.

Agencies have made marked strides in obtaining unqualified

audit opinions in their financial statements. The number of the 24

CFO Act agencies that were able to attain an unqualified opinion

on their financial statements from their auditors increased to 18 in

fiscal 2000, up from just 6 only 4 years ago. Also, for the first time

the Office of Management and Budget [OMB], reported that all 24

CFO Act agencies met their March 1 reporting deadline.

But the timeliness of agencies having audited financial statements must be improved further. Issuing historical financial statements 5 to 6 months after year end is simply too late to be relevant

in today’s fast-paced, forward-looking and knowledge-based economy. These financial statements and our audit report should be

issued much sooner. We should seek to be able to issue these consolidated financial statements and our report months earlier.

For example, the auditors for the Social Security Administration

issued their fiscal year 2000 audited financial statements on November 30, 2000, 2 months after the fiscal year end. Other agencies

should follow their lead so that we would then be able to issue the

consolidated financial statement audit no later than the end of the

calendar year.

Many agencies undertake tremendous efforts lasting 5 months or

more to produce audited financial statements as of a date and period ending months earlier. The need for such time-consuming procedures often represents nothing less than heroic efforts on behalf

of the people who are involved. Both by agency and contractor personnel, these procedures primarily result from inadequate financial

management systems and poor controls.

A majority of the unqualified opinions discussed above, meaning

the 18, were obtained through expending significant resources, the

use of extensive ad hoc procedures and making billions of dollars

in adjustments to derive financial statements months after the end

of the fiscal year.

In addition, many of the agencies who received qualified opinions, or disclaimers of opinion, also had a number of heroic measures undertaken and spent millions of dollars in order to be able

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to get to where they were. It is important to note that the biggest

heroic effort is probably related to the consolidated financial statement audit itself; and the dedicated professionals of the Treasury

Department, of OMB and GAO who are to be commended for their

efforts in trying to make this happen.

However, it is also important to understand that heroic efforts

must be combined with sustained efforts to improve agencies’ underlying financial management systems and control. If agencies

continue, year after year, to rely on significant, costly and time-intensive manual efforts to achieve or maintain unqualified opinions,

without making these underlying systemic improvements, it can

serve to mislead the public as to the true status of an agency’s financial management capabilities. In this case, an unqualified opinion would become an accomplishment without much substance.

Stated differently, we need a substantive victory, not a superficial one. Winning the battle is getting a clean opinion on the financial statements. We must win the war. The war is getting a

clean opinion on the financial statements, no material control

weaknesses, no compliance problems, and to have systems, controls

and procedures such that agencies have timely, accurate and useful

information to make informed decisions day to day, not just focusing on today, but also anticipating tomorrow. This is absolutely essential.

The past 4 years have included extensive cooperative efforts and

considerable attention by the agency chief financial officers, inspectors general, Treasury, OMB officials and the GAO. From the outset, all parties involved understood the formative challenges that

were ahead. As we previously reported, they face the need to overcome decades of neglect in addressing serious financial management and internal control problems across government.

I am pleased to say that in the past few weeks I have met with

Secretary of the Treasury, Paul O’Neill, and OMB Director Mitch

Daniels to discuss the need for aggressive action to accelerate

progress in financial management reform. I am heartened that

they strongly support these efforts, and that support is clearly evidenced by their personal statements brought before the committee

today.

We have already agreed to cooperatively pursue developing short

and long-range strategies and operational plans with key milestones for addressing the problems that have prevented us, the

GAO, from expressing an opinion on the U.S. Government’s consolidated financial statements. Therefore, at this juncture, with the

benefit of several years of experience by the government, and having the required financial statements subject to audit, it is appropriate to focus particular attention on the most serious obstacles to

achieving an unqualified opinion on the consolidated financial

statements.

These obstacles include, No. 1, financial management problems

at specific agencies that have not been able to produce auditable

financial statements, especially the Department of Defense and the

Department of Agriculture; two, problems in resolving difficulties

in reconciling intra-governmental transactions, transactions between government agencies; three, information system security

weaknesses that affect agencies across government and not only afVerDate 11-MAY-2000 10:34 Feb 27, 2002 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\DOCS\76938.TXT HGOVREF1 PsN: HGOVREF1
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fect the issue of accountability but also national security and personal privacy; and, four, the need to modernize agency financial

management systems to ensure that they routinely provide timely,

accurate and useful information for managing operations day to

day.

Irrespective of the unqualified opinions on their financial statements, many agencies do not have timely, accurate and useful financial information and sound controls to make informed decisions

and to ensure accountability on an ongoing basis. This is what the

ultimate goal of financial management reform legislation was when

it was enacted in the 1990’s.

As we look ahead, it is essential for the government to begin

strengthening its financial reporting to make more meaningful information available to the Congress, other policymakers, and the

American people. Financial reports must continue to strive to further report our long-range financial commitments and contingencies which will be useful in highlighting the long-range fiscal

challenges facing the Nation due to the demographic trends that

we face and escalating healthcare costs.

Also, enhanced reporting in certain key areas, including performance information, focusing on results and outcomes that the American people understand and can identify with will be central to

managing government operations more efficiently, effectively and

economically and in supporting the Government Performance and

Results Act.

In addition, enhanced disclosures on the government’s most valuable asset, its own employees, or human capital, is needed to draw

further attention to the need to revamp Federal strategic human

capital management and assess the government’s capability to perform its missions in the future.

In closing, Mr. Chairman, I want to underscore the importance

of the President and the new administration emphasizing and giving priority to, No. 1, addressing the problems preventing us from

being able to express an opinion on the government’s consolidated

financial statements; No. 2, having effective internal control; and,

No. 3, modernizing Federal financial management reporting and

related systems as we move forward.

As I stated at the outset of my testimony today, my recent meetings with Treasury Secretary O’Neill and OMB Director Mitch

Daniels have been most encouraging. I look forward to working

closely and cooperatively with them and the dedicated career staff

of GAO, OMB, Treasury and others in order to develop these short

and long-range plans and strategies in order to solve the problems

and win the war.

Finally, I think it is important to reemphasize the importance of

the efforts of this committee in particular, and the Congress in general, to conduct periodic oversight in this area. Having effective financial management and reporting is critical. While the U.S. Government doesn’t have to worry about bondholders like the private

sector, and State and local governments do, and while the U.S.

Government doesn’t have a stock price, and therefore there are not

market conditions that absolutely mandate that it must have audited financial statements, we must have them in order to maintain the confidence and respect of the American people. We must

7

also have them in order to make sure that we have the underlying

systems, controls, and mechanisms to make sure that we are making informed decisions; and that we are maximizing the economy,

efficiency and effectiveness of the Federal Government for the benefit of the American people and assuring accountability over trillions of dollars of resources and assets.

Mr. Chairman, I can assure you that I and the dedicated professionals at GAO stand ready to do our part, and we thank you for

your interest and efforts.

Thank you, Mr. Chairman.

Mr. HORN. Well, we thank you, because you have an outstanding

staff, and we have worked with it for over 6 years, and you have

done a very fine job in trying to pull these parts together.

[The prepared statement of Mr. Walker follows:]

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Mr. HORN. We will have the testimony of Mr. Hammond before

we go to questions on panel one.

So, Mr. Hammond, Undersecretary for Domestic Finance, Department of the Treasury, and a frequent witness here, we are glad

to see you back, although as I passed the Treasury yesterday it

looks like some of the place is still burned. When are we going to

solve that problem? The Treasury Departmnet is the second oldest

building in Washington.

Mr. HAMMOND. And, as you can expect with the second oldest

building in Washington, it is going through some major renovations; they keep finding more interesting things as they knock

down a wall here and move a partition there. It is going to be in

really great shape when it is all done, but, I am afraid it is about

a 5-year process going forward.

