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S. Hrg. 110–724 

IN THE RED: ADDRESSING THE NATION’S 

FINANCIAL CHALLENGES 

HEARING 

BEFORE THE

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT 

INFORMATION, FEDERAL SERVICES, AND 

INTERNATIONAL SECURITY SUBCOMMITTEE 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JUNE 26, 2008 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

( 

(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

BARACK OBAMA, Illinois 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

SUSAN M. COLLINS, Maine 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN WARNER, Virginia 

JOHN E. SUNUNU, New Hampshire 

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, 

FEDERAL SERVICES, AND INTERNATIONAL SECURITY SUBCOMMITTEE 

THOMAS R. CARPER, Delaware, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

BARACK OBAMA, Illinois 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

TOM COBURN, Oklahoma 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

PETE V. DOMENICI, New Mexico 

JOHN E. SUNUNU, New Hampshire 

JOHN KILVINGTON, Staff Director 

KATY FRENCH, Minority Staff Director 

MONISHA SMITH, Chief Clerk 

(III) 

C O N T E N T S 

Opening statements: Page 

Senator Carper ................................................................................................. 1 

Senator Coburn ................................................................................................. 5 

Senator Voinovich ............................................................................................. 6 

WITNESSES 

THURSDAY, JUNE 12, 2008 

Gene Dodaro, Acting Comptroller General, U.S. Government Accountability 

Office ..................................................................................................................... 9 

Daniel I. Werfel, Acting Controller, Office of Management and Budget ............ 11 

Kenneth E. Carfine, Fiscal Assistant Secretary, U.S. Department of Treasury 12 

David M. Walker, President and Chief Executive Officer, Peter G. Peterson 

Foundation ............................................................................................................ 30 

Robert L. Bixby, Executive Director, The Concord Coalition ............................... 31 

James Horney, Director, Federal Fiscal Policy, Center on Budget and Policy 

Priorities ............................................................................................................... 33 

Maurice P. McTigue, Vice President of the Mercatus Center, and Director, 

Government Accountability Project, George Mason University ....................... 35 

ALPHABETICAL LIST OF WITNESSES

Bixby, Robert L.: 

Testimony .......................................................................................................... 31 

Prepared statement .......................................................................................... 124 

Carfine, Kenneth E.: 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 108 

Dodaro, Gene: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 49 

Horney, James: 

Testimony .......................................................................................................... 33 

Prepared statement .......................................................................................... 148 

McTigue, Maurice P.: 

Testimony .......................................................................................................... 35 

Prepared statement .......................................................................................... 157 

Walker, David M.: 

Testimony .......................................................................................................... 30 

Prepared statement .......................................................................................... 114 

Werfel, Daniel I.: 

Testimony .......................................................................................................... 11 

Prepared statement .......................................................................................... 92 

APPENDIX 

Charts submitted by Senator Carper ..................................................................... 45 

Report entitled ‘‘The Federal Government’s Financial Health, A Citizen’s 

Guide to the 2007 Financial Report of the United States Government,’’ 

submitted by Mr. Werfel ...................................................................................... 98 

Questions and Responses for the Record from: 

Mr. Dodaro ........................................................................................................ 162 

Mr. Horney ........................................................................................................ 183 

Mr. McTigue ...................................................................................................... 189 

(1) 

1The charts referred to submitted by Senator Carper appears in the Appendix on page 45. 

IN THE RED: ADDRESSING THE NATION’S 

FINANCIAL CHALLENGES 

THURSDAY, JUNE 26, 2008 

U.S. SENATE, SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, FEDERAL SERVICE, AND INTERNATIONAL SECURITY, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:32 p.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Thomas R. Carper, 

Chairman of the Subcommittee, presiding. 

Present: Senators Carper, Coburn, and Voinovich. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. The Subcommittee will come to order, and on 

behalf of Dr. Coburn and myself, welcome to each of you. We are 

going to be joined by several of our colleagues as the afternoon goes 

on, and I suspect we will have some votes, although we do not 

know just when. And so we will take them as they come. 

I asked our staff to put up the chart,1 which indicates, if you 

will, a budget that combines the trust funds with our operating 

budget. We have, at least for 2007, some idea of how monies were 

being allocated, and I just want to draw our attention to the red 

part of the chart, which is part of Health and Human Services. It 

is mostly Medicare and Medicaid. It is about $556 billion last year, 

2007, and there is a little pink area there that is right alongside 

of the red, which indicates that is the rest of HHS outside of Medicare and Medicaid. And then the blue right below the red, the blue 

there is Social Security Administration, a little over $600 billion. 

Again, that is 2007. 

My staff was going over a couple of charts with me earlier this 

morning, and they said this is what it is in 2007. If we come back 

and visit this chart again about the middle of this century, in about 

45 years or so, the red and the blue will crowd out everything else. 

That is just about what we will be able to do if we stay on the path 

that we are on. And I think we are realizing that is unacceptable, 

and part of the challenge for us, not just for Dr. Coburn and myself, but for our colleagues, for the House of Representatives, the 

Administration, whoever our Presidents are going to be in the 

years to come, it is up to us to make sure that—when we gather 

2 

here, I will be long gone from the Senate in 45 years, although Dr. 

Coburn may still be around. He will still be delivering babies, 

wherever he is. 

Senator COBURN. That is right. 

Senator CARPER. But we can be blue States and red States, but 

we cannot afford to have a pie chart that is just blue and just red. 

We have been joined by Senator Voinovich. Glad to have you 

here. 

For the past 11 years, the Treasury Department has been required to prepare a financial statement for the Federal Government, as you know, and have it audited by the GAO. Every year, 

the information contained in this statement and the process used 

to prepare the statement has been so unreliable that GAO’s audit 

team has essentially been unable to do its job. As such, GAO has 

been forced each year to issue a so-called disclaimer of opinion on 

the government’s finances, which is really a nice way of saying that 

they will not attach their good name to the Treasury’s work. 

