HomeReportsBureau of the Comptroller and Global Financial ServicesFY 2018 Department of State Agency Financial Report...Section I: Management’s Discussion and Analysis

# 					FY 2018 Department of State Agency Financial Report: Section I: Management’s Discussion and Analysis			

Bureau of the Comptroller and Global Financial Services

 In this section										/

													Section Table of Contents											

                -  Section Table of Contents 
                -  About the Department                    -  Our Vision, Mission, and History 
                  -  Our Organization and People 
                  -  Our Work at Home and Overseas 
                -  Strategic Goals and Government-wide Management Initiatives                    -  Managing for Results: Planning, Budgeting, Managing, and Learning 
                  -  Joint State-USAID Strategic Goals 
                  -  Agency Priority Goals 
                  -  Cross-Agency Priority Goals 
                -  Performance Summary and Highlights                    -  Performance Reporting 
                  -  Major Program Areas 
                  -  Program and Project Design, Monitoring, and Evaluation Policy 
                  -  Maximizing America's Investment Through Innovation and Evidence 
                -  Financial Summary and Highlights                    -  Balance Sheet: Overview of Financial Position 
                  -  Statement of Net Cost: Yearly Results of Operations 
                  -  Statement of Changes in Net Position: Cumulative Overview 
                  -  Combined Statement of Budgetary Resources: Ensuring Prosperity for America's Future 
                  -  The Department's Budgetary Position 
                  -  Resource Management Systems Summary 
                  -  Limitation of Financial Statements 
                -  Management Assurances and Other Financial Compliances                    -  Management Assurances 
                  -  Federal Managers' Financial Integrity Act 
                  -  Departmental Governance 
                  -  Federal Financial Management Improvement Act 
                  -  Federal Information Security Modernization Act 
                  -  Digital Accountability and Transparency Act 
                  -  Other Regulatory Requirements 

## Section Table of Contents

- About the Department
- Strategic Goals and Government-wide Management Initiatives
- Performance Summary and Highlights
- Financial Summary and Highlights
- Management Assurances and Other Financial Compliances

							About the Department					

### Our Vision, Mission, and History

> 
We must maintain America’s historic role as a truly global power, whose first instinct and overwhelming preference is to use diplomacy to solve global challenges.

**Michael Pompeo**Secretary of State

#### Our Vision

On behalf of the American people we promote and demonstrate democratic values and advance a free, peaceful, and prosperous world.

#### Our Mission

The U.S. Department of State leads America’s foreign policy through diplomacy, advocacy, and assistance by advancing the interests of the American people, their safety and economic prosperity.

#### Our History

The U.S. Department of State (the Department) is the lead U.S. foreign affairs agency within the Executive Branch and the lead institution for the conduct of American diplomacy. Established by Congress in 1789, the Department is the nation’s oldest and most senior cabinet agency.

The Department is led by the Secretary of State, who is nominated by the President and confirmed by the U.S. Senate. The Secretary of State is the President’s principal foreign policy advisor and a member of the President’s Cabinet. The Secretary carries out the President’s foreign policies through the State Department and its employees.

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More information on the duties of the Secretary can be found at: https://www.state.gov/duties-of-the-secretary-of-state

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**DID YOU KNOW?**

*Michael R. Pompeo has visited 20 countries, traveling over 120,000 miles during his 5 months as Secretary of State. He travels to all corners of the world to do his job. His duties as Secretary include acting as the President’s representative at all international forums, negotiating treaties and other international agreements, and conducting everyday, face-to-face diplomacy.*

More information on the Secretary’s travel can be found at: https://www.state.gov/travels-with-the-secretary-of-state/

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### Our Organization and People

The Department of State advances U.S. objectives and interests in the world through its primary role in developing and implementing the President’s foreign policy worldwide. The Department also supports the foreign affairs activities of other U.S. Government entities including the United States Agency for International Development (USAID). USAID is the U.S. Government agency responsible for most non-military foreign aid and it receives overall foreign policy guidance from the Secretary of State. The State Department carries out its foreign affairs mission and values in a worldwide workplace, focusing its energies and resources wherever they are most needed to best serve the American people and the world.

The Department is headquartered in Washington, D.C. and has an extensive global presence, with more than 270 embassies, consulates, and other posts in over 180 countries. A two-page map of the Department’s locations appears in Appendix B. The Department also operates several other types of offices, mostly located throughout the United States, including over 25 passport agencies, two foreign press centers, one reception center, five logistic support offices for overseas operations, 20 security offices, and two financial service centers.

The Foreign Service officers and Civil Service employees in the Department and U.S. missions abroad represent the American people. They work together to achieve the goals and implement the initiatives of American foreign policy. The Foreign Service is dedicated to representing America and to responding to the needs of American citizens living and traveling around the world. They are also America’s first line of defense in a complex and often dangerous world. The Department’s Civil Service corps, most of whom are headquartered in Washington, D.C., is involved in virtually every policy and management area – from democracy and human rights, to narcotics control, trade, and environmental issues. Civil Service employees also serve as the domestic counterpart to Foreign Service consular officers who issue passports and assist U.S. citizens overseas.

Host country Foreign Service National (FSN) and other Locally Employed (LE) staff contribute to advancing the work of the Department overseas. Both FSNs and other LE staff contribute local expertise and provide continuity as they work with their American colleagues to perform vital services for U.S. citizens. At the close of 2018, the Department was comprised of nearly 76,000 employees.

The U.S. Department of State, with just over one percent of the entire Federal budget, has an outsized impact on Americans’ lives at home and abroad. For a relatively small investment, the Department yields a large return in a cost-effective way by advancing U.S. national security, promoting our economic interests, creating jobs, reaching new allies, strengthening old ones, and reaffirming our country’s role in the world. The Department’s mission impacts American lives in multiple ways.

These impacts include:

- We support American citizens abroad.  We provide emergency assistance to U.S. citizens in countries experiencing natural disasters or civil unrest. We assist with intercountry adoptions and work on international parental child abductions. In 2017, there were 4,714 adoptions to the United States, and 83 adoptions from the United States to other countries. In calendar year 2017, we worked on international parental child abduction cases involving 1,155 children – resulting in the return of 215 children to the United States.
- We create American jobs.  We directly support millions of U.S. jobs by promoting new and open markets for U.S. firms, protecting intellectual property, negotiating new U.S. airline routes worldwide, and helping American companies compete for foreign government and private contracts.
- We promote democracy and foster stability around the world.  Stable democracies are less likely to pose a threat to their neighbors or to the United States. We partner with the public and private sectors in countries in conflict to foster democracy and peace.
- We help to make the world a safer place.  Under the New Strategic Arms Reduction Treaty, we are reducing the number of deployed nuclear weapons to levels not seen since the 1950s. The Department has helped over 40 post-conflict countries clear millions of square meters of landmines and unexploded ordnance. We also work with foreign partners to strengthen international aviation and maritime safety and security.
- We save lives.  Strong bipartisan support for U.S. global health investments has led to worldwide progress against HIV/AIDS, tuberculosis, malaria, and polio. Better health abroad reduces the risk of instability and enhances our national security.
- We help countries feed themselves.  We help other countries plant the right seeds in the right way and get crops to markets to feed more people. Strong agricultural sectors lead to more stable countries.
- We help in times of crisis.  From natural disasters to famine to epidemics, our dedicated emergency professionals deliver assistance to those who need it most.
- We promote the rule of law and protect human dignity.  We help people in other countries find freedom and shape their own destinies. We advocate for the release of prisoners of conscience, prevent political activists from suffering abuse, train police officers to combat sex trafficking, and equip journalists to hold their governments accountable.
- We help Americans see the world.  The Department’s Bureau of Consular Affairs supports and protects the American public. In 2018, we issued 21.1 million passports and passport cards for Americans to travel abroad. We facilitate the lawful travel of international students, tourists, and business people to the United States, adding greatly to our economy. We provide information to help U.S. citizens assess risks of international travel and learn about steps to take to ensure their safety when traveling abroad.
- We are the face of America overseas.  Our diplomats, development experts, and the programs they implement are the source of American leadership around the world. They are the embodiments of our American values abroad and a force for good in the world.

The Secretary of State is supported by a Deputy Secretary, the Executive Secretariat, the Office of U.S. Foreign Assistance Resources, the Counselor and Chief of Staff, six Under Secretaries, and over 30 functional and management bureaus and offices. The Deputy Secretary of State serves as the principal deputy, adviser, and alter ego to the Secretary of State. The Under Secretaries have been established for Political Affairs; Economic Growth, Energy and Environment; Arms Control and International Security Affairs; Public Diplomacy and Public Affairs; Management; and Civilian Security, Democracy and Human Rights. The Under Secretary for Management also serves as the Chief Financial Officer for the Department.

Six regional bureaus support the Department’s political affairs mission – each is responsible for a specific geographic region of the world. These include:

- Bureau of African Affairs (AF),
- Bureau of European and Eurasian Affairs (EUR),
- Bureau of East Asian and Pacific Affairs (EAP),
- Bureau of Near Eastern Affairs (NEA),
- Bureau of South and Central Asian Affairs (SCA), and
- Bureau of Western Hemisphere Affairs (WHA).