Mr. HORN. Well, we are glad to hear your testimony. You have

a major role in this. I agree with the Comptroller General. As I

mentioned to you, the Secretary of the Treasury and I chatted

about this yesterday, and he means business on people meeting

those deadlines next year.

Mr. HAMMOND. Thank you, Mr. Chairman. I am very pleased to

appear today again to discuss the financial report of the U.S. Government, and I would like to thank you for your focus and continuing support of improving Federal Government financial accountability and reporting.

I ask that my written statement be included in the record in its

entirety.

The Department of the Treasury is dedicated to producing useful

governmentwide financial statements and has devoted considerable

resources to this effort. Further evidencing this commitment, as

you mentioned, Secretary O’Neill has submitted a written statement for the record for this hearing as well evidencing his strong

support.

Mr. HORN. Without objection, that will be put in the record at

this point.

Mr. HAMMOND. Thank you.

While we are pleased again to issue the fiscal year 2000 financial

report on time this year, actually we are a day early, reporting not

fully reliable financial results 6 months after the close of a fiscal

year is simply not good enough. Working with the Federal community, we have made incremental progress each year, but incremental progress may not prove to be sufficient.

Treasury, in conjunction with OMB and the GAO, will conduct

a comprehensive review of the financial statement production process. While we have made significant progress in performing the

consolidation, the remaining challenges warrant a fresh look.

Additionally, later this year Treasury will implement the first

phase of our multiyear revamping of governmentwide central accounting systems and processes for reporting budget execution information. This is a critical first step toward improving overall Federal financial management.

Within Treasury, the Financial Management Service is primarily

responsible for producing these statements; and on a personal note

I would very much like to thank all the people at Treasury and

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FMS who have really worked tirelessly to produce this year’s report

and the improvements that we are talking about.

This past year we continued to focus on three critically important

areas: first, ensuring that the financial information reported to us

by the program agencies is consistent with the information in the

agency’s own financial statements; second, identifying, reconciling

and eliminating intra-governmental transactions; and, third, assisting the agencies in reconciling their fund balances with Treasury

records.

We also worked to modernize and improve the systems used to

report both the budget execution information and the accrual-based

information contained in this report.

It is essential that the information received from the agencies be

consistent with the information presented in their financial statements. Our auditors, GAO, reported this year, however, that they

could not fully verify the information provided to us as consistent

with the information in agency-level financial statements. This

finding comes in spite of a process that requires agency chief financial officers to prepare, and inspectors general to review, a detailed

comprehensive worksheet that crosswalks the data submitted to

Treasury to individual line items on the agency’s audited financial

status. Clearly, this process needs to be reviewed.

Additional improvements have been made in the accuracy of the

2000 opening net position balances. Over the last year, Treasury

worked very closely with program agencies to reach agreement on

opening balances. Last year, the unexplained opening balance differences were approximately $70 billion. This year, the unexplained

differences for all agencies are approximately $8 billion, evidencing

improvement but, nonetheless, not an acceptable result.

We continue to take actions that improve data accuracy. A clear

indication of progress was a reduction in the number of adjustments submitted during our review process from 575 for the previous year to 280 this year. The audits of the agency’s financial

statements have disclosed that the agencies continue to have difficulties identifying transactions with each other so that the transactions can be reconciled or eliminated for governmentwide reporting. If these transactions are not eliminated, total government assets, liabilities, revenues and expenses are misstated by the net

amount of these transactions.

For the second year in a row, we were able to resolve the intragovernmental elimination issue for borrowing and investment

transactions between program agencies and either the Bureau of

the Public Debt or the Federal Financing Bank, a subset of the

total governmental elimination issue. We lack specific explanations

this year for only about $3 million in such transactions out of a

total of more than $2 trillion outstanding.

This past year we also focused on addressing elimination issues

regarding transactions between the program agencies and the Office of Personnel Management and the Department of Labor as well

as the buying and selling transactions between agencies themselves. While we still have considerable work to do, we were able

to significantly reduce the unexplained differences. We will work

with agencies to formulate additional guidance based on the

progress made this year.

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With regard to buying and selling transactions between Federal

agencies, Treasury has been working with the consultants to develop a buy-sell model that allows for eliminating such transactions. This model produced significant improvements this year,

and we hope that next year the information will be sufficient to

justify that the buy-sell transactions are immaterial at the governmentwide level.

Treasury continues to assist agencies in reconciling their fund

balance amount with the amount reported to them. Today, the discrepancies most often are a result of timing differences and are resolved in a few monthly cycles.

In order to capitalize on improvements over the next few years,

program agencies’ reconciliations of fund balances must be a management priority and a routine ongoing accounting function. Agencies have made much progress in institutionalizing the process. To

further facilitate this, Treasury is redesigning its systems to simplify the process to improve the availability of the data.

As you have heard, the current State of Federal financial reporting is not satisfactory. I am confident that a creative and committed effort by Treasury, program agencies, OMB, the CFO council

and GAO, combined with adequate funding, can result in breakthrough changes.

In the short-term, we will make the changes that can be made

to improve the preparation of the financial report. For the longterm, we are taking considerably more aggressive action.

Our most critical short-term challenges remain in three areas

pertaining to preparation of the report. In the area of intergovernmental transactions at the request of the principal agencies, the

joint financial management improvement program has initiated an

effort to better define the problems and identify areas for focused

attention. That is a beginning.

Additionally, we must fully develop the process for a complete

reconciliation of the budget results with the financial statements’ results of operations. We will also provide comparative financial

statements at the appropriate time. And, one other area where usefulness can be dramatically improved is in the content of our reports; and we will reach out to stakeholders to find out what they

believe is most useful.

Recently, we modified our systems and processes to provide agencies with easier and quicker access to certain budgetary information through the Internet. Agencies can now obtain Web-based access to important accounting information. As we roll this out governmentwide over the next 7 months, we are confident that this

will go a long way toward assisting agencies with reconciling their

fund balances and outline our approach to long-term solutions for

redesigning the governmentwide accounting process.

We continue to improve our Standard General Ledger based reporting systems. Just as manufacturers reject components that do

not meet specifications, our new reporting systems reject reports

that do not meet specifications of the U.S. Standard General Ledger. As agencies move toward SGL-compliant accounting systems,

the reports will continue to improve.

The FACTS II system, jointly developed with OMB, became fully

operational with year-end 1999 reporting. FACTS II loads the prior

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year results directly into the budget formulation process, which

helps budget offices ensure that the budget process begins with

what actually happened the previous year.

Improving financial management and accountability is a top priority for Treasury, and we are prepared to take a lead role. We will

work closely with OMB and program agencies to raise the bar in

financial management improvements.

As I mentioned at the beginning of my testimony, Treasury,

OMB and GAO will reevaluate the process we use to prepare the

governmentwide financial statements. Our review may indicate

that it may not be workable, within 30 days of completing agency

financial statements, to produce the financial report, complete the

consistency evaluation, and obtain an audit opinion.

Our goals include: accelerating the timeframes for issuing yearend audited financial statements, providing for comparative reporting, and moving toward the preparation of quarterly statements by

program agencies. We will also consider new ideas such as audit

committees and the use of pro forma financial statements with

budget submissions.

Our ultimate success will be achieved when we reliably and accurately report on the distinctly different financial activities of many

agencies of government as if they were one entity, and do so in a

timeframe and a manner that is truly useful.

Thank you, Mr. Chairman. That concludes my formal remarks.

I will be happy to take questions.

Mr. HORN. Well, we thank you, and we hope that some of the optimism in your statement will come to reality next year.

[The prepared statement of Mr. Hammond follows:]

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Mr. HORN. We now have the Honorable Mitch Daniels, Director,

Office of Management and Budget. Mr. Daniels.

Mr. WALKER. I don’t know if he is here yet, Mr. Chairman. You

may want to go into Q and A.