Fiscal year 2007 was, for the most part, little different from past 

years. However, let me just hasten to add, improvements have been 

made, and we look forward to hearing about some of those from 

this panel, and maybe from others as well. However, the major impediment to the Treasury Department receiving a clean opinion on 

our consolidated financial statements are largely the same as they 

have been for the past decade or more. 

First, there are the longstanding financial management problems 

at the Department of Defense that we all know about. In part because of the significant amount of money that goes in and out of 

that Department, the government as a whole, our government as 

a whole, cannot get a clean opinion until they are also improving 

their financial statements as well. 

Second, there is our inability, at a governmentwide level, to keep 

track of the money that individual agencies transfer to and from 

each other. 

And, third, there is Treasury’s inability to reliably sum up all the 

financial statements from across the government into a single set 

of consolidated financial statements. 

In addition to these problems that we have known about and 

have been grappling with for some time, GAO has highlighted a 

handful of other financial-related internal control problems that we 

have yet to fully get our arms around. They are the inability of 

OMB and the agencies to determine the extent to which improper 

payments occur throughout government. Then there is our inability 

to manage and effectively execute tax collection activities so that 

we are collecting taxes from all of those who owe them. And then 

there is the problem that a number of agencies are unable to deal 

with their information security weaknesses. 

I will note here that these three issues—improper payments, information security weaknesses, and the tax gap—are issues that 

this Subcommittee, Dr. Coburn and I and our colleagues, our staffs, 

have focused on a good deal, and we are going to focus on them 

some more. Based on our work, we share a deep concern for the 

potential growing risk that those three areas present to us. 

I would like to point out, I think it is Article I, Section 9 of our 

Constitution reads, ‘‘A regular statement and account of the reVerDate Aug 31 2005 09:16 Mar 19, 2009 Jkt 044120 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 P:\DOCS\44120.TXT SAFFAIRS PsN: PAT
3 

1The chart referred to appears in the Appendix on page 46. 

ceipts and expenditures of all public money shall be published from 

time to time.’’ It was probably easier to do when that was written 

than it is today. So when we ask for a clean financial statement 

from the Federal Government, we are not really asking for anything more than what was required of us some 217 years ago. 

Yet, to this date, the average taxpayer or even a well-trained accountant, for that matter, cannot vouch for the accuracy of the 

Treasury’s annual statements or gain any assurance from them 

that our tax dollars are well spent. 

This situation would be maybe laughable if it were not so serious. Imagine what would happen if a major business’ books were 

in this sort of shape. In fact, it is not so difficult to recall the corporate accounting scandals of just a few years ago. Businesses folded. People were fired. People went to jail. And while the Federal 

Government’s repeated failings in the basics of financial management have not received the media attention that the failings of 

some private sector companies have received, I, for one, think the 

state of our Nation’s finances should be seen as nothing less than 

a scandal. 

I am not suggesting that anyone here get fired or go to jail, but 

we do need to take definitive action to provide the kind of quality 

financial management and transparency that the American people 

expect and I believe they deserve. 

The Congress, and especially our next President, whoever that 

may be, need to play an important leadership role in this regard. 

Sometimes I think we sort of self-flagellate ourselves here in the 

Congress and say that it is all of our responsibilities. Any government entity that I have ever been a part of or had a chance to observe, whether it was the State level or whether it was the city 

level or county level, if you have a chief executive and a level of 

government where you have a legislative body of some kind, if you 

do not have strong leadership on fiscal issues from the chief executive, it is my experience it is not in the nature of a legislative body 

to provide that, absent the leadership from the top. And that is just 

an observation I would provide. So I do not just say this is the Congress’ job. This is a shared responsibility, and the President has a 

large responsibility, too. 

But among the problems highlighted by GAO’s audit report is the 

fiscally unsustainable long-term path this Nation faces, and I am 

grateful to the GAO for taking on this important issue. 

Now I am supposed to look to another chart to my right. Is that 

right? Is there another chart for me to look at? All right. I asked 

them to make sure to cue me about these charts.1

Major fiscal exposures or liabilities. Some of this print might be 

a little small, so I will just kind of walk us through it, if I could. 

We have some more explicit liabilities, including publicly held debt 

and military and civilian pensions and retiree health at the top. 

And if you come across to the right on our chart, we are looking 

at 2000, and there is a column there below the word ‘‘2000.’’ We 

will look at commitments and contingencies and some implicit exposures. Then come over to the right a bit more from the 2000 column, we have the 2007 column, and then at the far right, the perVerDate Aug 31 2005 09:16 Mar 19, 2009 Jkt 044120 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 P:\DOCS\44120.TXT SAFFAIRS PsN: PAT
4 

centage increase from 2007 over 2000. But the explicit liabilities 

are up by about 57 percent from roughly $7 trillion to $11 trillion. 

The commitments and the contingencies and things like Pension 

Benefit Guaranty Corporation and undelivered orders, that sort of 

thing, they are up by—they are small. They are only about—only 

about a trillion dollars, but up about almost 100 percent from 7 

years ago. 

The implicit—this is where the real money is, and this is the implicit exposures. We see for future Social Security benefits in 2000, 

we are looking at about $3.8 trillion, in 2007 up to $6.8 trillion. Not 

quite double, but close. Future Medicare Part A benefits, up in 

2000 from $2.7 trillion, and by 2007 up to $12.3 trillion. That is 

an increase of, I think, about four-fold. Future Medicare Part B 

benefits, exposure in 2000 was roughly $6.5 trillion; more than 

doubled to $13.4 trillion in 2007. And the Medicare Part D prescription drug benefit, we did not have that in 2000, and starting 

in 2007 we are looking at an implicit exposure of about $8.4 trillion. And that is a program that is actually coming in under budget, at least so far, and we are still looking at that magnitude. 