The Department also includes the Bureau of International Organization Affairs. This Bureau develops and implements U.S. policy in the United Nations, its specialized and voluntary agencies, and other international organizations. The Department’s organization chart can be found at https://www.state.gov/r/pa/ei/rls/dos/99484.htm.

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**DID YOU KNOW?**

*Edward Reilly Stettinius, Jr., the 48th Secretary of State, served as the Secretary of State (1944-1945) and was the first U.S. Ambassador to the United Nations (1945-1946).*

More information on former Secretaries can be found at: https://history.state.gov/departmenthistory/people/secretaries

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### Our Work at Home and Overseas

At home, the passport process is often the primary contact most U.S. citizens have with the Department of State. There are 29 domestic passport agencies and centers, and approximately 7,500 public and 700 Federal and military passport acceptance facilities. The Department designates many post offices, clerks of court, public libraries and other state, county, township, and municipal government offices to accept passport applications on its behalf.

Overseas, in each Embassy, the Chief of Mission (usually an Ambassador) is responsible for executing U.S. foreign policy aims, as well as coordinating and managing all U.S. Government functions in the host country. The President appoints each Chief of Mission, who is then confirmed by the Senate. The Chief of Mission reports directly to the President through the Secretary of State. The U.S. Mission is also the primary U.S. Government point of contact for Americans overseas and foreign nationals of the host country. The Mission serves the needs of Americans traveling, working, and studying abroad, and supports Presidential and Congressional delegations visiting the country.

Every diplomatic mission in the world operates under a security program designed and maintained by the Department’s Bureau of Diplomatic Security (DS). In the United States, DS investigates passport and visa fraud, conducts personnel security investigations, and protects the Secretary of State and high-ranking foreign dignitaries and visiting officials. Click here for an “In Focus” view of our global visa fraud investigations.

Additionally, the Department utilizes a wide variety of technology tools to further enhance its effectiveness and magnify its efficiency. Today, most offices increasingly rely on digital video conferences, virtual presence posts, and websites to support their missions. The Department also leverages social networking Web tools to engage in dialogue with a broader audience. See Department websites of interest.

							Strategic Goals and Government-wide Management Initiatives					

### Managing for Results: Planning, Budgeting, Managing, and Learning

The Department of State has strengthened program and project management through enhanced guidelines to better align and manage programs with best practices and policy priorities. The Department uses the Managing for Results (MfR) Framework, which encourages enterprise-wide linkages of strategic planning, budgeting, managing, and improving results. The purpose of the MfR Framework is to help bureaus and missions achieve improved outcomes by conducting policy, resource, and program decision making that is informed by strategic planning and data gleaned through rigorous monitoring and evaluation practices.

The concurrent February 2018 release of the State/USAID Joint Strategic Plan (JSP) and the FY 2019 President’s Budget resynchronized strategic planning, budgeting, program management, and learning. These integrated processes inform and facilitate one another, improving the effectiveness of how both agencies carry out their business. The Department and USAID’s major strategic planning processes and documents are implemented at three organizational levels:

- Joint Strategic Plan – Four-year agency strategic plan that outlines State and USAID overarching goals and objectives, and guides bureau and mission planning.
- Bureau Strategies   - Joint Regional Strategies – Four-year strategic plan for each region that sets joint State and USAID priorities and guides key partner bureau and mission level planning.
  - Functional Bureau Strategies – Four-year strategic plan that sets priorities for each State functional bureau and guides key partner bureau and mission level planning. 
- Integrated Country Strategies (ICS) – Four-year strategic plan that articulates whole-of-government priorities in a given country and incorporates policy priorities. As a whole-of-government document, each ICS incorporates the relevant USAID mission’s Country Development Cooperation Strategy and the official U.S. Government strategy for all Security Sector Assistance in the respective country.

### Joint State-USAID Strategic Goals

The Department of State and USAID published its FY 2018-2022 JSP in February 2018 following a consultative process that involved the senior leadership of the two agencies, bureau leadership, and subject matter experts. The JSP lays out the strategic direction of U.S. diplomacy and development efforts over the next four years. Its goals and objectives articulate how State and USAID will enable the United States to succeed in a competitive globalized era, and how our agencies adapt on delivering our missions. It contains four goals and 16 objectives as shown in the “State-USAID Joint Strategic Goal Framework.”

The JSP, along with the National Defense Strategy, directly supports the National Security Strategy (NSS). There is a direct correlation between all 16 JSP objectives and 13 of 15 NSS objectives. The JSP was developed through policy guidance from the Secretary of State, USAID Administrator, Congress, and the National Security Council.

The JSP informed the overarching policy direction for the seven new Joint Regional Strategies, 40 Functional Bureau Strategies, and 185 Integrated Country Strategies in 2018. The goals and objectives established in the JSP provided both a policy and strategic vision for all Department bureaus and posts by laying out actions and performance goals of which all bureaus and posts needed to consider in developing their respective strategies. Once finalized, the goals and objectives in each bureau- and mission-level strategy will be made available to the public through the Department’s internet site at https://www.state.gov/plans-performance-budget/.

### Agency Priority Goals

Agency Priority Goals (APG) are a performance accountability structure of the Government Performance Results Act (GPRA) Modernization Act of 2010 that provide agencies a mechanism to focus leadership priorities, set outcomes and measure results, bringing focus to mission areas where agencies need to drive significant progress and change. In collaboration with the Office of Management and Budget, the Department of State has identified four APGs for the FY 2018 – FY 2019 cycle, which align with updated goals and objectives in the FY 2018-2022 Joint Strategic Plan. APGs support improvements in near-term outcomes, customer service or efficiencies, and advance progress toward longer-term, outcome-focused strategic goals and objectives. APGs are intended to demonstrate quarterly progress on near-term results or achievements the agency seeks to accomplish within 24 months.

- Visa Security:  By September 30, 2019, the Department will update the DS-160 and DS-260 non-immigrant and immigrant visa application forms and add the newly-collected fields to our data sharing feeds for interagency partners.
- IT Modernization:  By September 30, 2019, the Department will improve its IT service delivery by reducing the average time associated with providing new IT capabilities by 20 percent, managing 100 percent of workforce digital identities through a central Enterprise Identity Management solution, from a baseline of zero, and increasing workforce access to cloud-based email and business data from any device from 10 percent to 100 percent.
- HIV/AIDS:  By September 30, 2019, new infections are fewer than deaths from all causes in HIV-positive patients in up to 13 high-HIV burden countries through leadership by State and implementation by USAID; the U.S. Department of Health and Human Services and its Agencies, including the Centers for Disease Control and Prevention, the Health Resources and Services Administration, and the National Institutes of Health; the Departments of Defense, Labor, and Treasury; and the Peace Corps.
- Category Management:  By September 30, 2019, meet or exceed Federal targets for Best-In-Class contract awards.

The Department’s official reporting on APGs can be found on Performance.gov at https://www.performance.gov/state/state.html .

### Cross-Agency Priority Goals

The President’s Management Agenda’s long-term vision for modernizing the Federal Government will improve the ability of agencies to deliver mission outcomes, provide excellent customer service, and serve as effective stewards of taxpayer dollars on behalf of the American people. To drive these management priorities, the Administration leverages Cross-Agency Priority (CAP) goals to coordinate and publically track implementation across Federal agencies. CAP goals provide the components of the Federal Government Performance Plan required by the GPRA Modernization Act of 2010. As of October 2018, the Department contributes to 10 CAP goals. Progress updates on CAP goals are published on Performance.gov at https://www.performance.gov/CAP/CAP_goals.html .

							Performance Summary and Highlights					

### Performance Reporting

The strategic objectives of the Joint Strategic Plan serve as the primary basis for performance analysis and program decision making within the Department and USAID. Department of State and USAID report annual progress and results toward achieving the strategic objectives and performance goals articulated in the JSP via the Annual Performance Plan/Annual Performance Report (APP/APR). The latest reporting on the JSP – including performance goals, performance indicators, and a narrative explanation of progress aligned to the FY 2018-2022 JSP – can be found in the FY 2019 APP/FY 2017 APR at https://www.state.gov/plans-performance-budget/performance-plans-and-reports/.

The GPRA Modernization Act of 2010 requires that agencies tie their annual performance information to the strategic objectives identified in their strategic plan. The primary method for accomplishing this link is through performance goals, which identify the specific, measurable, and attributable level of performance that the Department and USAID will strive to achieve and to which it can hold the agencies accountable. The performance goals in the JSP provide measurable progress towards the achievement of the strategic objectives in the Plan and reflect the Department and USAID strategic and management priorities. The majority of the performance goals are measured annually; the performance goals identified as Agency Priority Goals, as noted earlier, have data available on a quarterly basis. The following section provides an overview of major program areas. These programs are included in the Financial Section, Section II of this AFR, on the Consolidated Statement of Net Cost.