Mr. HORN. We have him as the second panel. I don’t know what

‘‘here’’ and ‘‘there’’ did on the scheduling, so we will go to questions

then. It would have been better if we had all three of you there.

So, let’s start with Mr. Putnam, and then I will do it after 10 or

15 minutes, and then he will do it again.

Mr. PUTNAM. Thank you, Mr. Chairman. I thank the gentlemen

for their testimony.

One of the problems that Mr. Walker highlighted was that of resolving difficulties and reconciling intergovernmental transactions

and the information system security weaknesses. After we have

come out of the year 2000 and spent—I don’t even know if we

know, because we don’t have auditable statements, how much we

spent to get everybody Y2K ready, presumably that means we upgraded to the latest and best and most effective computer and information technologies. What are the outstanding information security issues, how can we address those and what do you presume

the cost of those upgrades to be?

Mr. WALKER. Let me take a shot, Mr. Putnam.

First, you are correct that there was a tremendous amount of financial and human resources focused on the Y2K effort, which was

a date certain, so you had to get it done by a certain date. In fact,

quite frankly, I think that is evidence of how the government mobilized on a governmentwide basis, and it was a success story, where

we actually avoided any major disruptions associated with Y2K.

While clearly there were some supplemental benefits that were

achieved through those expenditures with regard to trying to upgrade a number of existing information technology systems and capabilities, the fact of the matter is that we still have throughout

government too many systems that are legacies of the past; too

many systems that are freestanding, non-integrated; too many systems that are designed based upon the individual wants of various

entities, whether it be the numerous entities within the Department of Defense or the Agriculture Department, rather than looking at it on an enterprise-wide basis to really have an enterprisebased architecture that is focused on the needs of the entity as a

whole, where you only have to enter the data once and where you

have much more reliability not only from the standpoint of computer security but also for the accuracy of the information.

I don’t have a particular estimate. I don’t know, Jeff, if you do,

of some of the estimates of the magnitude and the economics associated with it as it relates to dollars.

Mr. STEINHOFF. I have been told that roughly one-half of capital

spending at the Federal, State and local level is on IT. At the Federal level this year, it is projected to be $40 billion. At the heart

of all of the issues, all of the problems on the chairman’s chart

today, are poor systems. Y2K fixed one part. It dealt with that date

issue. But it did not deal with the underlying systems problems.

We are going to have to make a major investment. It must be done

in a very wise manner.

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Mr. PUTNAM. Let me follow-up on that, because it occurs to me,

and I am new to this process, but in the State legislature every

year, every single year, we spent a fortune on information technology, and we fell further behind. Corporate people know that.

Today you buy it, then it is obsolete. There has to be some bettercoordinated way for us to get on top of that issue.

I would ask, if Congress were to pose the question, exactly what

is the figure that all the Federal Government spends on information technology? Would that even be a determinable number?

Mr. STEINHOFF. I would want to get back to you on that, but the number that I have heard is that $40 billion will be in the budget

this year.

Mr. WALKER. That is probably the hard dollar number, rather

than necessarily the costs associated with all the people who are

working on information technology. We will review that, Mr. Putnam, and get back to you.

[NOTE.—The publication entitled, ‘‘The 2000 Financial Report of

the U.S. Government,’’ may be found in subcommittee files.]

Mr. WALKER. I do think it is important to note that in order for

us to be able to make sure that, ultimately, Federal managers and

leaders have timely, accurate and useful information to make informed decisions day to day, a big part of that is going to be to upgrade the existing systems that are out there and to integrate them

while we are also dealing with security issues and related matters.

In that regard, I might add, in the private sector, frankly, things

would not be done the way that sometimes they are done in the

government. You have to have a mechanism at the very top where

somebody can say yes or no on a systems project, either yes, you

are going to do it, or no, you are not going to do it, based upon an

overall master plan, based upon an enterprise-based architecture

meeting certain minimum standards. In addition, you have to be

able to have control of the money.

Therefore, I think, among other things, what that means is we

do need a Federal CIO. In addition to that, the CIO’s in the individual departments and agencies need to have more input on

whether or not systems are going to move forward or not based

upon an enterprise-based architecture and ought to have more authority on whether or not money is going to be spent. Because, all

too frequently, what ends up happening, it happens in the private

sector, too, if you don’t control it, you have a number of different

individuals and entities come up with what they want, and they

will end up having their own individual initiatives under way to

try to design systems that they want, which is far in excess of what

they need, but they are not integrated with or consistent with the

overall enterprise architecture and plan.

This is a particular challenge at the Defense Department, and I

expect in the not-too-distant future I will be making some recommendations about what needs to be done to try to deal with

that.

Mr. PUTNAM. Is the current congressional budgeting and appropriations process effective in helping to accomplish the overall efficiency goals? In other words, by having an annual budget and the

requirements for the agency submissions for requests, the President’s submission of his budget, the timeliness of our budget procVerDate 11-MAY-2000 10:34 Feb 27, 2002 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 C:\DOCS\76938.TXT HGOVREF1 PsN: HGOVREF1
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ess, which is then followed by the actual appropriations process,

are there congressional reforms that could be made that would support your efforts to increase efficiency? And in the course of that,

if you would, comment on the prospect of a multiyear or 2 year

Federal budget.

Mr. WALKER. Well, I do think we need to do things differently,

not only in the executive branch in certain regards, but also the

legislative branch; and I do think we need to look at the mechanisms that are in place for reviewing and approving the undertaking and funding of major projects.

For example—I will give you one example. Yesterday, I had a

meeting with 18 inspectors general, a State auditor and county and

local auditors. One of the reasons I did that is I pulled them all

together for 2 days in Washington to talk about mutual challenges,

of which we have a number.

One of our mutual challenges is in the area of computer security;

and one of our mutual challenges is in the area of how you get control of all these IT expenditures. One of the things I found is, as

many times is the case, sometimes the States are way ahead of the

Federal Government. Sometimes the Federal Government is a lag

indicator.

In this regard, there were several of the States that talked about

the fact that not only do they have a CIO but they have a council

mechanism in place that, before any major IT projects can be funded or undertaken, they have to be reviewed and approved by a body

of qualified parties, independent parties, and they have the authority to say yes or no. And if they say no, there is no money that goes

for that project.

I am happy, we at the GAO will be happy to think about some

of the things we think make sense in this area not only from the

standpoint of the executive branch, but also for the legislative

branch as well. But I think changes have to occur on both ends of

Pennsylvania Avenue.

Mr. HORN. Very good. Thank you. I agree with you completely.

Does the gentleman have some more questions on this one, or do

you want to go to another?

Mr. PUTNAM. If I may.

Mr. HORN. Please.

Mr. PUTNAM. Is it possible, considering the nature of the duties

and responsibilities of the Federal Government, the security issues,

the secrecy issues that are part and parcel of budgets like the Department of Defense, recognizing that we have a long way to go to

become better, but is it possible at the end of the day in a perfect

world for the U.S. Government to produce a true, clean financial

statement that comports with traditional accounting standards?

Mr. WALKER. Yes, that is possible. I fully expect that it will end

up happening during my term of office, which I have 121⁄2 years

left. I would like for it to happen early in my term of office.

But, I think what is important, Mr. Putnam, and I think it is an

excellent question, is that it is not just getting a clean opinion.

That can be a superficial victory. We need to be able to deal with

the substance, not just the form. We need to make sure that we

have the right kind of systems, strong controls, appropriate compliance mechanisms, and we need to have the data now, not 5 to 6

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months after the end of the year. Because, you know, managers

have to be able to make decisions not only about resources today,

but anticipating problems for tomorrow. It is not just oversight, it

is foresight that we need this information for.

So, yes, I think we can get there. I think we will get there, and

I think I am encouraged by the fact that the Secretary of the

Treasury, the Director of OMB and myself, who are the three principals of the joint financial management improvement program,

have agreed to get together to try to come up with a game plan to

help us get there. That is the first time that happened. I was

pleased they accepted my proposal on that, and I am looking forward to getting together to do that.