If you look at the totals, looking all the way down the column 

from 2000, we are looking at a total exposure or liability of a little 

over $20, $20.4 trillion. Moving over to the 2007 column and coming down to the bottom, exposure or liability, if you will, almost 

$53 trillion in 2007. And that is an increase of 158 percent. That 

is an increase in 7 years. We cannot afford another 7 years like 

that. God knows we cannot afford another 47 years like that, and 

part of our responsibility and hopefully part of this hearing is to 

help ensure that we do not continue down the road that is laid out 

there. 

Let me conclude here, if I may, to observe that—one thing our 

next President has got to do, together with us, is to find a way to 

overhaul our entitlement programs so that they are not as much 

of a burden as our next generation. We are getting killed on health 

care costs, and Medicare and Medicaid especially. The Social Security Trust Fund I think is fixable. Medicare and Medicaid are a far 

bigger challenge. And I hope one of the things that we will accomplish before I leave here, I say this to my colleagues, Senators 

Voinovich and Coburn, one of the things I hope that we accomplish 

in the time that I am here in the Senate is to fix Social Security 

for the next several generations or more, and that would be a wonderful accomplishment. That is a lot easier, though, than Medicare 

and Medicaid, as we know. 

But having said that, when Senator Voinovich and I were in our 

old jobs, we were able to cut taxes, balance budgets, make investments as were needed. Those were better economic times. But 

when things we thought were worthwhile, we paid for them. We actually paid for them. And that is a philosophy that we need to reembrace here in our Nation’s capital. 

I will close by mentioning PAYGO rules. Not everybody likes the 

PAYGO rules. I always like to quote the guy who used to be the 

Chancellor of the Exchequer, and he used to say, ‘‘When you find 

yourself in a hole, stop digging.’’ That is the theory of holes. And 

I just think if things are worth having, we ought to pay for them. 

If they are not worth having, we ought not to pay for them. And 

5 

1The chart referred to appears in the Appendix on page 45. 

the guy who really, I think, raises that as much as anybody I know 

is the fellow here to my right—and to my left, both of them. So in 

a sense, I am speaking to the choir on this stuff. 

All right. That is what I wanted to say, and we look forward to 

hearing from all of you, and before we do that, I am going to ask 

Dr. Coburn to weigh in, and then Senator Voinovich, and then we 

will turn it over to our witnesses. Thank you all. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. Well, first of all, I thank Chairman Carper for 

having this hearing. Probably not many people are going to tune 

into C–SPAN on this hearing, and that is our biggest problem in 

the country, is people do not realize the significant difficulty we 

have in front of us. 

I would point out on Senator Carper’s chart—leave it up there 

for a second—that 60 percent of the increase in that is pure demographics. It is the aging of the population on programs we have already promised. Fifteen percent, as one person adamantly opposed 

to Medicare Part D, is because we added a new entitlement and did 

not figure out any way to pay for it. And so the other 35 percent 

of the increase in debt comes because Congress passed bills—not 

by themselves, with the President, but they passed the bills to increase that spending. So as we talk about these issues today, the 

responsibility lies both here and the Executive Branch. We hear a 

lot about the Executive Branch, but the Executive Branch cannot 

spend one penny that the Congress does not pass the money for. 

So it is a dual responsibility, and when there is a dual responsibility, then there is dual shared culpability in terms of association 

with that. 

The pattern that most people do not understand is Medicare is 

not going to sink. Medicaid is not going to sink us. Interest is going 

to sink us. Interest is the thing that is going to sink us. You see 

the green in this chart as we go from 1970 to 2080, you see as a 

proportion of the budget, in 2080 65 percent of the budget is interest. And, that is common, basic math, we know. Albert Einstein 

said the most powerful force on Earth is not the atom. He said it 

is compound interest. And it can be a tool to help you, but it can 

be a tool that will greatly harm you. And what we are seeing manifested out is the irresponsibility of both Executive Branch and Congress, not just one but both, in terms of what we have got on the 

horizon. 

There are a lot of reasons for that. Most of them are parochial, 

short-term thinking by Congress instead of long-term, hard-choice 

decisionmaking by Congress. But if we do not change that trend 

line, then what we will have done is abandon the heritage of this 

country for everybody else that follows us. 

Put the other one up. Not that one, the next one.1

Here we look at the percentage of the GDP that is held by the 

public, but interesting to note, 50 percent of that money that is 

held out there is not held by Americans. It is held by non-Americans. So as we look at the oil crisis that is in front of us today, 

what we should duly note is because we have been fiscally irreVerDate Aug 31 2005 09:16 Mar 19, 2009 Jkt 044120 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 P:\DOCS\44120.TXT SAFFAIRS PsN: PAT
6 

1The chart referred to appears in the Appendix on page 48. 

sponsible, 23 percent of the increase in the cost of oil is because 

of the devaluation of the dollar that is based directly on the fact 

that we are seen as irresponsible and possibly not capable of repaying our debt. 

Now, it is not unfixable. It is fixable. Even with the demographic 

shifts that nobody here is responsible for other than me and you 

and our kids, even with the demographic shifts, we can fix it. And 

this is just one plan. It is put out by Paul Ryan, the Ranking Member on the Budget in the House. And if you look at his plan, it is 

not perfect, it is not everything I would do, but it is the first comprehensive plan that has been forwarded to fix this. So there is the 

debt, and you can see it will peak, but most of the time it is peaking is because we are having a demographic shift, not because we 

are acting irresponsibly. 