### Major Program Areas

#### Peace and Security

The United States faces ever-evolving and multi-dimensional security challenges. To meet these challenges, we support and collaborate with both new and old partners to defend shared interests and to adapt to the changing international environment. This means working to advance nonproliferation, antiterrorism, demining, and related programs; global threat reduction; and security assistance. The Department is focusing its efforts on strategically vital regions to prevent crises and foster resilience in ways that align to our broader commitments and that secure our borders.

#### Democracy, Human Rights, and Governance

Accountable governments contribute to a freer, more prosperous, and peaceful world. Democracies are our strongest partners on security, trade, and energy, in peace and in conflict. Our support – which includes efforts to address transnational criminal organizations and illicit pathways to the U.S. border, as well as the underlying conditions for weak governance, corruption, uneven economic growth and human rights abuses – is a lifeline for nations and individuals striving for change, and is our greatest strength in combating violent extremism. Democratic governments work with the United States to build consensus and solve problems on the global stage. Their respect for the pluralism of ideas, inclusiveness, and vibrant civil societies leads to innovation and entrepreneurship that benefit all.

#### Health, Education, and Social Services

U.S. efforts to improve specific challenges in global health and education advance our broader national security interests by addressing underlying drivers of terrorism and constraints to inclusive economic growth that open markets and reduce fragility. The State Department and USAID use diplomacy and foreign assistance programs to create an AIDS-free generation, end preventable child and maternal deaths, reduce the threat of infectious diseases, and fight pandemic diseases. The U.S. Government partners with multilateral institutions, donor nations, and other organizations to encourage and empower developing countries to build strong, sustainable health care systems. Expanding health care capacity abroad is essential to long-term development. U.S. investments, such as those supporting the immunization of hundreds of millions of children in low-resource countries, save lives and result in healthier people. Our investments make for stronger, more prosperous, and more stable countries; enhance international security and trade; and in turn ensure a safer, more resilient America. Despite successes in recent decades, the United States recognizes that much remains to be done to strengthen health systems in developing countries so that they can address emerging threats and long-term challenges, such as HIV/AIDS, tuberculosis, malaria, and maternal and child mortality. Investments in PEPFAR focused U.S. support in key countries to expand HIV prevention and treatment services and leverage increased performance and efficiency gains. Infectious disease outbreaks remain among the foremost dangers to human health and the global economy, as many countries have limited capacity to prevent, detect, and rapidly respond to these threats. Health is the largest component of U.S. development assistance.

#### Humanitarian Assistance

The Department is addressing many of the underlying drivers of threats to our national security through migration and refugee assistance. The Department and other U.S. agencies work to ensure outcome documents and resolutions adopted in the United Nations or other international forums are consistent with U.S. policy. Our efforts include outreach to and dialogue with government officials, multilateral organizations, NGOs, and other entities engaged in demographic, family planning, and gender equality policy work. This allows the United States to maintain a leadership role in shaping global humanitarian assistance while also working with international partners on long-term solutions.

#### International Organizations and Commissions

The United States benefits from a disciplined, purposeful, and deep engagement with the rest of the world. American interests are protected by an international system that allows for cooperation with like-minded partners without compromising our independence. The Department continues to strengthen American leadership both in our partnerships and with multilateral institutions, such as the host of United Nations agencies and organizations. U.S. leadership in these venues is often instrumental to fostering cooperation, sharing the costs of taking action, and protecting the rule of law, human rights, dignity, and democratic values. In the absence of a sustainable and business-like U.S. presence across the international system, including at the United Nations, U.S. national interests would not be protected. U.S. leadership ensures that these partnerships remain healthy bidirectional relationships.

U.S. senior officials also engage publicly and privately with citizens in countries eager for progress and those burdened by oppressive governments. The U.S. Government pushes back on attempts to dismantle institutions, and works with like-minded governments. The Department also engages regional mechanisms to advance our ideals and to deter backsliding by governments.

#### Diplomatic and Consular Programs

Twenty-first century diplomatic and development challenges demand new approaches to meet our goals. Meeting these challenges requires a flexible and efficient support platform for our global staff. As the Department adapts how it delivers on mission, our ability to keep personnel safe from physical and virtual threats is a top priority. By ensuring that only the right people are allowed on systems with a sophisticated cybersecurity infrastructure, the Department can carry out the mission while maintaining security. State is striving to ensure that all personnel, whether they are diplomats, development professionals, security agents, or family members, receive the right training at the right time so that everyone is a contributor to overall security in both the real and digital worlds.

#### Administration of Foreign Affairs

In the 21st Century, effective engagement with international partners, stakeholders, customers, and audiences requires data-informed decision making and risk-based investments that apply new technologies and innovative approaches for strengthening collaboration, ensuring coordinated and integrated strategic planning linked to budget priorities, and expanding our internal and external networks. In an era when information is disseminated instantaneously worldwide, our ability to engage quickly and effectively is a core competency for our high-performing, motivated professionals. To meet these challenges also requires a nimble and efficient support platform for our professionals representing the United States around the world.

Another focus of the Department is transitioning engagement activities from limited, exclusive, and direct contacts to an approach based on a culture of openness. This has resulted in expanding the use of digital communications such as social media, video conferencing, and smart phone applications that allow the Department to directly reach citizens and to open up our public engagement to all who are interested, not just the limited audience that can be invited to attend events in person. Evidence-based planning and increased operational efficiency and effectiveness are among the factors accounting for the improvements in performance and results.

### Program and Project Design, Monitoring, and Evaluation Policy

The Department is committed to using design, monitoring, evaluation, and data analysis best practices to achieve the most effective U.S. foreign policy outcomes and greater accountability to our primary stakeholders, the American people. In response to requirements contained in the Foreign Aid Transparency and Accountability Act and the Program Management Improvement and Accountability Act, the Department updated its evaluation policy to encompass the full spectrum of performance management and evaluation activities including program design, monitoring, evaluation, and analysis and learning. Per 18 FAM 300, Program and Project Design, Monitoring, and Evaluation Policy, bureaus are putting in place performance management documents and practices including the use of logic models, theories of change, performance metrics, monitoring structures, and other foundational components against which progress can be monitored and evaluated.

### Maximizing America's Investment Through Innovation and Evidence

#### Evidence and Evaluation

The Department supports the analysis and use of evidence in policymaking by training staff, creating groups for knowledge sharing, establishing and monitoring evaluation requirements, providing funding opportunities to gather better evidence, and maintaining a central database to manage and share evaluations. The Department continues efforts to strengthen the use of data and evidence to drive better decision making and achieve greater impacts. Ongoing performance monitoring data provide a picture of how programs are doing, and program evaluation is used to understand why they are working.

In 2018, the Department completed the process of modifying the Foreign Affairs Manual to integrate program design and performance monitoring into its evaluation policy. The updated policy and corresponding tools, such as a program and project design tool kit, will improve performance management and the evaluability of Department efforts.

The Department continues to integrate and facilitate program planning, performance management, and decision support processes. Several bureaus have designated or hired a full-time Bureau Evaluation Coordinator responsible for coordinating evaluations of the bureau’s programs as part of a larger strategy to grow research and performance management capacity.

The Department’s Evaluation Community of Practice, with over 430 members, meets monthly to discuss policy issues, share best practices, and host presentations. The Department also hosts evaluation events that bring together the Department’s evaluation community and serve as a venue where evaluation leaders can share how they have used the results of evaluations to validate current plans or inform future decisions. These events range from large, multi-day sessions to shorter, topical seminars and workshops. This group is now complemented by the Program Design and Performance Management Community of Practice which holds monthly meetings that support the implementation of the new program design and performance management policy requirements under 18 FAM 300.

In FY 2017, the Department completed 85 evaluations: 25 evaluations of Diplomatic Engagement- and 60 evaluations of Foreign Assistance-funded programs and projects (including 23 evaluations sponsored by Office of the U.S. Global AIDS Coordinator), and included discussion of evaluation findings in the budget request process. Evaluation findings are tracked, communicated, and implemented within the commissioning bureau.

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More information on the Department’s Program and Project Design, Monitoring, and Evaluation Policy can be found at: https://fam.state.gov/fam/18fam/18fam030104.html

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#### Training

In the past year the Department has increased the number of staff trained in the management of evaluations and strengthened planning and performance management practices across regional and functional bureaus via classroom-based training. Key elements of this progress include:

- As part of an effort to solidify its Managing for Results infrastructure, the Department developed coursework on strategic planning and performance management, which equips personnel with the skills to develop strategic plans, articulate and measure bureau and office performance, and link performance goals to strategic goals and objectives. As of April 2018, 76 personnel had participated in the Department’s multi-day Strategic Planning and Performance Management training.
- Through the ongoing Teamwork@State initiative, the Department advanced the skills of project managers and staff by developing and deploying simple program management toolkits that improve the ability of staff and teams to develop office-level plans, manage projects, and improve processes. In 2017, the Teamwork@State team provided training to 599 staff members through formal and online trainings, targeted facilitations, webinars, briefings, and consultations, and as a result, increasing the Department’s project management knowledge and skills.
- Through the Department’s Foreign Service Institute, we also trained 245 people in an intensive project management workshop that serves as an introduction to the terminology and phases of the project management cycle.
- The Department continued to prepare personnel to conduct program evaluations by providing a series of workshops to 100 staff, including Bureau Evaluation Coordinators and performance management specialists, on managing different aspects of evaluations. These trainings are yielding a growing base of professionals with the tools to manage and assess program and project performance at the Department.