Mr. HAMMOND. If I could add to that a little, I think it has always historically been a matter of emphasis. If you look at other

areas of financial reporting in the Federal Government, you find

that there is reason for great optimism.

We report budget results within 15 workdays of the end of the

fiscal year. Those are reliable. We report daily cash positions in

less than 24 hours, showing all the cash activity for the previous

day. We report on the entire public debt outstanding within 3

working days of the close of the previous month, and that is done

on a financial accounting basis.

So, I think there is potential—and we have seen evidence of

doing this in a reliable form. The question now is emphasis and

making sure that the systems today match the needs of financial

accounting going forward.

Mr. WALKER. If I can followup on Don’s point, a couple of things.

No. 1, the Federal Government historically has been focused on two

things when you are dealing with accounting, cash—and cash is

important no matter what sector you are in—and, second, the

budget. There are all kinds of systems that exist out there, and

have existed out there for years, where people watch their budget,

because, either they want to make sure they spend it all or make

sure they don’t violate the applicable limits, obviously. So there is

a lot out there already on the budget side.

But what has not been out there, and there was no legal requirement for it to really be out there until the new financial management reforms came into place, were the traditional accounting systems that resulted in accrual-based financial statements that resulted in periodic reporting like the State and local governments

have had for years and like the private sector has had for decades.

I also think it is important to note that GAO does give clean

opinions, despite some rumors to the contrary. In fact, we have

given a clean opinion on the Bureau of Public Debt for several

years, the FDIC for several years, and, for the first time, gave a

clean opinion for the Internal Revenue Service financial statements

this year, although they, like many other agencies, have numerous

material control weaknesses, meaning the IRS has significant compliance problems, and so they have still got these underlying problems.

It is possible, I think we will get there, but it is going to take

the combined efforts of a number of parties, and some time to get

us to where we need to be—and some money too, I might add.

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Mr. PUTNAM. Thank you, Mr. Chairman. I might propose to the

Ways and Means Committee we could make a lot of money by letting individual CPAs around the country bid on the right to audit

the IRS.

Mr. HORN. We will have Commissioner Rossotti this coming

week, and I am sure you can pose that question.

Any other items you want to pursue?

Mr. PUTNAM. I will let you go ahead.

Mr. HORN. Let me ask about the trustee reports. The Comptroller General has been on some of those boards in his career, Social

Security, Medicare, and the administration has issued its annual

trustee reports on Social Security and Medicare in time for certain

information to be included in the government’s financial report.

Last year, the GAO emphasized the need for the trustee reports to

be released prior to the statutory date of April 1st, so that information could be included in the government’s financial year. The administration issued these reports on March 19, 2001, and therefore,

current information was included in the government’s financial report. What do you believe should be done?

Mr. WALKER. Well, first, I want to acknowledge progress for this

year, and I want to thank Don and the others that were involved

in trying to make sure that this happened.

What we do have is what I would call a subsequent events footnote in the consolidated financial statements this year that provides information, summary information, from the most recent

trustee’s report of Social Security and Medicare, and compares it

to the financial statement information.

I think that is a positive step, first step.

I do think, however, over time what needs to happen is we need

to have the updated—the full updated information dealing with the

Social Security and Medicare trustees’ information in the notes to

the financial statements, the consolidated information.

In addition, I think over time what we need to do is that we need

to issue the consolidated financial statement report and our audit

much quicker; and in order to make that happen, it means that,

over time, the Social Security and Medicare trustees are going to

have to start issuing numbers as of September 30, which is fiscal

year end, rather than as of December 31, which is calendar year.

I think that is doable.

I have had some informal conversations with some of the actuaries. But I think that we need to enhance the disclosures, we need

to accelerate the timeframe, and we need to make sure that we

have more than a subsequent events note in there, that we have

more fuller disclosure of information in there than is the case now.

Mr. HORN. I take it you would favor audited reports out of the

trustees?

Mr. WALKER. I think we have to recognize—I think the projections, and that is what they are, the projections that the Social Security and Medicare trustees do should be subject to some type of

audit procedures. At the same point in time, there are limits as to

what those procedures should be and what they can be.

Obviously, when you are dealing with historical financial information, then the degree of confidence that one should expect to be

attained and that can be attained through auditing procedures is

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much higher. When you are dealing with projection information, I

think that there needs to be an independent review of such things

as, are the methods generally acceptable, are the assumptions reasonable, is the math proper? Because last year, not this year, but

last year, Medicare actually had to reissue its numbers because

there was a material misstatement in the numbers. I think that is

something that we have to try to avoid.

The other thing I think we have to recognize is that—I would

argue that, if you are looking at American citizens, that probably

some of the most important information in this consolidated financial statement report is not the value of assets the Federal Government has but the projected financial condition of the Social Security and Medicare programs on which they are counting. I think it

is critically important that when we look to consolidate this report

and make sure it maximizes its usefulness that we think about it

from the standpoint of the citizenry, because that is ultimately who

we are serving. I think it is important that we continue to make

progress there.

Mr. HORN. You recently testified before the Senate Committee on

the Budget that the government today is moving from balancing

the budget to balancing the fiscal risk. As you point out, this increases the importance of providing Congress and policymakers

with timely, accurate and useful financial administration and information for use in deliberations involving long-range fiscal policy

challenges facing our Nation.

What do you see as some of the fundamental fiscal challenges

that do face the Nation?

Mr. WALKER. Well, if I can use a couple of boards, Mr. Chairman,

I will be happy to oblige you on that. I appreciate that question.

I didn’t know if I would get to use them or not, but this question

gives me a chance.

Mr. WALKER. Right now, we all recognize—right now we are living in a time of surpluses. However, we know two things for certain. While surplus projections cannot be totally relied upon, we

need to do them, they have to be based on a number of assumption.

There are two certainties.

First, we know we face a demographic tidal wave because the

people are already alive. We know that the first baby boomers are

going to start retiring in 2011, that is when they reach 65; some

may retire earlier, some later, but the first one reaches 65 in 2011,

which is just beyond the 10-year projection period. We also know

that health costs are again on the rise at a much faster rate than

historically has been the case.

What this simulation will show you, this is a GAO simulation,

it will show you that if Congress saves every penny of the Social

Security surplus, but if either through tax cuts or spending increases, all of the ongoing budget surplus is spent or consumed one

way or the other, this is our future in 2030 and 2050. By year

2030, we will have to cut discretionary spending by about 50 percent. And by——

Mr. HORN. By 15, was it?

Mr. WALKER. 50. And by year 2050, we won’t have any main or

discretionary spending, or money to pay Medicare and Medicaid.

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Now, that is pretty dramatic. Now, these are based upon the

growth rates of CBO, which is pretty healthy growth.

The fact is that we need to recognize that while we are in good

shape today, we have major challenges in the long-run. So it is

very important that we have financial statement information, and,

I would argue budget information. More information has to be

made available through the budget process to think about the longterm implications of current decisions, because there are certain

things that we might be able to afford today, but we are not going

to be able to sustain tomorrow. And it also means that we need to

get on with reforming entitlement programs, because it is only

going to get tougher the longer the time passes in that regard.

I am pleased to see, by the way, in the financial statement, the

management discussion analysis, that there was recognition of that

fact as well in this year’s financial report.

Don, do you want to comment?

Mr. HAMMOND. Well, I think an analysis of the flows within government is a very important element of financial reporting. For

these reports to be useful, they have to provide not only the data,

but also some benchmarks of analysis to indicate how these things

measure up. We tried to do some of that this year for, I think in

many senses the first time, and there is obviously more that can

be done.