Put the next chart up, please.1

And then government spending as a percentage of GDP, as you 

see what our current policy is, if we continue to do nothing—and 

I would tell you in the last 7 years, we have done nothing. What 

our current policy is we are going to go to 80 percent of GDP by 

2078. That is absolutely unsustainable. We all know that. We will 

not recognize the country that we are in if we are in that shape. 

So we have to have a plan, and you can see as a percentage of 

spending of GDP, if you just take Congressman Ryan, which, 

granted, is all going to be controversial, but at least somebody is 

out there with a comprehensive plan that addresses all these 

issues, you can see we can actually perform below the historical average of the last 50 years in terms of a percentage of GDP. 

So the purpose of this hearing is to hear from you, one, on the 

magnitude of the problem and, two, some of the potential ways in 

which we can keep from ducking the hard choices. And that would 

be my hope, is that you really talk hard and straight with us about 

where we have failed, about what we need to do, and about the 

timeliness of what we do, because time, based on the most powerful 

??? for on Earth, compound interest debt, is killing us. 

Thank you, Mr. Chairman. 

Senator CARPER. Thank you, Dr. Coburn. Senator Voinovich. 

OPENING STATEMENT OF SENATOR VOINOVICH 

Senator VOINOVICH. Thank you very much, both of you, for holding this hearing. 

I look forward to hearing the witnesses today. I think we need 

to be reminded of the fiscal realities in which we find ourselves. We 

are operating in the red. The Federal Government’s checkbook is 

not balanced. We cannot continue to live in the United States of 

Denial. Here we are, in denial. And I am glad to see that a couple 

of my friends—and all of you are my friends, but particularly two 

people that I have worked with for the last several years: David 

Walker and Bob Bixby are here today, and you are still at it, and 

you have not quit. That is wonderful. 

In March 2007, they came out to Cincinnati on their Fiscal 

Wake-Up Tour, which was a huge success, and I do not think anyone has worked harder to make the public aware of the situation 

7 

that both my colleagues have been talking about than the two of 

you. 

The country needs to know the truth of the sad state of our finances. We are truly operating in the red. As of 2007, the national 

debt stood at almost $9 trillion. As of today, the national debt is 

$9.4 trillion, with each American owing more than $31,000. And 

the deficit for 2008 will be added to that number, including, on average, $273 billion a year in interest payments on this debt over 

the next decade. 

But too many in Washington pretend this debt does not even 

exist, and perhaps even more concerning is that 51 percent of the 

privately owned national debt is being held by foreign creditors, as 

Senator Coburn has said, mostly central banks. That is up 37 percent just from 6 years ago. Foreign creditors provided more than 

70 percent of the funds the United States has borrowed since 2001. 

Who are these foreign creditors? According to the Treasury Department, China, Japan, and the oil-exporting countries known as 

OPEC. 

If these foreign investors were to lose confidence and pull out of 

the U.S. treasuries, ‘‘Katy, bar the door.’’ Just talk to Alan Greenspan about that. Borrowing hundreds of billions of dollars from 

China and OPEC puts not only our future economy but also our national security at risk. It is critical that we ensure that countries 

that control our debt do not control our future. And with the babyboomer generation coming into retirement, the costs of Social Security and Medicare start to soar. Our national debt is projected to 

explode if we do not do something now to change the path we are 

headed down. 

The Federal Government’s accumulated long-term financial obli- gations grew by $2.5 trillion last year, a result of the increase in 

the cost of Medicare and Social Security benefits as more babyboomers retire. Taxpayers are on the hook for a record $57 trillion 

in Federal liabilities to cover the lifetime benefits of everyone eligible for Medicare, Social Security, and other government programs. 

That is nearly $500,000 per household. 

I know too well the situation the Federal Government finds itself 

in, and I look forward to hearing the solutions you lay out for us 

today and continuing this conversation to raise the public’s awareness of the looming crisis. We are in it now. It is going to get 

worse. And I am extremely interested in hearing your thoughts on 

two pieces of legislation that have been proposed to address the entitlement and tax reform problem: Securing America’s Future Economy, or SAFE Act, and the Bipartisan Task Force for Fiscal Responsibility Act. Both bills create a bipartisan commission to look 

at our Nation’s tax and entitlement systems and recommend reforms to put us back on a fiscally sustainable course and ensure 

the solvency of entitlement programs for future generations. 

But it is time to act, and it would be wonderful if through this 

hearing and other hearings we could get the Presidential candidates to start talking about the national debt. When was the last 

time we heard the President of the United States talk about the 

national debt? When is the last time we really talked about it in 

Congress? And thank God you are doing this, and a couple of other 

committees. Maybe we can make some progress. 

8 

1The prepared statement of Mr. Dodaro appears in the Appendix on page 49. 

You know what would be nice? If we could get Senator Obama 

and Senator McCain to sign on to one of these bills and say, ‘‘If I 

get elected’’—or ‘‘When I get elected, then I will appoint my Secretary of the Treasury, I will appoint my OMB Director to this, and 

we are going to get started. We are going to do something about 

this.’’ 

Thank you. 

Senator CARPER. Thank you. Senator Voinovich, and thank you 

for the passion that you bring to this. My hope is that the next 

President will just bring at least a small measure of that passion 

to these issues. 

Let me take a moment just to introduce our three witnesses for 

this panel, and then we will recognize you to speak. 

Our first witness today is Gene Dodaro, the Acting Comptroller 

General of the United States. Mr. Dodaro took over in March of 

this year after the resignation of former Comptroller General David 

Walker, who is here today, and who we will be hearing from, I 

think, on our next panel. Previously, Mr. Dodaro spent—was it 9 

years as Chief Operating Officer—— 

Mr. DODARO. Yes. 

Senator CARPER [continuing]. For the Government Accountability 

Office, the No. 2 spot at GAO, as I recall. 