#### Management Challenges: Providing an Independent Statement of the Agency

In the 2018 annual statement, the Department’s Office of Inspector General (OIG) identified the most serious management and performance challenges for the Department. These challenges were identified in the areas of: protection of people and facilities; oversight of contracts, grants, and foreign assistance; information security and management; financial and property management; operating in contingency and critical environments; workforce management; and promoting accountability through internal coordination and clear lines of authority.

The OIG statement may be found in the Other Information (OI) section of this report. In response to the OIG’s recommendations, the Department took a number of corrective actions. Information on management’s assessment of the challenge and a summary of actions taken may also be found in the OI section.

							Financial Summary and Highlights					

The financial summary and highlights that follow provide an overview of the 2018 financial statements of the Department of State (the Department). The independent auditor, Kearney & Company, audited the Department’s Consolidated Balance Sheet for the fiscal years ending September 30, 2018 and 2017, along with the Consolidated Statements of Net Cost and  Changes in Net Position, and the Combined Statement of Budgetary Resources1. The Department received an unmodified (“clean”) audit opinion on both its 2018 and 2017 financial statements. A summary of key financial measures from the Balance Sheet and Statements of Net Cost and Budgetary Resources is provided in the table below. The complete financial statements, including the independent auditor’s reports, notes, and required supplementary information, are presented in Section II: Financial Information.

To help readers understand the Department’s principal financial statements, this section is organized as follows:

- Balance Sheet: Overview of Financial Position ,
- Statement of Net Cost: Yearly Results of Operations ,
- Statement of Changes in Net Position: Cumulative Overview ,
- Combined Statement of Budgetary Resources: Ensuring Prosperity for America’s Future ,
- The Department’s Budgetary Position ,
- Resource Management Systems Summary , and
- Limitation of Financial Statements .

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1 Hereafter, in this section, the principal financial statements will be referred to as: Balance Sheet, Statement of Net Cost, Statement of Changes in Net Position, and Combined Statement of Budgetary Resources. (back to text)

### Balance Sheet: Overview of Financial Position

The Balance Sheet provides a snapshot of the Department’s financial position. It displays, as of a specific time, amounts of future economic benefits owned or managed by the reporting entity (Assets), amounts owed (Liabilities), and amounts which comprise the difference (Net Position) at the end of the fiscal year.

***Assets.*** The Department’s total assets were $105.6 billion at September 30, 2018, an increase of $5.0 billion (5 percent) over the 2017 total. Fund Balance with Treasury increased $3.6 billion (7 percent) as a result of increased appropriations for International Peacekeeping Activities; Embassy Security, Construction, and Maintenance; Diplomatic and Consular Programs; and Global Health and Child Survival. Property and Equipment increased by $815 million (3 percent) from September 30, 2017. New buildings, structures and improvements accounted for $751 million of this increase with the top nine New Embassy Compound projects and one fitout project accounting for $618 million of the increase (see “Real Property Projects – 2018 Cost Activity”). Additionally, as part of the Property and Equipment increase, land increased by $59 million due to acquisitions in Chiang Mai for $35 million, Mogadishu for $12 million, and Bridgetown for $5 million.

Other assets increased $66 million (3 percent) as a result of decreases in reimbursable agreements with USAID and the Defense Security Cooperation Agency offset by slight increases in reimbursable agreements with the Department of Energy and other Federal agencies; as well as, voluntary contributions for relief of refugees, real property rent, and advances on behalf of USAID. Investments increased $398 million (2 percent) because contributions and appropriations received to support the Foreign Service Retirement and Disability Fund (FSRDF) were greater than benefit payments. There was also an increase due to an investment in the International Center.

Fund Balance with Treasury, Investments, and Property and Equipment comprise 97 percent of total assets for 2018 and 2017.

The six-year trend in the Department’s total assets is presented in the “Trend in Total Assets” bar chart. Total assets have increased an overall $20.8 billion (25 percent) since 2013. This upward trend resulted primarily from an $11.3 billion increase in Fund Balance with Treasury, a $6.7 billion increase in Property and Equipment, and a $1.9 billion increase in Investments.

Many Heritage Assets, including art, historic American furnishings, rare books and cultural objects, are not reflected as assets on the Department’s Balance Sheet. Federal accounting standards attempt to match costs to accomplishments in operating performance, and have deemed that the allocation of historical cost through depreciation of a national treasure or other priceless item intended to be preserved forever as part of our American heritage would not contribute to performance cost measurement. Thus the acquisition cost of heritage assets is expensed not capitalized. The maintenance costs of these heritage assets are expensed as incurred, since it is part of the government’s role to maintain them in good condition. All of the embassies and other properties on the Secretary of State’s Register of Culturally Significant Property, however, do appear as assets on the Balance Sheet, since they are used in the day-to-day operations of the Department.

***Liabilities.*** The Department’s total liabilities were $29.9 billion at September 30, 2018, an increase of $3.1 billion (12 percent) between 2017 and 2018. After-Employment Benefit Liability comprises 75 percent of total liabilities and increased $2.0 billion (10 percent) from 2017. International Organizations Liability increased $815 million (42 percent) and Accounts Payable increased $359 million (13 percent).

The six-year trend in the Department’s total liabilities is presented in the “Trend in Total Liabilities” bar chart. Over this period, total liabilities increased by $3.5 billion (13 percent). This change is principally due to the increase in the After- Employment Benefit Liability, a $2.0 billion increase. The increase is due to a higher number of Foreign Service employees enrolled in the plan and changes in the key economic indicators underlying the actuarial computation over time.

***Ending Net Position.*** The Department’s net position, comprised of Unexpended Appropriations and the Cumulative Results of Operations, increased $1.9 billion (3 percent) between 2017 and 2018. Cumulative Results of Operations increased $460 million and Unexpended Appropriations were up $1.4 billion due in part to the budgetary financing sources used to purchase property and equipment.

### Statement of Net Cost: Yearly Results of Operations

The Statement of Net Cost presents the Department’s net cost of operations by major program instead of strategic goal. The Department believes this is more consistent and transparent with its Congressional Budget submissions. Net cost is the total program cost incurred less any exchange (i.e., earned) revenue. The presentation of program results is based on the Department’s major programs related to the major goals established pursuant to the Government Performance and Results Act (GPRA) of 1993 and the GPRA Modernization Act of 2010. The total net cost of operations in 2018 equaled $28.7 billion, an increase of $2.2 billion (8 percent) from 2017. This increase of net costs was mainly due to increases in actuarial costs and pension expenses in the FSRDF due to actuarial assumption changes; increases in spending for global health programs; and increases in diplomatic and consular programs.

The six-year trend in the Department’s net cost of operations is presented in the “Trend in Net Cost of Operations” bar chart. There is an increase from 2013 to 2018 of $3.6 billion. Increases from 2013 generally reflect costs associated with new program areas related to countering security threats and sustaining stable states, as well as the higher cost of day-to-day operations such as inflation and increased global presence.

The “Net Cost of Operations by Major Program” pie chart illustrates the results of operations by major program, as reported on the Statement of Net Cost. As shown, net costs associated with two of the major programs (Health, Education, and Social Services) and (Diplomatic and Consular Programs) represents the largest net costs in 2018 – a combined $16.7 billion (58 percent). The largest increase was in the Administration of Foreign Affairs program. This program increased by $1.4 billion as a result of increases in the actuarial loss on pension assumption changes for the FSRDF. These increases are predominately due to the decrease in the assumed rate of return and the changes made in the mortality rates based upon the 2018 Experience Study performed by the Department’s actuary. In the Health, Education, and Social Services, net costs increased by $0.5 billion as a result of increased spending on the global health programs.

#### Earned Revenues

Earned revenues occur when the Department provides goods or services to another Federal entity or the public. The Department reports earned revenues regardless of whether it is permitted to retain the revenue or remit it to Treasury. Revenue from other Federal agencies must be established and billed based on actual costs, without profit. Revenue from the public, in the form of fees for service (e.g., visa issuance), is also without profit. Consular fees are established on a cost recovery basis and determined by periodic cost studies. Certain fees, such as the machine readable Border Crossing Cards, are determined statutorily. Revenue from reimbursable agreements is received to perform services overseas for other Federal agencies. The FSRDF receives revenue from employee/employer contributions, a U.S. Government contribution, and investment interest. Other revenues come from ICASS billings and Working Capital Fund earnings.

Earned revenues totaled $8.6 billion for the fiscal year ending September 30, 2018, and are depicted, by program source, in the “Earned Revenues by Program Source” pie chart. The major sources of revenue were from consular fees ($4.5 billion or 52 percent), reimbursable agreements ($2.1 billion or 24 percent), and ICASS earnings ($1.0 billion or 12 percent). These revenue sources totaled $7.6 billion (88 percent). Overall, revenue decreased by two percent – $182 million from 2017 to 2018. This decrease is primarily a result of a decrease in reimbursable activity with other Federal agencies.