Mr. WALKER. Real quickly, Mr. Chairman, this chart shows what

happens to Social Security and Medicare in the outyears. Right,

now the blue, we are in times of surplus; the red, obviously, is

times of deficit. Look how rapidly that accelerates starting shortly

after baby boomers begin retiring.

The key on the entitlement programs, by the way, in our view

is not solvency, it is sustainability. It is what percentage of the

budget and what percentage of the economy do these programs represent? Solvency is a legal issue more than anything else; it is not

an economic issue. It does not have economic substance. We need

to focus on economic substance rather than legal solvency.

Mr. HORN. Any thoughts on that, Secretary Hammond?

Mr. HAMMOND. I am afraid that is out of the range of my expertise. We have some very bright people at Treasury who deal with

some of the more important issues revolving around Social Security.

Mr. HORN. Why don’t we have the question put to them, and respond, and put it at this point in the record?

Mr. HAMMOND. We would be happy to.

Mr. HORN. Great.

Mr. WALKER. I am pleased to say that I think in the management discussion analysis portion that was done by Treasury, that

they do acknowledge that sustainability is in question, yes.

Mr. HORN. One of the problems in this town is that OMB often

has some economic figures, and CBO on the Hill and Congress has

others. How can we get that balance where everybody agrees these

are the numbers?

Mr. WALKER. Well, first, if you look at the 10-year projections

that are currently being used for the basis of the current debates

in Congress about tax cuts, spending and other types of activities,

the projections or the assumptions that are being used by OMB

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and CBO are remarkably similar. I mean they are very, very close,

probably closer than they have about ever been. Obviously, we need

to have those kinds of projections, because we need to have something to be able to try to make some informed judgments. At the

same time, I think we have to recognize that the further out you

go, the less certainty there can be with regard to what those projections are.

I would, however, reinforce that these projections, I think, have

a higher degree of reliability. Why? Because they deal with people,

and we know the people are going to be here, and in the case of

Social Security, we know what the promises are. Now, healthcare

cost increases are a wild card. We don’t really know that, but we

do know they are going up, and we do know that our current system doesn’t have effective means of controlling those healthcare

costs.

Mr. HORN. Are there any other charts from the Comptroller General?

Mr. WALKER. Well, I will show you one more that emphasizes

what I mean. Thank you, Mr. Chairman.

I think this depletes the inventory after this.

One of the disclosures that we have, which I do appreciate the

Treasury Department’s support and OMB’s support to get this in

here this year, is to talk about the difference between what historically had been in there, which is the prior year’s report. And the

most recent report that just gets issued about the same time as the

consolidated financial statements. This year I think it got issued on

March 19; last year it got issued 1 day after we issued the consolidation financial report, and we all looked foolish, frankly.

This shows you how significantly things can change in 1 year.

This is the HI program or so-called Part A of the Medicare program, which is only part of the program. And you can see it is good

news and bad news, what happened in this latest report that was

issued on March 19.

The good news is from a solvency standpoint it looks like we are

more solvent, and we are, based on these projections, that the date

by which you have a situation where HI is going to have a negative

cash-flow has been extended from 2010 to 2016. And, in fact, the

Trust Fund is not expected to run out of assets until 2029, which

is 4 years later than last year.

However, if you look below that line, you find that the long-range

situation is much worse. The numbers are self-evident. But the one

that I would bring to the fore is that the unfunded liability, which

is not on here, the unfunded liability of the promises that have

been made but are not funded for in just Part A of Medicare alone

in the last year have gone up from $2.6 trillion to $4.6 trillion. And

that is just Part A of Medicare, that doesn’t count SMI.

This is very important information. This is very important information that ultimately we need to make sure is not relegated to

a footnote and that we end up increasing the prominence and the

timeliness of some of this information.

Mr. HORN. Well, we thank you. And get us a set of the materials

so we can put it in the record of this hearing. And that will be, I

am sure, looked at by quite a few people. We put it in parens, part

A, which I think would clarify it a little bit.

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The Director is here, so we will have him come out and make his

presentation, and I would like for both of you to stay here. He is

in our lounge here and watching what you are doing. So if you both

will stay, we will have some decent dialog, questions and answers

with all of you.

We will put in the record at the beginning of this hearing the

opening statement of the ranking Democrat, Ms. Schakowsky.

And we will also have, I believe, Secretary O’Neill’s statement.

Mr. PUTNAM. Mr. Chairman, will the record be open for several

days for testimony?

Mr. HORN. Yes, 7 days, for anybody that wants to put in testimony.

I am going to swear in the Director.

Is this your first appearance after your confirmation, or have you

been to a few other ones?

Mr. DANIELS. There have been a few other opportunities.

Mr. HORN. Mr. Daniels, you say you have the truth, the whole

truth and nothing but the truth on your testimony. Anybody behind you from OMB, we will swear them in too, so whatever you

would like on it.

[Witnesses sworn.]

Mr. HORN. OK.

Mr. DANIELS. With the Chair’s pleasure, I will read, then, a short

statement.

Mr. HORN. Well, we would like to limit it to about 15 minutes.

Mr. DANIELS. I was thinking 5.

Mr. HORN. Of course, would like to see a dialog here. That is how

we learn things. Not that your statement isn’t very learned.

Mr. DANIELS. It was already my plan to abbreviate what we submitted for the record.

STATEMENT OF MITCH DANIELS, DIRECTOR, OFFICE OF

MANAGEMENT AND BUDGET

Mr. DANIELS. As the committee might imagine, our priority has

been and is for at least the next several days to deliver to the Congress the President’s budget. But we are already embarked on the

design and construction of what we hope will be an ambitious management reform agenda, and we did give the outlines of that in the

President’s budget blueprint at the end of February. Along with the

top career professionals at OMB, our new team spent Saturday, on

St. Patrick’s Day, in a day-long review of management issues and

opportunities facing the Federal Government, and we are at work

on a strategy and a prioritization among those that we intend to

present to the Congress later on this year, and hold ourselves accountable for achieving.

We note that over the last decade, Congress has built a new legislative framework for financial management performance measurement, better and more effective government generally, and we

know this morning’s emphasis is on financial management, certainly a prerequisite of sine qua non of much of the rest of the

progress we hope and intend to make.

I reviewed the earlier testimony and it noted directly that the

Federal Government has made some progress in this area recently.

We can all be glad about the growth in the number of agencies who

61

have been able at least to secure the designation of having clean

audits, and it is I think our expectation, as yours, that within the

next few years, all agencies will achieve that status. I guess I

would simply note that my view of that is only a first step, not to

be equated with sound financial management. Audits are a means

and a tool, not an end to themselves. Clean opinions are important

and, as I said, a prerequisite to public accountability, but in and

of themselves do not translate into good government.

As we have seen already, agencies can get the good housekeeping

seal of a clean audit opinion while remaining in a state of unsatisfactory management status. Some of the agencies on Comptroller

Walker’s high-risk list, with problems of high-risk, have passed

their audits and have passed for years.

I looked at the three that you have given your A grade on the

subcommittee’s report card—and, incidentally, I commend you for

not joining the society-wide tendency to grade inflation, Mr. Chairman. You obviously reserved that grade for what you saw as the

best, but two of those three have very, very substantial problems,

visible for us all to see. One has been on the GAO high-risk list

every year for over a decade. The other has difficulty, to say the

least, in estimating the future costs of its most significant program

which has experienced a 50 percent, that is to say, a $4 billion increase or overrun only noted in the last few years. Those are your

best performers.

I also note in these first weeks of looking at this issue that a

clean opinion has sometimes been accomplished only at the—only

through a process that my colleagues describe as heroic, or—I

guess others have also made this observation. It tells me nothing,

other than at least for one point in time, for 1 day, that a given

agency had books that seemed to reconcile and balance. But, until

that agency can generate similarly reliable information on a consistent basis, quarterly, monthly, maybe more often, I don’t think

any of us can rest or take too much comfort.