Our next witness is Danny Werfel, the Acting Controller in the 

Office of Management and Budget. Mr. Werfel previously served in 

a host of positions at OMB, including the Chief of Financial Integrity in the Analysis Branch. Also, I think you worked as a trial attorney in the Department of Justice’s Civil Rights Division. Is that 

correct? 

Mr. WERFEL. That is correct. 

Senator CARPER. And our third and final witness on this panel 

is Kenneth Carfine, Fiscal Assistant Secretary for the U.S. Department of Treasury, a job that you have held since your appointment 

in March 2007, a little more than a year ago. Mr. Carfine previously served as Deputy Assistant Secretary for Fiscal Operations 

and Policy, a position to which he was appointed in April 2003, and 

I am sure that was not his first job. He has done a lot of other 

things, and we will not go into all of those. 

We are delighted that you are all here. We look forward to hearing your testimony. Your entire statements will be made part of 

the record, and just feel free to summarize. I would ask you to stay 

fairly close to 5 minutes. If you go over a little bit, we will not bang 

down the gavel. But try to stay fairly close to that if you would. 

Thank you. 

Mr. Dodaro, welcome. 

TESTIMONY OF GENE DODARO,1 ACTING COMPTROLLER 

GENERAL, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. DODARO. Thank you, Mr. Chairman. Good afternoon to you 

and Senator Voinovich. I appreciate the opportunity to be here 

today to discuss the results of GAO’s audit of the consolidated financial statements for fiscal year 2007. As you noted in your opening statement, like prior years, we were unable to give an opinion 

9 

1The report entitled ‘‘The Federal Government’s Financial Health, A Citizen’s Guide to the 

2007 Financial Report of the United States Government,’’ appears in the Appendix on page 98. 

on the accrual basis financial statements for a wide range of reasons which are documented in our report. The main three you also 

pointed out in your opening statement, which are the serious financial management problems at DOD, the inability to reconcile 

intragovernmental transactions among departments and agencies, 

and an ineffective process in compiling the financial statements by 

the Department of Treasury. 

I would note, though, that there were three positive developments in this past year. First, we were able to give an opinion, an 

unqualified opinion, on the 2007 Statement of Social Insurance. 

Now, this statement is a very important statement as it discusses 

the difference between the scheduled expenditures for Medicare 

and Social Security programs compared to projected revenues. And 

it shows a $41 trillion gap of where there is fiscal exposure for the 

Federal Government similar to the exposure chart that you mentioned before. So that was a positive development because it provides greater reliability to that information and helps to put the 

spotlight on the government’s long-term financial condition. 

Second, Treasury and OMB published a summary Citizen’s 

Guide this past year at the urging of former Comptroller General 

Walker, and in concert with the Joint Financial Management Improvement Program Principals.1 That was a positive development. 

It is a very brief guide, but it highlights the long-term fiscal challenges facing the Federal Government. 

Finally, if I could direct your attention to this past year, of the 

24 agencies that are covered by the CFO Act, 19 of those agencies 

were able to get unqualified opinions. When the legislative requirement first came into place for fiscal year 1996, only 6 of the 24 

agencies were able to get unqualified opinions. Although the Federal Government was late to the game with a requirement for audited financial statements, much later than the State and local governments, as well as the private sector, progress has been made. 

This needs to be sustained in the next Administration. The five 

agencies that did not receive unqualified opinions this past year 

are some large departments like DOD, Department of Homeland 

Security, NASA, Agriculture, and the State Department. 

And the next chart shows the magnitude and the pervasive nature of DOD throughout the government’s finances, with about 20 

percent of net costs, 20 percent of liabilities, and almost half of the 

assets of the Federal Government.DOD needs to make major 

strides as it is the major critical path to an opinion on the consolidated financial statements of the Federal Government. 

Now, in addition to being a good accountability tool, the financial 

statements are also beginning to shed more light on the long-range 

financial challenges of the Federal Government. This next chart 

shows the steadily increasing debt of the Federal Government from 

2003 to 2007. This debt is growing both in debt held by the public 

as well as the debt the government owes itself regarding the later, 

the government borrowed about $200 billion in Social Security excess of revenues over projected benefits paid to help finance the 

rest of the Federal Government’s costs. When such borrowings 

10 

1The prepared statement of Mr. Werfel appears in the Appendix on page 92. 

occur, they basically generate IOUs to the Social Security trust 

funds. So the total debt is going up. The debt ceiling has had to 

be raised three times in the last 4 years, and it is expected that 

the debt ceiling will have to be raised again, either the later part 

of this year or next year. So that issue will be confronting the Congress soon. 

Now, our simulations are similar to the ones that you, and Dr. 

Coburn showed, where the total debt just skyrockets in the outyears based on the simulations. The next chart shows what some 

of the impact would be on this. Basically, if in the out-years revenue as a percent of gross domestic product is held at about 18.3 

percent, which is about what it has been on average the last 40 

years, by the year 2030 we will only have enough funds to pay interest on the debt, Medicare, and Social Security. We will not have 

any revenues left to pay for any part of the Federal Government 

that is remaining. 

Obviously, this is not going to happen, but it shows the magnitude of the challenge confronting the Federal Government and 

the size and scope of the problem going forward. Simply put, the 

Federal Government is on an unsustainable path. It is a matter of 

the utmost importance to the country, and it really needs to be 

dealt with. 

I commend you for holding this hearing and for maintaining the 

attention to these important issues, both from an accountability 

standpoint and from a government fiscal policy standpoint. 

Thank you very much. 

Senator CARPER. Thank you very much, and thank you again to 

you and the folks that you now lead. Thank you for your stewardship and for being there to help us be better fiscal stewards than 

would otherwise be the case. 