### Statement of Changes in Net Position: Cumulative Overview

The Statement of Changes in Net Position identifies all financing sources available to, or used by, the Department to support its net cost of operations and the net change in its financial position. The sum of these components, Cumulative Results of Operations and Unexpended Appropriations, equals the Net Position at year-end. The Department’s net position at the end of 2018 was $75.7 billion, a $1.9 billion (3 percent) increase from the prior fiscal year. This change resulted from the $1.4 billion increase in Unexpended Appropriations and a $460 million increase in Cumulative Results of Operations.

### Combined Statement of Budgetary Resources: Ensuring Prosperity for America's Future

The Combined Statement of Budgetary Resources (SBR) provides data on the budgetary resources available to the Department and the status of these resources at the fiscal year-end. The SBR displays the key budgetary equation: Total Budgetary Resources equals Total Status of Budgetary Resources.

D

The Department’s budgetary resources consist primarily of appropriations, spending authority from offsetting collections, and unobligated balances brought forward from prior years. The “Trend in Total Budgetary Resources” bar chart highlights the budgetary trend over the fiscal years 2013 through 2018. A comparison of the two most recent years shows a $1.3 billion (2 percent) increase in total resources since 2017. This change resulted from an increase in unobligated balances from prior year budget authority ($3.6 billion) and decreases in appropriations ($1.9 billion) and offsetting collections ($0.4 billion).

### The Department's Budgetary Position

For FY 2018 the majority of the Department’s funding was provided by the Department of State, Foreign Operations, and Related Programs Appropriations Act, 2018 (Public Law No. 115-141) enacted on March 23, 2018. The Bureau of Budget and Planning manages the Diplomatic Engagement portion of the budget, and the Office of U.S. Foreign Assistance Resources manages Foreign Assistance funds.

#### Budgetary Position for Diplomatic Engagement

The FY 2018 appropriations for Diplomatic Engagement totaled $15.2 billion, which included $11.0 billion in Enduring funds from Title I of the Act, and $4.2 billion in Overseas Contingency Operations (OCO) funded through Title VIII. Funding in both titles supports the people and programs that carry out U.S. foreign policy, advancing U.S. national security, political, and economic interests at 277 posts in 191 countries around the world. These funds also maintain and secure the U.S. diplomatic infrastructure platform, from which U.S. Government agencies operate overseas. In addition to new FY 2018 funding, nearly $12.2 billion in prior year funding remained available for obligation in FY 2018.

In addition to appropriated resources, the Department earned an estimated new revenue of $3.5 billion from user fees derived from passport and visa processing, including Machine Readable Visa fees, Immigrant Visa fees, the Western Hemisphere Travel Initiative Surcharge, Visa Fraud Prevention and Detection fees, and other fee and surcharge revenues that support the Consular and Border Security Programs (CBSP). CBSP provides protection to U.S. citizens overseas and contributes to national security and economic growth. These vital programs deny individuals who threaten the country entry into the United States, while facilitating the entry of legitimate travelers.

In FY 2018, Diplomatic and Consular Programs (D&CP), the Department’s principal operating appropriation, totaled $8.7 billion, including Enduring and OCO funds. Within the total, $5 billion supported ongoing program operations and $3.7 billion went toward the Worldwide Security Protection (WSP) program to strengthen security for diplomatic personnel and facilities. Major elements of this funding included $958 million to support operations of the U.S. Mission in Iraq; $858.3 million for activities in Afghanistan; $113.3 million for key programs and activities in Pakistan; and $1.1 billion for supporting operations in other areas of unrest including high threat, high risk posts. In addition, $641 million supports public diplomacy programs to counter misinformation and secures support for U.S. policies abroad, of which $83 million is OCO and $558 million is Enduring.

The Department’s Information Technology (IT) Central Fund supported $363 million in IT investments for FY 2018. This included $103 million from the Capital Investment Fund (CIF) appropriation and $260 million in revenue from Expedited Passport fees. Investment priorities included modernization of the Department’s global IT infrastructure, architecture, and mobile device management. Accelerated cloud migration facilitates collaboration, data analytics, and records management.

The Embassy Security Construction and Maintenance (ESCM) appropriation totaled $2.3 billion, including $72 million in OCO, which provides U.S. missions overseas with secure, safe, and functional facilities. ESCM’s centerpiece programs are Capital Security Cost Sharing ($1 billion) and Maintenance Cost Sharing ($0.2 billion), which enabled the Department to begin seven New Embassy Compound/New Consulate Compound projects and five maintenance projects. In addition to State’s funding, these programs rely on over $1 billion in interagency contributions based on each agency’s overseas presence. With other agency contributions, total funding for these programs exceeds $2.5 billion. This funding supported maintenance and repairs of the Department’s real estate portfolio, which exceeds $52 billion in replacement value for owned assets and includes approximately 25,100 properties.

The Educational and Cultural Exchange Programs (ECE) appropriation was funded at $646 million. ECE programs engage both domestic and foreign audiences to develop mutual understanding and build foundations for international cooperation. Major highlights of FY 2018 funding included: $320 million for Academic Programs, such as the J. William Fulbright Scholarship Program, $215 million for Professional and Cultural Exchanges, notably the International Visitor Leadership Program and Citizen Exchange Program, and $29 million for the Young Leaders Initiatives. This appropriation also funds over 400 employees of the Bureau of Educational and Cultural Affairs.

The FY 2018 appropriation provided a total of $1.5 billion for the Contributions to International Organizations (CIO) account, including $96.2 million for Overseas Contingency Operations, and $1.4 billion in Enduring funds. Assessed contributions to international organizations include those for the United Nations and its specialized agencies, regional and Inter-American organizations, and other international organizations. The FY 2018 appropriation provided $1.4 billion for the Contributions for International Peacekeeping Activities (CIPA) account, including $967.5 million in OCO, and $414.6 million in Enduring funds for assessed contributions to international peacekeeping activities authorized by the United Nations.

The remainder of the Diplomatic Engagement enduring budget is comprised of Related Programs ($204 million) and International Commissions ($137 million) appropriations. Related programs include appropriations for the National Endowment for Democracy ($170 million), The Asia Foundation ($17 million), and the East-West Center ($16.7 million). The largest of the International Commissions is the International Boundary and Water Commission (IBWC), a binational commission that implements boundary and water treaties and international agreements between the United States and Mexico. IBWC was funded at $77.5 million.

Looking ahead, the Department’s FY 2019 Diplomatic Engagement budget request totals $12.7 billion in new budget authority. The Department is not requesting OCO funding in FY 2019.

In February 2018, Congress passed a two-year budget deal that raised discretionary spending caps in FY 2018 as well as FY 2019. The higher discretionary spending cap included in the budget deal allowed the Administration to request all of the FY 2019 funding for the State Department and USAID as base funding, with no funds requested as OCO. While some of the Department’s FY 2019 request still supports extraordinary costs of operating in conflict areas, these costs are no longer temporary and therefore are included in the request for Enduring funds in the base budget.

As part of the FY 2019 budget request, the Department also proposed that Congress cancel $301.2 million in Worldwide Security Protection Overseas Contingency Operations carryover balances appropriated as part of the FY 2017 Security Assistance Appropriations Act. This $301.2 million had been intended for security support to anticipated diplomatic reengagements in Syria, Libya, and Yemen. Net of this proposed cancellation, the FY 2019 Diplomatic Engagement request is $12.4 billion in budget authority.

The FY 2019 President’s Budget lays out a vision for a Federal Government that is efficient, effective, and accountable. It provides for a strong national defense, promotes a healthy American economy, and takes steps to curb wasteful spending. The FY 2019 request will allow the Department to advance the nation’s most important foreign policy goals and national security interests while ensuring that U.S. taxpayer dollars are used as effectively and efficiently as possible.

#### Budgetary Position for Foreign Assistance

The FY 2018 Department of State Foreign Assistance budget totaled $18.5 billion. Foreign Assistance programs support the President’s commitment to four key national priorities: defending U.S. national security, fostering opportunities for U.S. economic interests, asserting U.S. leadership and influence, and ensuring effectiveness and accountability to the U.S. taxpayer.

Foreign Assistance programs under the purview of the Department of State are the Democracy Fund (DF); U.S. Emergency Refugee and Migration Assistance (ERMA); Foreign Military Financing (FMF); Global Health Programs (GHP); International Military Education and Training (IMET); International Narcotics Control and Law Enforcement (INCLE); International Organizations and Programs (IO&P); Migration and Refugee Assistance (MRA); Nonproliferation, Antiterrorism, Demining, and Related Programs (NADR); and Peacekeeping Operations (PKO). The Department also implements funds from the Assistance for Europe, Eurasia, and Central Asia account and the Economic Support Fund account.

An important aspect of the Department’s FY 2018 budget is the OCO component. OCO funds enable us to prevent, address, and help countries recover from manmade-caused crises and natural disasters, particularly in Africa, the Middle East and South Central Asia. The Department’s Foreign Assistance portion of the FY 2018 budget for OCO totaled $3.9 billion in ERMA, FMF, INCLE, MRA, NADR, and PKO.