I suppose I will just close by saying that progress ought to be

noted, some satisfaction ought to be taken. But I think we have to,

as I know this committee does, keep that in full perspective, and

a celebration ought to be postponed until we are sure there is a

meaningful and lasting quality to these achievements. This administration is ready and eager to try to take the next step in what

all parties, I know, recognize as a long-term exercise.

I thank you for this opportunity to be here, Mr. Chairman, and

welcome your questions.

[The prepared statement of Mr. Daniels follows:]

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63

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Mr. HORN. I will yield to Mr. Putnam to question both individually. If the others would like to get up here so we can get a dialog,

and see if there are different perspectives between the Comptroller

General of the Treasury and OMB.

Mr. Putnam.

Mr. PUTNAM. Thank you, Mr. Chairman. I appreciate Mr. Daniels’ and Mr. Walker’s comments that a clean audit is not an end

unto itself, but the sound management practices that produce it are

really what we are after, and I am pleased that the President has

made a priority of holding agency heads accountable.

How does he intend to do that? What practices will occur? What

consequences will take place as a result of continued lack of management controls?

Mr. DANIELS. I am glad to hear you use the word ‘‘consequences,’’ Congressman, because ultimately there have to be these, and this

is an issue that ranges beyond simply the subject that engages our

attention this morning. All too often the finding of inadequacy, for

instance in the financial management context, or of failure of performance, which could relate to programmatic evaluations, has no

consequences at all. We are intent at our agency on linking performance to the budget process, beginning this year, and we have

an OMB-wide effort on now to make that real. I think this is the

next essential step in a process that Congress has begun over the

last several years with the passage of several important pieces of

legislation, and we intend to be very serious about it.

Mr. PUTNAM. Could you go into some detail on this move toward

performance-based budgeting? We will actually, if accomplished,

have an opportunity to—for the legislative branch as policymakers to say, for example, for $800 million a year we can meet 80 percent

of the need for children on free or reduced lunch, for $100 million

we can meet 100 percent of the need, and we will be able to quantify those policy differences and the performance that each investment renders?

Mr. DANIELS. Well, 1 fine day, I hope we can. In the near-term,

I would like to believe that at least we could begin the process of

identifying, for example, among similar or even duplicative programs, which are performing best, which are performing most poorly, so that Congress at least would have the information necessary

to redeploy funds from weak to strong performers. We are not even

there yet. Of course, it may prove a challenge for the political process to take that last step of imposing consequences, because that

has not always been the result, even on those occasions in the past

when clear evidence of failed performance was available.

Mr. PUTNAM. Has the administration, through its new agency

and department heads, undertaken a thorough strategic review of

the mission of their agencies and given these new agency heads the

opportunity to develop their mission and identify responsibilities

that may have been given to them by the Congress, or have grown

into their roles through time and evolution and bureaucratic creep

and everything else, that they would like to devolve their agencies

or departments so that we could then address it in the legislative

branch?

Mr. DANIELS. I think an honest answer is there hasn’t been time

yet. Many of our departments and agencies, as you know, have only

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one or two or a handful of the President’s appointees in place. Now,

strategic plans have been required of agencies and departments,

and that is a starting point that provides a template, at least; and

we use, for instance, the document that we found waiting for us at

OMB as a starting point. But I would say, simply using that one

example, that it was—it was not more than that, and we intend to

make it considerably more specific and considerably more programmatic before we embrace it and seek to act on it.

Mr. PUTNAM. The agency’s financial statements this year re- ported improper payments of over $20 billion. This number is not

even complete. GAO continued to find that most agencies have not

estimated the magnitude of improper payments in their programs,

nor have they comprehensively addressed the issue.

This is the part—I mean, this is really the core of the issue.

When people get mad about government, it is the fact that we are

still sending checks to people who have been dead for 3 years, it

is the fact that we continue to buy $800 toilet seats and all of these

kinds of things. I really don’t want to sound like the Pollyanna citrus grower from Florida that I am, but when you come into this

business and you look at the magnitude of government and how we

throw commas and zeroes around and mistake billions for trillions

on a regular basis, that is the core of the cynicism about government and the reluctance of the American people to believe that we

have our act together up here, and that the agencies have their act

together, and that the people who are hardworking employees of

those agencies have their act together.

What is being done and what can we do more of to get our hands

around that?

Mr. DANIELS. I share your sense and the public’s sense of dissatisfaction, or even fury at the findings.

Mr. HORN. We have to find a microphone that does work for you.

Mr. DANIELS. My technical assistant here has perhaps addressed

the problem.

Mr. HORN. He has 121⁄2 years to go.

Mr. DANIELS. I was observing that—I was certainly supporting

the Congressman’s observation that this is a subject that the public

rightly finds unsatisfactory, and we do too. And although we have

not made our final selections of those management problems, we

will attack it in this first year or second year of the administration.

I am prepared to guarantee you that erroneous payments will

make the cut. The Comptroller’s reports have highlighted this for

quite some time, extrapolated to the whole government even conservatively, those findings would lead to a stunning amount of

money now.

Granted, erroneous payments do include under as well as overpayments. Granted, that some care and caution has to be undertaken to make sure that reducing overpayments or mispayments

does not so encumber the system that beneficiaries, rightful beneficiaries, are unduly penalized. But those observations cannot get

in the way, I think, of an all-out assault on this area.

We have to—as regards this entire realm of management problems which my defense-minded friends would call a target-rich environment, you know, I think we have to be very, very selective,

and that is the process we are about now.

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I once heard Secretary George Shultz ask rhetorically, why does

the Frenchman kiss the lady’s hand? And his answer was, ‘‘Because he has to start somewhere.’’ And you know, I think we have

to be very mindful of the fact that we have to go after the big opportunities, not only for purposes of making sure we get something

done, but I think also that we can learn from each experience and

become better and more effective as we move on to the next and

the next.

Mr. HORN. Let me give you two examples, and perhaps the

Comptroller General can get into that one, too. The HCFA, the

Health Care Financial Administration of Medicare—and the Comptroller General’s team has looked at that for a long time, it has

some real risk problems. We have intermediaries between the

healthcare thing, we have the actual client and the doctors, and we

really need to take a look at that, which nobody has done either

up here or in the administration that I can recall.

My second example that worries me every year is the Columbus,

OH Army operation where they are putting out processing of contracts and payments and so forth. They have just been off the wall.

Now, I think they have improved it quite a bit and they are not

completely off-the-wall anymore. But that is the kind of thing that

can really cause difficulty when they don’t have the right level of

personnel, and that is part of the problem.

Go ahead, Mr. Walker.

Mr. WALKER. Well, first I think it is important to know what improper payments are and what they aren’t. You know, in some

cases, there are things that clearly are improper expenditures of

taxpayer funds, where you are paying somebody who is deceased

where you are paying twice, where you are paying for services that

weren’t rendered, etc. In some cases, they represent payments

where there is a lack of adequate documentation, and you don’t

know whether or not it was a justified payment or not. But, I do

think we can recognize that, whether you be in the public sector

or the private sector, the whole principle that you must measure

something in order to manage it. And therefore, one of the first

things that we need to do is to try to measure these improper payments, have control mechanisms to try to avoid them.

One example is HCFA, the Health Care Financing Administration. We worked with them to come up with a methodology to

measure estimated improper payments. They then began to take

steps to manage them. Their improper payments have gone down

from approximately $23 billion in 1996 to about $11.9 billion in fiscal year 2000; still too high, but that is considerable progress.

I think we also have to recognize that it is not just the systems

and the controls, since we can have some perverse incentives. And

one of the things that we are working with the Congress on, and

this came up in the hearing before Chairman Shays, another subcommittee of this committee, we have some perverse incentives in

the law. For example, there is something called the Prompt Payment Act, which says that if the Federal Government does not pay

a payment within a certain number of days, the Federal Government has to pay interest. On the other hand, if there has been a

double payment, under the current law the contractor doesn’t have

to tell you they have been paid twice; and, in fact, if they don’t tell

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you and they hold onto the money for a considerable period of time,

they don’t have to pay interest or penalty for having done that.