Mr. Werfel, we are delighted that you are here. Please feel free 

to proceed. 

TESTIMONY OF DANIEL I. WERFEL,1 ACTING CONTROLLER, 

OFFICE OF MANAGEMENT AND BUDGET 

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

Coburn, and Senator Voinovich, for having this hearing today. We 

have heard so far today a lot about the rising cost of entitlement 

programs and the expected impact, the enormous impact it is going 

to have on the Federal Government and our fiscal health in the 

coming decades. What I would like to focus on—and we will certainly like to discuss those issues as well, but for the purpose of 

my oral statement, I would like to talk about the fact that this impending fiscal crisis really brings into sharp focus the need to meet 

our financial management goals because of the critical role that the 

financial management community plays in not only reporting on 

our fiscal situation but on controlling costs and making sure that 

we are operating an efficient and effective government. 

When the CFO Act of 1990 was passed close to 18 years ago, 

Congress established three fundamental objectives for Federal financial management: Transparency, informing the public on the 

nature of our Nation’s finances; internal controls was the second 

11 

1The report entitled ‘‘The Federal Government’s Financial Health, A Citizen’s Guide to the 

2007 Financial Report of the United States Government,’’ appears in the Appendix on page 98. 

objective, making sure that we are putting in the right people, 

process, and technology to track funds and mitigate financial risks; 

and, third, decision support, making sure we have the right financial information at the right time to inform agency decisionmaking. 

Significant results are being achieved with respect to the reliability, timeliness, and readability of agency financial reports 

today. With respect to reliability, as Mr. Dodaro pointed out, 80 

percent of CFO Act agencies achieved a clean audit opinion today. 

With respect to timeliness, all agencies are now reporting those audited financial statements with 45 days after the end of the fiscal 

year, and Treasury and OMB issues the governmentwide report 

only 30 days after that. And with respect to readability of our reports, through an OMB pilot program agencies are not producing 

summary documents to help readers digest hundreds of pages of 

detailed financial and performance information. 

Attached to my testimony today is a great example of how we are 

working to make government financial reports more readable and 

transparent, ‘‘The Federal Government’s Financial Health, A Citizen’s Guide to the 2007 Financial Report of the United States Government’’ provides readers an eight-page, easy-to-read version of 

the larger, 182-page Financial Report.1 The Treasury Department 

and OMB are very proud of the report, and I think GAO is as well, 

not only because it improves the presentation—— 

Senator CARPER. Let me just interrupt. Whose idea was that? 

Mr. WERFEL. Whose idea? Well, it was Mr. Walker’s—— 

Senator CARPER. David Walker. 

Mr. WERFEL. Yes. 

Senator CARPER. Thank you very much. 

Mr. WERFEL. Do not ever say I do not give credit where credit 

is due. 

We are proud of this report not only because it presents our financial information more effectively, but we are proud because of 

the clarity and transparency we are giving to the most significant 

fiscal challenge facing the government today, the one that we have 

talked about so far. 

The Federal financial community plays an important role in fiscal sustainability issues. We are responsible for ensuring that the 

data and the analysis are clearly and effectively communicated, 

and the Citizen’s Guide represents an important first step in this 

area. Also, as Mr. Dodaro mentioned, the clean opinion on our 

Statement of Social Insurance is another important step. 

The Federal financial community is responsible for more than 

just reporting on the Nation’s fiscal health. We play a critical role 

in developing and implementing strategies to control Federal 

spending and otherwise ensure that the fiscal health of the Federal 

Government remains sound. In areas such as improper payments, 

billions of dollars in error are being eliminated. In real property, 

billions of dollars in unneeded assets are being removed from our 

inventory. 

Despite these results, more work needs to be done. While most 

of our major financial reports are passing audit scrutiny, too many 

12 

1The prepared statement of Mr. Carfine appears in the Appendix on page 108. 

of them are not. And to address this, we have sound corrective action plans in place to address financial management weaknesses, 

and these action plans are already leading to results. Trends are 

showing better audit results each year. 

With the unprecedented challenge before us, we need to make 

sure that our Federal financial leaders are moving beyond the fundamentals of just audited financial statements. Do our financial reports contain the right information most relevant to important programmatic and business decisions that agencies are making? 

As we approach the 20-year anniversary of the CFO Act, OMB 

looks forward to working with Congress and GAO to evaluate financial management requirements today to address these questions. We must ensure that the CFO Act and other relevant laws 

are best positioning the Federal CFO to help the government 

through the financial challenges that lay ahead. 

At this time I am happy to answer any questions that you have. 

Thank you. 

Senator CARPER. And I am sure we will have some. Thank you 

very much for that statement. 

Mr. Carfine, you are the third witness, and we look forward to 

hearing what you have to say. 

TESTIMONY OF KENNETH E. CARFINE,1 FISCAL ASSISTANT 

SECRETARY, U.S. DEPARTMENT OF TREASURY 

Mr. CARFINE. Mr. Chairman and Members of the Subcommittee, 

thank you for inviting me to this hearing to discuss the Financial 

Report of the U.S. Government for Fiscal Year 2007. Your interest 

in improving Federal financial management and, in particular, fiscal sustainability is greatly appreciated. 

The Financial Report reflects Treasury’s longstanding responsibility to provide the Congress and the public with timely and reliable information on the costs of the government’s operations, the 

sources used to fund them, and the implications of the government’s financial commitments. The Financial Report provides the 

net operating costs for fiscal year 2007, the net position of the government at the close of the fiscal year, and other critical information concerning the financial performance of the Federal Government. 

The report also contains a Statement of Social Insurance, which 

shows the present value costs of the government’s exposures of its 

social insurance programs, primarily Social Security and Medicare. 

The Statement of Social Insurance became the first and, to date, 

the only component of all the governmentwide financial statements 

to earn an unqualified audit opinion from GAO. 