The Democracy Fund appropriation totaled $215.5 million in FY 2018; the funds were split, however, between the Department and USAID. The Department was allocated $150.4 million to promote democracy in priority countries where egregious human rights violations occur, democracy and human rights advocates are under pressure, governments are not democratic or are in transition, where there is growing demand for human rights and democracy, and for programs promoting Internet Freedom.

The FY 2018 ERMA appropriation totaled $1 million. ERMA serves as a contingency fund from which the President can draw in order to respond effectively to humanitarian crises in an ever-changing international environment.

The FY 2018 FMF appropriation totaled $6.1 billion, of which $460 million is designated as OCO and $5.7 billion supports core programs. FMF promotes U.S. national security by contributing to regional and global stability, strengthening military support for key U.S. allies and regional partner governments, and countering transnational threats, including terrorism and trafficking in narcotics, weapons, and persons. The provision of FMF assistance to partner militaries establishes and facilitates strong military-to-military cooperation, promotes U.S. trade and economic interests, and enables friends and allies to be interoperable with U.S., regional, and international military forces. The majority of FMF is allocated to Israel, Egypt, Jordan, Pakistan, and Iraq, and OCO funds are concentrated in Eastern Europe (Georgia, Ukraine, and Moldova) and the Near East and South Asia (Egypt, Iraq, Jordan, Lebanon, Tunisia, and Pakistan).

In FY 2018, the portion of the Global Health Programs appropriation managed by the Department totaled $5.7 billion. This is the primary source of funding for the President’s Emergency Plan for AIDS Relief. These funds are used to control the epidemic through data-driven investments that strategically target geographic areas and population where the initiative can achieve the most impact for its investments. The majority of the funds ($3.7 billion) continued to be allocated to the Africa region where the HIV/AIDS epidemic is the most widespread. There was also made a $1.4 billion contribution to the Global Fund to Fight AIDS, Tuberculosis, and Malaria.

The FY 2018 IMET appropriation totaled $110.9 million. IMET is a key component of U.S. security assistance that promotes regional stability and defense capabilities through professional military training and education. IMET students from allied and friendly nations receive valuable training and education on U.S. military practices and standards. IMET is an effective mechanism for strengthening military alliances and international coalitions critical to the global fight against terrorism.

The INCLE appropriation for FY 2018 totaled $1.4 billion, of which $417.9 million is OCO and $950.8 million is for core programs. INCLE supports the safety and security of the United States through bilateral, regional, and global programs that address and mitigate security threats posed by illicit trafficking in narcotics, persons, and wildlife, among other pernicious forms of transnational crime. INCLE programs assist U.S. partners in developing their criminal justice systems and capabilities in order to protect the national security and economic interests of the United States from the impact of crime and instability overseas. In FY 2018, many INCLE resources were focused where security situations are most dire, and where U.S. resources were used in tandem with host-country government strategies to maximize impact.

The FY 2018 IO&P appropriation totaled $339 million. It provided international organizations voluntary contributions that advanced U.S. strategic goals by supporting and enhancing international consultation and coordination. This approach is required in transnational areas where solutions to problems are best addressed globally, such as protecting the ozone layer or safeguarding international air traffic. In other areas, the United States can multiply its influence and effectiveness through support for international programs.

In FY 2018, the MRA appropriation totaled $3.4 billion, of which $2.4 billion was OCO and $927.8 million was for core programs. These funds provided humanitarian assistance and resettlement opportunities for refugees and conflict victims around the globe. In FY 2018, MRA contributed to key multilateral organizations such as the UN High Commissioner for Refugees and the International Committee of the Red Cross, and to non-governmental organizations that address pressing humanitarian needs overseas and resettle refugees in the United States.

The NADR appropriation in FY 2018 totaled $876 million, of which $220.5 million is OCO and $655.5 million supported core programs. NADR funding is used to support U.S. national interests through critical, security-related programs, especially in the areas of nonproliferation and disarmament, export control, and other border security assistance; global threat-reduction programs; antiterrorism programs; and conventional weapons destruction.

The PKO appropriation totaled $537.9 million, of which $325.2 million was OCO and $212.7 million supported core programs. PKO is used to support programs that bolster the capacity of partner nations to conduct critical peacekeeping and counterterrorism operations, support stabilization in countries grappling with violent conflict, enhance maritime security, and promote security sector reform. In FY 2018, the PKO program supported ongoing requirements for the Global Peace Operations Initiative, security sector reform in Liberia, South Sudan, and the Democratic Republic of the Congo, as well as multinational peacekeeping and regional stability operations, particularly in Somalia.

The Department of State’s FY 2019 budget request for Foreign Assistance is currently under congressional consideration. The request is for $26.9 billion to support core programs.

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**DID YOU KNOW?**

*George Catlett Marshall served as the 50th Secretary of State (1947-1949). He led the effort for the massive aid package to Western Europe that became known as the Marshall Plan. In 1953, he received the Nobel Peace Prize for his work to restore Europe’s economy in the post-World War II period.*

More information on former Secretaries can be found at: https://history.state.gov/departmenthistory/people/secretaries

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### Resource Management Systems Summary

Other Information, Section III of this AFR, provides an overview of the Department’s current and future resource management systems framework and systems critical to effective agency-wide financial management operations, financial reporting, internal controls, and interagency administrative support cost sharing. This summary presents the Department’s resource management systems strategy and how it will improve financial and budget management across the agency. This overview also contains a synopsis of critical projects and remediation activities that are planned or currently underway. These projects are intended to modernize and consolidate Department resource management systems.

### Limitation of Financial Statements

Management prepares the accompanying financial statements to report the financial position and results of operations for the Department of State pursuant to the requirements of Chapter 31 of the U.S. Code Section 3515(b). While these statements have been prepared from the books and records of the Department in accordance with FASAB standards using OMB Circular A-136, *Financial Reporting Requirements*, revised, and other applicable authority, these statements are in addition to the financial reports, prepared from the same books and records, used to monitor and control the budgetary resources. These statements should be read with the understanding that they are for a component of the U.S. Government, a sovereign entity.

							Management Assurances and Other Financial Compliances					

### Management Assurances

The Department’s Management Control policy is comprehensive and requires all Department managers to establish cost-effective systems of management controls to ensure U.S. Government activities are managed effectively, efficiently, economically, and with integrity. All levels of management are responsible for ensuring adequate controls over all Department operations.

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### Federal Managers' Financial Integrity Act

The Department of State’s (the Department’s) management is responsible for managing risks and maintaining effective internal control to meet the objectives of Sections 2 and 4 of the Federal Managers’ Financial Integrity Act. The Department conducted its assessment of risk and internal control in accordance with OMB Circular A-123, *Management’s Responsibility for Enterprise Risk Management and Internal Control*. Based on the results of the assessment, the Department can provide reasonable assurance that internal control over operations, reporting, and compliance were operating effectively as of September 30, 2018.

Management’s responsibility for establishing and maintaining effective internal control over financial reporting, which includes safeguarding of assets, is an important reporting requirement. The Department conducted its assessment of the effectiveness of internal control over financial reporting in accordance with Appendix A of OMB Circular A-123. Based on the results of this assessment, the Department can provide reasonable assurance that its internal control over financial reporting was operating effectively and the Department found no material weaknesses in the design or operation of the internal control over financial reporting.

As a result of its inherent limitations, internal control over financial reporting, no matter how well designed, cannot provide absolute assurance of achieving financial reporting objectives and may not prevent or detect misstatements. Therefore, even if the internal control over financial reporting is determined to be effective, it can provide only reasonable assurance with respect to the preparation and presentation of financial statements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

*Michael R. Pompeo**Secretary of State**November 15, 2018*

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### Departmental Governance

#### Management Control Program

The Federal Managers’ Financial Integrity Act (FMFIA) requires the head of each agency to conduct an annual evaluation in accordance with prescribed guidelines, and provide a Statement of Assurance (SoA) to the President and Congress. As such, the Department’s management is responsible for managing risks and maintaining effective internal control.

The FMFIA requires the GAO to prescribe standards of internal control in the Federal Government. Commonly known as the Green Book, these standards provide the internal control framework and criteria Federal managers must use in designing, implementing, and operating an effective system of internal control. The Green Book defines internal control as a process effected by an entity’s oversight body, management, and other personnel that provides reasonable assurance that the objectives of an entity are achieved. These objectives and related risks can be broadly classified into one or more of the following categories:

- Effectiveness and efficiency of operations,
- Compliance with applicable laws and regulations, and
- Reliability of reporting for internal and external use.

OMB Circular A-123, *Management’s Responsibility for Enterprise Risk Management and Internal Control* provides implementation guidance to Federal managers on improving the accountability and effectiveness of Federal programs and operations by identifying and managing risks, establishing requirements to assess, correct, and report on the effectiveness of internal controls. OMB Circular A-123 implements the FMFIA and Green Book requirements. FMFIA also requires the Statement of Assurance to include assurance on whether the agency’s financial management systems comply with government-wide requirements. The financial management systems requirements are directed by Section 803(a) of the FMFIA and Appendix D to OMB Circular A-123, *Compliance with the Federal Financial Management Improvement Act of 1996*.