That doesn’t make a lot of sense to me.

Part of this comes back to our system where we have—where we

need to have systems that can do data matching, and there are

some issues there that we may need to look at, some possibly statutes, too, because of the privacy issues. There have been certain

barriers that have been raised. Lots of times what we want to do

is to do matching, match deceased lists against payments, and

sometimes you run into barriers as to whether or not you are able

to do that because of, ‘‘privacy concerns.’’ So this is on our radar screen. I am encouraged to hear that Director Daniels is saying that this is going to make their shortlist.

I hope our high-risk list also makes the shortlist, that would be one

of the objectives, because I think that would be a real accomplishment as well. Thank you.

Mr. HORN. You mentioned the word ‘‘privacy,’’ and that is one of

the questions I want to ask the Director.

The issue of privacy is obviously very important to the average

citizen and to many of us here in Congress. Whether it is privacy

with the Internet, in their homes, or in regard to medical records,

people obviously don’t want that put out in the public domain. As

you are aware, Congress delegated to the previous administration

the authority to develop and promulgate regulations relating to the

medical privacy rules and, in fact, such rules were developed prior

to the end of that administration.

I would like to know, and I think all of us up here would like

to know, what is the administration’s position on the medical privacy regulations that were developed by the previous administration? There are a number of privacy-related proposals floating

around both the House and Senate, as well as in many committees

with different jurisdictions.

When we put the Hutchinson bill through the Government Reform Committee, it went to the floor, and we had the popping out

of different—the Commerce Committee in particular and others,

and they said, oh, we will take care of it. Well, they haven’t taken

care of it for 5 years. And what we wanted to do was get the best

brains that the President and the leaders of the Senate and the

House could put together to see what the options were and what

is happening in other parts of the world.

The European Community has mandated that its member countries will have a privacy law. Now, that is going to be a problem

in the terms of economic data moving back across the Atlantic, and

I have suggested to about four or five of the Prime Ministers over

there, why don’t you get a team of people, your CEOs in your firms

in Europe and our CEOs in the United States, and get the impact

of this before we do something crazy.

So I am just curious where we are on that, because it needs some

coordination within the executive branch as well.

Mr. DANIELS. That regulation, proposed regulation, is under review, as you know, along with all of those which were inherited

from the latter stages of the previous administration. And it is a

matter of some urgency and high priority, and I think you can look

forward to some action on it in the not-too-distant future.

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There are a lot of interests to be balanced here. We got into this

subject by talking about one of them, which is the occasional conflict between fiscal responsibility and accuracy and individual privacy, but there are other dimensions to the problem, as you know

full well, in the health care, medical context; some privacy protective regulations that could frustrate another societal goal, which is

medical research. It could even interfere with the clinical process

and the patient’s ultimate well-being.

So all of those things are being looked at very carefully. The

paramount value I am sure that will be applied to that is individual privacy, but we have to make sure to find ways to protect that

in a way that allows other important goals, such as care of the public dollar to proceed also.

Mr. HORN. Any thoughts, Mr. Walker?

Mr. WALKER. I do think it is important, Mr. Chairman, that in

addition to protecting the privacy of individuals, that we also recognize that in order to make sure that we are minimizing improper

payments and that we are fighting fraud, that does occur, especially in the healthcare industry. We have had a number of cases

there. We have to make sure that there are mechanisms in place

such that entities like the inspectors general and the GAO and

those that are trying to safeguard the public’s money have reasonable access to do things like data matching and to do analyses and

investigations to try to make sure that taxpayer funds are only

spent for bona fide expenses.

Mr. HORN. Let me pose another question here that a lot of us feel

very strongly about. I don’t expect you to really know this bill number, but it is H.R. 616 that would establish a separate Office for

Management and Budget in the Executive Office of the President.

The reason I advocate this change is that since assuming this

chairmanship about 7 years ago, it was very clear to me, after dozens of hearings, and now 200 hearings, we have management

issues that aren’t being faced up. And that isn’t a matter of party,

it isn’t a matter of liberal or conservative or anything else, it is

simply the fact that when President Nixon put the M in OMB, I

was an enthusiastic booster of that. I thought, ‘‘hey, this is great.’’

We can use the budget to get their attention in Cabinet departments and deal with some of these management tasks.

My friends in the senior civil service over the last 5 or 6 years

before I came here, they said, ‘‘Steve, you are kidding yourself.’’ It

isn’t happening. The budget just squeezes out everything.

I think that is true, even though we have balanced budgets now,

that we need to get a focus on the management. Y2K is one that

everybody knows, that I started in April 1996. They weren’t doing

a thing. They had a system for management. Nothing ever was

done there. The gentleman retired. Then years later, he was pulled

out, made assistant to the President, and it worked. But you had

to get focus on it, and there wasn’t focus. They were 2 or 3 years

behind.

And I just would like to get your thoughts on this. Should there

be an Office of Management where you have somebody with the

Comptroller General’s background? That is exactly what we need

in that spot, not a budget person, but someone who knows what big

corporate operations are, big governments are, and how we could

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better serve the people by performance budgets, as Mr. Putnam

noted, and what they have done in New Zealand. I have taken a

long look at that. It is worth looking at it.

Two socialist governments, in Australia and New Zealand, about

the same time said, how are we going to get this job done? We can’t

pay the bills. We need to better know which programs are not

working and get rid of those.

Now, in our country, Oregon comes to closest on this, South

Carolina has been working on that, Minnesota has also been working on that. When we went to New Zealand to check what they

were doing, they had followed Mrs. Thatcher’s look at her own British Isles, and then they kept it going, and it still is, where Ambassadors have to account for everything, including the art on the

walls.

A friend of mine who was an ambassador from New Zealand

said, I am going to send the paintings back to them, they are not

going to take in my budget. So you had to start to think about

what do you do with the people’s money.

So I would be interested to know what your feeling is on that.

Mr. DANIELS. My attitude for now, Mr. Chairman, is that I would

not support that legislation, but I am not closed-minded to it, and

I don’t dispute for a moment your point that this has perhaps

never been a sufficient priority in the past for either party. I would

be willing to revisit my opinion on that question after some decent

interval in which we will try very, very hard to realize the initial

intent of assigning management responsibility to the same office

that holds the purse strings, in a way, of the executive branch.

I would salute, and have in the past, the previous administration

for taking one step, I think, in that direction by unifying within

OMB budget and management responsibilities. That, at least in

theory, brings together in one place the agency’s resources directed

at management, and its clout or its, let’s say, persuasive interaction with departments and agencies at the budgetary level.

So my attitude is, though, what is important is that the job get

done. And if we cannot make better progress under this scheme

after some reasonable period of time, you will not find me territorial at all about this. I would worry that free-floating anywhere

else in the government you wouldn’t—this function would not be

any better off, it wouldn’t have any greater clout or any greater influence than, at least in theory, it can today.

I would say that I hope there is something—I won’t forget the

bill number—661 happens to be the number of billions of dollars

that we have proposed in discretionary spending in this year’s

budget, and——

Mr. HORN. I won’t say we are clairvoyant, but it is H.R. 616.

Mr. DANIELS. Well, it is not just a good mnemonic for me. Let

me suggest another linkage.

One reason I think that management has been consistently

crowded out over the last few years is that the budget process, as

it happens in the Congress, between Congresses and administrations, has just grown, grown, grown until it is an almost 24/7, 365

day a year exercise. It has been so disorderly, so chaotic, so disrespectful of its own stated rules that it does devour the time of

all concerned.