As you know, the retirement of the baby-boom generation will 

have a profound impact on the finances of Social Security and 

Medicare. There are currently 3.3 covered workers per Social Security beneficiary. That number will fall to 2.1 in 2034. Medicare 

faces the same demographic challenges as Social Security, but additionally must cope with the rapid expected growth in health care 

costs. While Social Security expenditures are expected to grow considerably over the next 75 years, Medicare obligations are expected 

13 

to dwarf those of Social Security. The 75-year present value of projected Medicare expenditures, less tax and premium revenue, is 

$34 trillion, while the 75-year present value of projected Social Security expenditures, less tax revenue, is $4.7 trillion. 

The Financial Report shows that the Federal Government current policies are unlikely to be sustainable. Total expenditures, including interest, are expected to grow to 50 percent of GDP by 2070 

and 60 percent by 2080. If revenues in the future continue at the 

historic average level of 18 percent of GDP, they will barely cover 

one-third of total government expenditures and would not be sufficient to cover the net interest on the government debt. 

The consequences of the projected growing gap between revenues 

and expenditures would be a rapidly increasing debt-to-GDP ratio. 

By 2030, the need to fund government deficits will drive the debtto-GDP ratio to 68 percent, far surpassing the non-wartime peak 

of 49 percent in 1993. By 2040, this ratio is projected to reach 128 

percent, well above the World War II peak of 109 percent. Thereafter, the ratio of debt held by the public to GDP rises sharply to 

300 percent by 2060, and doubling against to 600 percent by 2080. 

It is important to note that these are merely projections based 

on a number of assumptions that can change and alter the outlook. 

Yet the projections provide an important signal about the difficulties that the government faces in attempting to sustain current 

policies. Avoiding the consequences of this fiscal path will require 

actions to bring program expenditures in line with available resources. How soon those actions are taken will greatly influence 

their ultimate impact on the Nation. 

For fiscal year 2007, GAO was unable to express an opinion on 

the other financial statements in the Financial Report due to longstanding material weaknesses. I recognize that until our statements can withstand audit scrutiny, we will not benefit from the 

report’s full value in informing the Congress and the public about 

the government’s fiscal position and condition. We are working 

with OMB and the other Federal agencies to address these issues 

and are making significant progress. 

A common critique of the financial report of the U.S. Government 

is that, despite the fact that it contains more than 180 pages of detailed information on the government’s financial condition, it is not 

a practical document for communicating with the American citizen 

or the Congress. In response to this feedback, the Treasury Department and OMB, in cooperation with GAO, developed and issued the 

summary report that Mr. Werfel mentioned. This guide provides a 

summary of the key data and issues addressed in the full report 

in a manner that is user-friendly to the general public. 

The process of preparing the Financial Report of the U.S. Government and the annual agency financial reports can have an impact on improving management and control of the government’s finances. However, these reports are of limited or even minimal 

value if they go unread. As such, in addition to continuing to pursue resolution of the governmentwide reporting weaknesses, we 

will continue to focus on how to make the document and the information it contains more relevant and useful to the general public. 

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

and I look forward to your questions. 

14 

Senator CARPER. Well, gentlemen, thank you all for that testimony. 

I say this to my colleagues, I am sitting here listening, and we 

are encouraged that for the first time, I think the first time ever, 

we actually have the Statement of Social Insurance that is done, 

signed off on, and I think it said about 80 percent of our 24 major 

Federal agencies have gotten clean audit opinions, and that is encouraging as well. 

There is an irony, though, at least for me, that even as we have 

a better financial reporting that is beginning to occur, something 

we all welcome, the picture that is presented by that better financial reporting is bleak and very discouraging. 

There is part of me that says—and I almost said it may be better 

if we did not know just what an awful situation we are in, but to 

be serious, we need to know. And the fact that we have actually 

information that is reliable, that has been documented, in the end 

that will be a good thing. 

I do want to commend those whose efforts led us to really to 

achieve those benchmarks and milestones. Obviously, we are not 

done, but that is progress, and people are to be commended for 

that. 

Let me just start with the Department of Defense and let’s focus 

on their progress, or lack thereof. In addressing their financial 

management problems, I think they are having a big impact on our 

ability or our inability to obtain a clean opinion governmentwide. 

I would just ask this panel—I do not care who takes the first shot 

at it, but why is this the case? And what can be done further by 

you, by us, by the Administration to get a clean opinion at the Department of Defense? 

Mr. DODARO. I will take the first shot at that. The Department 

of Defense—— 

Senator CARPER. I know you all have some ideas because I read 

them. 

Mr. DODARO. Yes, I believe you did, Senator. Actually, the Department of Defense’s problems are very serious ones. They comprise in whole or in part about 15 of the 28 areas that we have on 

our high-risk list at GAO that we have been maintaining since 

1990. The problems fall into several different categories. One, for 

an enterprise as large as the Department of Defense and the fact 

there was no requirement for annual financial statements of the 

Federal Government prior to 1996, they had hundreds of systems 

that were in place that were developed in isolation of one another. 

So their financial systems and the volume of their transactions 

were enormous, and they are not well postured to bring those systems together to produce reliable financial statements. 

Second, they have great difficulty accounting for financial statement purposes, for equipment, property, inventory given the volume of their activities going forward. 

Third, they have enormous liabilities. Just pick one related to environmental clean-up. When they close a base or a facility, they 

have difficulty coming up with estimates that are auditable to be 

able to be in a position to know exactly what the size of those 

clean-ups were. 

15 

They have tried various improvement efforts over the years. 