The Secretary of State’s 2018 Statement of Assurance for FMFIA is provided above. We have also provided a Summary of Financial Statement Audits and Management Assurances as required by OMB Circular A-136, *Financial Reporting Requirements*, revised, in the Other Information section of this report. In addition, there are no individual areas for the Department currently on GAO’s bi-annual High-Risk List.

D

The Department’s Management Control Steering Committee (MCSC) oversees the Department’s management control program. The MCSC is chaired by the Comptroller, and is comprised of eight Assistant Secretaries, in addition to the Chief Information Officer, the Deputy Comptroller, the Deputy Legal Adviser, the Director for the Office of Budget and Planning, the Director for Human Resources, the Director for Management Policy, Rightsizing, and Innovation, the Director for the Office of Overseas Buildings Operations, and the Inspector General (non-voting). Individual SoAs from Ambassadors assigned overseas and Assistant Secretaries in Washington, D.C. serve as the primary basis for the Department’s FMFIA SoA issued by the Secretary. The SoAs are based on information gathered from various sources including managers’ personal knowledge of day-to-day operations and existing controls, management program reviews, and other management-initiated evaluations. In addition, the Office of Inspector General, the Special Inspector General for Afghanistan Reconstruction, and the Government Accountability Office conduct reviews, audits, inspections, and investigations that are considered by management.

The Senior Assessment Team (SAT) provided oversight during 2018 for the internal controls over financial reporting program in place to meet Appendix A to OMB Circular A-123 requirements. The SAT reports to the MCSC and is comprised of 16 senior executives from bureaus that have significant responsibilities relative to the Department’s financial resources, processes, and reporting. The SAT also includes executives from the Office of the Legal Adviser and the Office of Inspector General (non-voting). The Department employs a risk-based approach in evaluating internal controls over financial reporting on a multi-year rotating basis, which has proven to be efficient. Due to the broad knowledge of management involved with the Appendix A assessment, along with the extensive work performed by the Office of Management Controls, the Department evaluated issues on a detailed level.

D

The Department’s management controls program is designed to ensure full compliance with the goals, objectives, and requirements of the FMFIA and various Federal laws and regulations. To that end, the Department has dedicated considerable resources to administer a successful management control program. The Department’s Office of Management Controls employs an integrated process to perform the work necessary to meet the requirements of OMB Circular A-123’s Appendix A and Appendix C (regarding Payment Integrity), the FMFIA, and the GAO’s Green Book. During FY 2018, the Department continued to expand our work on the Green Book requirements that are directly related to testing entity-level controls, which is a primary step in operating an effective system of internal control. Entity-level controls are mostly within the control environment, risk assessment, control activities, information and communication, and monitoring components of internal control in the Green Book, which are further required to be analyzed by 17 underlying principles of internal control. For the Department, all five components and 17 principles were operating effectively and supported the Department’s unmodified Statement of Assurance. The 2018 Appendix A assessment did not identify any material weaknesses in the design or operation of the internal control over financial reporting. The assessment did identify several significant deficiencies in internal control over financial reporting that management is closely monitoring. The Department complied with the requirements in OMB Circular A-123 during FY 2018 while working to evolve our existing internal control framework to be more value-added and provide for stronger risk management for the purpose of improving mission delivery.

The Department also places emphasis on the importance of continuous monitoring. It is the Department’s policy that any organization with a material weakness or significant deficiency must prepare and implement a corrective action plan to fix the weakness. The plan combined with the individual SoAs and Appendix A assessments provide the framework for monitoring and improving the Department’s management controls on a continuous basis. Management will continue to direct and focus efforts to resolve significant deficiencies in internal control identified by management and auditors.

During FY 2018, the Department continued to take important steps to transform how the Department is implementing an Enterprise Risk Management (ERM) System. A principal element is to integrate better risk management into our everyday work across all of our operations. The Department’s Office of Management Policy, Rightsizing, and Innovation (M/PRI) leads the Department’s ERM implementation. The Deputy Secretary, supported by M/PRI, established the Department’s Enterprise Risk Management Council. The Deputy Secretary elected to chair the Council, and membership includes all six Under Secretaries and six advisory members. M/PRI also expanded membership in the ERM working group that collectively contributed toward developing policies and in updating the Department’s risk profile. M/PRI developed a Departmental governance structure for ERM, enterprise risk criteria for use in improving the risk profile, completed an analysis of the strategic plan and its relation to the risk profile, and made other improvements to the process including a full implementation timeline.

### Federal Financial Management Improvement Act

The Federal Financial Management Improvement Act of 1996 (FFMIA) requires that Federal agencies’ financial management systems provide reliable financial data that complies with Federal financial management system requirements, applicable Federal accounting standards, and the U.S. Government Standard General Ledger (USSGL) at the transaction level.

OMB Circular A-123, Appendix D, *Compliance with the Federal Financial Management Improvement Act of 1996*, provides guidance the Department used in determining compliance with FFMIA. The Department considered results of OIG and GAO audit reports, annual financial statement audits, the Department’s annual Federal Information Security Modernization Act Report, and other relevant information. The Department’s assessment also relies upon evaluations and assurances under the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), including assessments performed to meet the requirements of OMB Circular A-123 Appendix A. When applicable, particular importance is given to any reported material weakness and material non-conformance identified during these internal control assessments. The Department has made it a priority to meet the objectives of the FFMIA.

In its Report on Compliance and Other Matters, the Independent Auditor identified instances, when combined, of substantial noncompliance with Federal financial management systems requirements and the USSGL at the transaction level. The Department acknowledges that the Independent Auditor has noted certain weaknesses in our financial management systems. OMB’s Appendix D provides a revised compliance model that entails a risk-and outcome-based approach to assess FFMIA compliance. In our assessments and evaluations, the Department identified similar weaknesses. However, applying the guidance and the assessment framework noted in Appendix D to OMB Circular A-123, the Department considers them deficiencies versus substantial non-conformances relative to substantial compliance with the requirements of the FFMIA. Nonetheless, the Department is committed to continuing to work to address all identified financial management system deficiencies.

### Federal Information Security Modernization Act

The Federal Information Security Modernization Act of 2014 (FISMA) requires Federal agencies to develop, document, and implement an agency-wide program to protect government information and information systems that support the operations and assets of the agency. It provided a leadership role for the Department of Homeland Security (DHS), created new cyber breach notification requirements, and modified the scope of reportable information from primarily policies and financial information to specific information about threats, security incidents, and compliance with security requirements. OMB issued new reporting guidance and deadlines for compliance with FISMA for FY 2018, consolidating prior guidance in what OMB memo M-18-02 said would “ensure consistent, government-wide performance and agency adoption of best practices.” It describes information security program oversight, FISMA reporting requirements including the requirement for agencies to conduct regular risk management assessments, and includes deadlines for agencies’ quarterly and annual FISMA metrics.

The Department of State remains committed to adopting the best cybersecurity practices and embedding them into the Department’s culture. As a result, we continue to improve our cybersecurity posture and provide transparency across the Department and with external partners.

The Department takes the responsibility of being compliant with FISMA very seriously. The National Institute of Standards and Technology (NIST) Cybersecurity Framework identifies five core functional areas in managing cybersecurity risk. In 2018, OMB and DHS used these core areas and assessed cybersecurity capabilities and compliance, and concluded that overall the Department improved its security posture from “at risk” to actively “managing” cybersecurity risk as highlighted below.

#### Identify

In 2018, the Department made significant progress in establishing and implementing a risk management strategy. Specifically, the Department:

- Developed services and tools to implement the agency-wide Cybersecurity Risk Management strategy to better identify, assess, respond to, and monitor information security risks at all levels of the organization, particularly, in identifying and enhancing the protection of high-value assets.
- Reduced the backlog of systems operating without an Authorization to Operate (ATO) or with an expired ATO. In the third quarter of 2018, the Department reported 67 percent of its systems as authorized to operated, compared to 21 percent in the third quarter of 2017. The dramatic improvement is due to a number of factors that include establishing a prioritization list that organizes the backlog into eight priorities based on system impact level and the risk, and the criticality of the information. The prioritization criteria ensures that systems at highest risk are addressed first. In addition, a streamlined process now facilitates applying NIST’s Risk Management Framework (RMF Steps 1-5) in a more efficient manner and reduces the cycle time required for an ATO from 9-12 months to 6-18 weeks, depending upon the size and complexity of the system being assessed.