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A major theme of President Bush’s budget was to try to move

back in the direction of an orderly budget process to live within the

confines of the Budget Enforcement Act and perhaps to add a couple other reforms that might allow these basic decisions to be made

in a more efficient way. If that happened, I guarantee you would

have a major impact in terms of freeing our time and attention and

resources to work on the rest of our assignments, starting with

management.

My last observation is that we will take your counsel and study

carefully some of these other examples of which I am only dimly

aware: New Zealand, Australia and so forth. I would observe that

these are all Parliamentary Systems, and I don’t think it is entirely

accidental, because I think you know from your experience that

whatever the shortcomings of past administrations, of the executive

branch, in managing its affairs, Congress plays a role too. Just as

fiscal reforms and spending reforms tend to run into severe opposition in Congress, so do management reforms. And there are a number of them that we intend to advance, consolidation of agencies

and of programs and so forth, that make eminent sense from a

management standpoint but do collide with political realities, because they can’t be done unilaterally the way I used to be able to

do it in the corporate world.

Mr. HORN. I just suggest that perhaps on the strategic plans of

these agencies, that we would—and I have told our own committee

chairmen on authorization and the cardinals on the committees,

that when we have that dialog, it ought not to be staff and staff;

it ought to be the people the President has selected as reflecting

his views; namely, you and others that are key people in making

government work. We need on those, say, once-a-year affairs, to sit

down around the table and talk to each other, those that are elected here to handle the budget through appropriations or whatever

the authorizations are for policy matters. And I would just hope

that we could get the right people around the table and then say,

you know, that isn’t the way we interpreted the law. Why don’t you

take a look at it?

I would like your—Comptroller General, I would like your views

on the Office of Management, what you think. You have had some

outstanding risk conflicts that you have put out with every new

Congress, hopefully. I think that people will read them and do

something about it. Well, we are trying to do that.

Mr. WALKER. From a conceptual standpoint, Mr. Chairman, I believe that it would be preferable to beef up the M in OMB, give it

the amount of resources that it needs in order to do its job, for it

to take the lead on strategic planning, financial management, information technology, and human capital on a government-wide basis,

and the interrelationship, obviously, having to work with the Cabinet, with the deputy secretaries; obviously having to work with

other parties such as OPM in the case of the people area. But, I

think from an intellectual standpoint, that if they had the right

players and enough resources, they would have the ability to be

able to link and leverage the budget process.

I also would add that in addition to leveraging the budget process, something can and should be done quicker than that, and that

is the issue of making sure that agencies have their performance

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measurement and reward systems, not just for their executives, but

cascading down to other fellow employees, also linked to the strategic plans and the outcomes that are desirable in the strategic

plans.

We know that human beings will end up being motivated based

upon how they are measured, and I think a vast majority of public

servants are well-intentioned capable people who want to do a good

job, and I think that we need to help them to be able to do that.

The last thing I would say, Mr. Chairman, is that I think because of the long-range fiscal challenges that I put up before on the

boards, that now is the ideal time that government should be asking two fundamental questions. First, what should government do

in the 21st century? And, how should government do business in

the 21st century?

On the first, that I think calls for a fundamental reassessment

of departments, agencies, and programs, obviously in some priority

order, to ask the question: Why are they here? Why did we put

them in place? Are the factors that caused them to be put in place

still relevant? What priority are they for today and tomorrow, not

for yesterday? That is going to take a cooperative effort between

the legislative branch and the executive branch because, as Director Daniels said, you have to make sure you deal with both ends

of Pennsylvania Avenue to get things done there.

On the other hand, on how government does business, making it

more results-oriented, focused on outcomes that matter to the

American people, maximizing performance and assuring accountability, I think OMB is in an ideal position to take the lead on that,

working with the parties that I mentioned before, and obviously we

will continue to try to play a constructive approach in trying to

help get those kinds of results for the American people.

Mr. HORN. Well, I think your wisdom is very good and I am glad

the Director will keep an open mind on this. It seems to me if you

people could get together every couple of weeks, I think it would

be worthwhile to have it happen. This is the one chance, when you

get a new administration full of enthusiasm, to get things done. I

think it will mean that you will be able to get people that want to

help you, doing things the right way.

As I suggested, the kind of background the Comptroller General

had is, to my judgment, exactly who ought to be the Director of an

Office of Management. We had about a dozen or two during President Eisenhower’s time. He was the first one that looked around

the whole White House and Executive Office of the President to

say, this place is just not staffed. He was used to vast forces, armies, whatnot, and he just couldn’t believe what he saw. So he

started to—President Truman put two people over in what is now

the Eisenhower Building and said, look through the Congressional

Record every day. That was the beginning of at least something

down there.

And President Eisenhower put in an Office of Liaison with Congress, a good management group in the Bureau of the Budget at

that time, who, if you wanted a law written or a corporate government function, which a number were, or working with the TVA,

which all the line agencies up here hated and all that, but a lot

of good things were done. They were done by able people without

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a partisan lilt. They were just people that were excellent professionals.

And that is what we ought to get on this, people that are professionals, that will take direction. But we need people I think, like

you do, to get people who can get things done, because otherwise

nobody is going to face up to it. You need to get a good deputy secretary in most of these agencies, and that would certainly help, but

they need coordination.

Mr. DANIELS. I couldn’t agree more, Mr. Chairman. As you and

I have discussed, we are searching for the best person, people, we

can. In fact, we have, I think, set the specifications at a level that

means it has taken a little time to find—to try to find the right

leader and supporting cast.

I couldn’t agree more that if we could get David Walker to take

this on, then the problem would be two-thirds solved. He is one of

the finest people in American government.

Mr. HORN. We could clone him.

Mr. WALKER. For the record, Mr. Chairman, I have a good job,

but I appreciate the compliment. And cloning is illegal in the

United States.

Mr. DANIELS. I know I would get shelled up here if I even attempted to steal him away from his congressional responsibilities.

But we have visited on multiple occasions, and we have used his

high-risk list as a starting point for our own target selection, and

we will continue to do that.

He has his responsibilities which are not the same, we know, as

ours; but there is this very strong convergence that you mentioned.

And, to the limits of what is appropriate, I want the relationship

between our two organizations to be tight.

Mr. HORN. Well, we thank you for coming. There are some other

questions we might submit, if we could, from either the minority

or the majority, that—some Members couldn’t make it here.

So I want to now thank the staff that put many of these things

together, and there is also a statement from Chairman Burton

which will go into the record at this point.

I’d like to thank the staff for their work on this. J. Russell

George, staff director and chief counsel, standing over there;

Dianne Guensberg is a professional staff member, detailee from the

General Accounting Office; Bonnie Heald, director of communications; Earl Pierce, professional staff; Matthew Ebert, policy advisor;

Grant Newman, assistant to the committee; Bruan Homm, intern.

On the minority staff, Mark Stephenson, professional staff; Jean

Gosa, minority clerk; and our two faithful court reporters, Bob

Cochran and Julie Bryan. Thank you very much.

Mr. WALKER. Mr. Chairman, if I can, just before you put the

gavel down, just for the record, I would like to publicly thank many

of the GAO professionals who were part of the GAO financial statement audit. I hate to mention names, but just a few who are with

me here today: Jeff Steinhoff, Gary Engel, Linda Calbom, Greg

Kutz, Steve Sebastian, McCoy Williams, and Phil Calder are

among the many dedicated GAO professionals that tried to make

this happen; and, again, to mention the Treasury, OMB, and other

public servants who also were part of this process.

Thank you, Mr. Chairman.

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Mr. HORN. Well, we thank you, and their names will be in the

record. If you would like to add some from the Treasury or the Office of Management and Budget we would be glad to put it in the

hearing record.

Thank you very much.

[Whereupon, at 11:55 a.m., the subcommittee was adjourned.]

[The prepared statements of Hon. Dan Burton, Hon. Janice D.

Schakowsky, and Paul O’Neill follow:]

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