#### Protect

In 2018, the Department met its targets and managed risk for remote access protection, as well as credentialing and authorization. Specifically, the Department:

- Significantly reduced the number of stale accounts (i.e. accounts not logged into in the last 90 days) and misconfigured accounts (i.e. shared mailboxes not configured to use SmartCards) on both of the Department’s unclassified and classified networks to improve access controls.
- Deployed a phishing awareness tool and performed quarterly exercises that test, train, and raise enterprise-wide awareness about how to recognize and respond to phishing attacks.
- Enhanced overall network security when unauthorized USB devices on OpenNet were identified; empowered information systems security officers at posts to remove the devices and take other remedial actions.
- Expanded its cyber and information security awareness capabilities via educational messaging distributed daily to all users worldwide seven days a week. These desktop alerts aimed to increase employees’ awareness of cybersecurity threats and vulnerabilities, and offer tips about protecting the Department’s information and infrastructure.
- Upgraded on-premise vulnerability and compliance scanning software to collect data and monitor exposure in real time.
- Implemented a system to collect and consolidate daily indicators of compromise and cybersecurity-related incidents. This data is incorporated in Threat Intelligence Watch lists.
- Continued to conduct annual in-depth penetration testing of the networks to identify, report, and mitigate network vulnerabilities before these security issues can be exploited. The Department’s penetration testing team expanded its involvement with the Department’s assessment and authorization process in accordance with NIST SP 800-53 Rev. 4 requirements.
- Required cleared American citizens, as well as locally employed staff to take Annual Counterintelligence and Insider Threat training.

#### Detect

In 2018, OMB and DHS verified the Department met its targets for intrusion detection and prevention, exfiltration, and enhanced defenses. Specifically, the Department: 

- Created the Vulnerability Control Board to identify unauthorized and malicious internet traffic that can be blocked to improve bandwidth and data security. Multiple sites and traffic types have already been identified and blocked at domestic and at overseas facilities.
- Issued a Request for Service through the DHS DEFEND-C contract to implement an identity credential and access management system, which includes phase two of continuous diagnostics and mitigation (CDM) efforts. The Department’s CDM program enhances government network security through automated control testing and progress tracking.

#### Response

In 2018, the ability to respond to and recover from cyber incidents was strengthened. Specifically, the Department:

- Continued to mature the Cyber Incident Response Team’s (CIRT) ability to ingest, review, and apply all threat warnings and indications of compromise from DHS and the Federal cyber threat intelligence community.
- Deployed endpoint incident response tools capable of querying the entire enterprise within minutes to assist with hunting and response activities.
- Realigned the CIRT to a functional team format based on the NIST Incident Response Lifecycle.
- Implemented endpoint quarantine technology and processes to reduce potential compromise spread.
- Conducted exercises to test its data breach response plan for personally identifiable information (PII). The plan established policies and procedures; roles and responsibilities; collaboration and coordination; and transparency and timeliness requisite for a successful response to and management of a breach involving PII and safeguarding individual privacy.

#### Recover

In 2018, OMB and DHS verified the Department met its targets for automated tracking of incident information and contingency planning. Specifically, the Department: 

- Established High Availability/Disaster Recovery plans in critical functions for high-value assets; updated the respective Information Technology Contingency Plan; and conducted tests following the recent transition to the Enterprise Converged Platform.
- Deployed and customized Splunk (a situational cybersecurity awareness tool) content to assist the cyber operations team with enhanced monitoring.
- Identified and worked on resolving of over 800 cases in response to cybersecurity-related incidents.
- Developed customized Splunk dashboards to monitor selected posts during times of heightened security concerns to provide an operationally-focused view of the collected logs. In cases where anomalies are observed, the Department initiates the incident response process.
- Placed blocking requests to the CIRT comprised of IP (intellectual property) addresses, URLs, and domains.
- Developed a Copyright Violations Report that generates daily reports on Internet traffic on the Department’s network. The reports include incidents of streaming or downloading potentially copyrighted visual and audio files. These efforts result in a major reduction in download violations and improved bandwidth at the impacted posts.
- Created a continuous monitoring capability that gives the CIO new visibility into other Federal agencies’ cyber threat information to better prioritize Computer Network Defense efforts.
- Established an internal cyber reporting capability – Situational Awareness Report – to help executive leadership focus on valid threats and make better-informed cybersecurity decisions.
- Deployed a Cybersecurity Situational Awareness dashboard capability using analytics to derive new insights for the network’s defense; included a capability that actively scans for shadow IT devices across the enterprise; and worked with domestic entities and posts to research, analyze, and remediate.

In its FY 2018 FISMA Report, the OIG cites significant weaknesses to information systems security. The Department acknowledges the weaknesses identified by the OIG in its FISMA review but does not believe that any of the FISMA findings, either individually or collectively, rise to the level that requires reporting of a material weakness under FMFIA. The Department of State remains committed to adopting the best cybersecurity practices and embedding them into the Department’s culture. As a result, we continue to improve our cybersecurity posture and provide transparency across the Department and with external partners.

### Digital Accountability and Transparency Act

The Digital Accountability and Transparency Act (DATA Act) of 2014’s purpose was to make information related to Federal expenditures more easily accessible and transparent. In doing so, the Federal Government gave citizens, Congress, and others unprecedented public access to structured information about spending and opened up new horizons for oversight, accountability, activism, and innovation. The law required the U.S. Department of the Treasury to establish common standards for financial data provided by all Government agencies. At the same time, other collaborative efforts were underway with regard to how these elements would be displayed and made available to the public through the website USASpending.gov . Ultimately, the goal of the law is to improve the ability of Americans to track and understand how the government is spending their tax dollars. It is also the first step in a larger and longer effort for agencies to use data as a resource to transform the way that leadership manages and governs the agencies.

The Department has made considerable progress in complying with the DATA Act. Because of the extensive global presence of the Department, with more than 270 embassies, consulates, and other posts in over 180 countries, the Department faces challenges in consolidating data originating from around the world. This challenge also requires communication between multiple systems. To satisfy the requirements of the DATA Act, the Department has undertaken an initiative to transition the Global Financial Management System data warehouse into a Global Business Intelligence solution. This solution will be the single source for meeting internal and external financial reporting requirements for the Department. As part of this effort, the Department is upgrading the infrastructure supporting the data warehouse.

The Department has put strong internal controls in place while developing new processes to accurately record and validate 57 standardized data elements, capturing Procurement Instrument Identifiers and Federal Award Identification Numbers, and expanding infrastructure to unite data elements from multiple systems. Extensive other internal controls were established. Examples include weekly reconciliations to identify actions that were recorded in the Department’s Global Financial Management System but did not have a matching action in the Federal Procurement Data System, and a Quality Assurance team who performs validation and verification procedures monthly. The Department reports financial and payment information to the public using USASpending.gov , and continues to work to achieve 100 percent accuracy of this data submitted from all around the world. The Department knows it needs to improve reporting of data for our overseas operations and will continue to make these improvements, while continuing to ensure the rigor and accountability over the expenditure of Department and taxpayer dollars.

----

**DID YOU KNOW?**

*James Gillespie Blaine served two terms as Secretary of State. He was the 28th and 31st Secretary of State.*

More information on former Secretaries can be found at: https://history.state.gov/departmenthistory/people/secretaries

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### Other Regulatory Requirements

The Department is required to comply with a number of other legal and regulatory financial requirements, including the Improper Payment Information Act (IPIA, as amended), the Debt Collection Improvement Act, and the Prompt Payment Act. The Department determined that none of its programs are risk-susceptible for making significant improper payments at or above the threshold levels set by OMB. In addition, the Department does not refer a substantial amount of debts to Treasury for collection, and has successfully paid vendors timely over 98 percent of the time for the past three fiscal years. A detailed description of these compliance results and improvements is presented in the Other Information section of this report.

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### On This Page

                    -  Section Table of Contents 
                    -  About the Department                        -  Our Vision, Mission, and History 
                      -  Our Organization and People 
                      -  Our Work at Home and Overseas 
                    -  Strategic Goals and Government-wide Management Initiatives                        -  Managing for Results: Planning, Budgeting, Managing, and Learning 
                      -  Joint State-USAID Strategic Goals 
                      -  Agency Priority Goals 
                      -  Cross-Agency Priority Goals 
                    -  Performance Summary and Highlights                        -  Performance Reporting 
                      -  Major Program Areas 
                      -  Program and Project Design, Monitoring, and Evaluation Policy 
                      -  Maximizing America's Investment Through Innovation and Evidence 
                    -  Financial Summary and Highlights                        -  Balance Sheet: Overview of Financial Position 
                      -  Statement of Net Cost: Yearly Results of Operations 
                      -  Statement of Changes in Net Position: Cumulative Overview 
                      -  Combined Statement of Budgetary Resources: Ensuring Prosperity for America's Future 
                      -  The Department's Budgetary Position 
                      -  Resource Management Systems Summary 
                      -  Limitation of Financial Statements 
                    -  Management Assurances and Other Financial Compliances                        -  Management Assurances 
                      -  Federal Managers' Financial Integrity Act 
                      -  Departmental Governance 
                      -  Federal Financial Management Improvement Act 
                      -  Federal Information Security Modernization Act 
                      -  Digital Accountability and Transparency Act 
                      -  Other Regulatory Requirements 

Tags

Accountability ReportBudget ReportBureau of Budget and PlanningBureau of the Comptroller and Global Financial ServicesFinancial ReportPerformance ReportsResource ManagementState Department MissionStrategic Plan

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## U.S. Department *of* State

#### The Lessons of 1989: Freedom and Our Future