They have made some incremental progress, but they still have a 

long way to go. They are trying right now to put in place a data 

structure so that they have a common set of requirements across 

the departments. They are going to try to go to a different approach to be prepared to be ready, to have auditable statements, 

but their current estimate is out into 2017 before that occurs. And 

if there is one recommendation I would have for this Subcommittee 

going forward, it would be to focus on the Department and have 

them here and to keep the sustained attention on their efforts to 

go forward. 

A big issue now is leadership. We are about ready to change to 

a new Administration. This will only be the second new Administration since the CFO Act was passed. So it is really important 

that the momentum be changed. We have recommended that there 

be a Chief Management Officer at the Department of Defense that 

spans Administrations—— 

Senator CARPER. Let me just interrupt. Has the Department 

taken the position the Deputy Secretary should assume those responsibilities? 

Mr. DODARO. That is their position. 

Senator CARPER. Gordon England is highly regarded, certainly by 

me and I think by many others. But is the suggestion that this is 

just—given everything else that is on the Deputy Secretary’s plate, 

this is probably not something that he or she has time to do well. 

Mr. DODARO. That is correct. We have respect for Mr. England 

as well, but, there is a lot going on with the Department of Defense 

right now, and these are not the type of problems that can be 

solved within a year or two of attention. They are going to span 

a wide number of years, and somebody needs to focus on them fulltime. That is the way some of the smaller departments and agencies have made progress, and that is why they are where they are 

today. 

Senator CARPER. Do you envision this person being a political appointee who would come and go with the beginning or the end of 

an Administration? Or is this somebody who would be there like 

maybe even a career professional or somebody that would be there 

for an extended period of time? 

Mr. DODARO. What we had envisioned was somebody that would 

have a 5- to 7-year term that would span Administrations, that 

would be able to work on these problems with a sustained improvement plan across time. 

One of the other factors that occurs at the Department of Defense, and whether it is weapons systems development, or whatever, there is a lot of movement of leadership within the Department, and that has been one of the things that we pointed out over 

time. When you have these long-term efforts—and this is a longterm effort because you are talking about business management 

systems dealing with one of the largest entities in the world, you 

are not going to be able to do it on a part-time basis. 

Senator CARPER. That reminds me, just checking in with my colleagues, when we observe all the folks that are nominated for positions in the Executive Branch for which they need Senate confirmation, the process that the folks go through, it is, as you know, 

16 

time-consuming. Then the process of confirmation, going through 

the hearings, and then going to the floor, and avoiding holes, we 

end up going for extended periods of time with key positions not 

being filled. It is not a good situation. 

Anyone else on this first question before I yield? Yes, Mr. Werfel? 

Mr. WERFEL. Yes, I would like to add to Mr. Dodaro’s comments. 

I have had the honor and the privilege of working with the Defense 

Department on their clean audit plans since 2003. 

Senator CARPER. OK. 

Mr. WERFEL. And one thing I can assure you of is that any lack 

of progress is not due to a lack of talent and dedicated professionals at the Pentagon. 

Senator CARPER. That is good to hear. 

Mr. WERFEL. They are a great group. 

If you look over time, you see a lot of progress being made, and 

there are things that we can point to, more liabilities getting to 

audit readiness, more internal controls being improved, clean audits at some of the small services. The U.S. Army Corps of Engineers just recently achieved a qualified audit, which was a major 

milestone. 

But what you have is—excuse the pun or metaphor, but a lot of 

it is trying to boil the ocean. The Department is so large and complex, so many thousands of transactions a minute going on, and so 

many different complexity to their organization—— 

Senator CARPER. Mr. Dodaro mentioned in 1996 all the different 

systems that did not talk with each other, and we have had 12 

years to go beyond that. Is it as bad as it was? Any idea? 

Mr. WERFEL. It is getting better, but it is a slow—it is like a glacier moving. It is an inch-by-inch process. 

Senator CARPER. It is like turning an aircraft carrier? [Laughter.] 

Mr. WERFEL. Well, we certainly do not turn on a dime in the government. But one of the things that I would like to share is that 

what we are starting to think more and more that will help the Defense Department is to start segmenting their milestones around 

objectives that do two things: 

First of all, we can prioritize areas that are material to the consolidated financial statement, because what you have with the Defense Department is they are so big and so large that some of their 

line items are material to our line items at the consolidated— 

things like their cash and their plant, property, and equipment, 

and their environmental liabilities. So if we can target those components in particular and target those areas that have the greatest 

nexus today towards mission effectiveness at the Defense Department—because if you look totally at their clean audit action plan, 

you can start to prioritize. Well, if they did a better job with these 

things, that is really going to impact their mission and their ability 

to support the warfighter and do other things. And then you can 

look down the list and say, well, these are good things to do but 

less impact. I think we need to go through a prioritization exercise 

with the Defense Department along those lines. 

And the last point I will make is one of the challenges is that, 

as you have heard me testify before, November 15 is a big day for 

the Federal agencies, the CFO community. We all sweat that one 

out as we wait for the auditors to come in and find out whether 

17 

we got a clean audit opinion. And that type of pressure really motivates and generates a lot of accountability at the agencies. 

The Defense Department does not have that type of November 15 

because they are not getting an audit right now, and sometimes I 

have talked about it as there is no moment of truth in the near 

future from a public transparency standpoint. So as we think about 

prioritizing the Defense Department’s efforts, we might also want 

to think about how can we create public transparency around how 

they are doing along these key milestones. So the next moment of 

truth is in 2017, and we are looking forward to working with GAO 

and Congress to think about how to implement that, assuming that 

is something that resonates with you. 

Senator CARPER. Good. Thank you. I am about 2 minutes over 

my time. 

Mr. Carfine, do you want to add anything or sort of underline 

anything that has been said by the first two witnesses? 

Mr. CARFINE. The only thing that I want to mention is that the 

problems at the Department of Defense as well as the other material weaknesses related to the financial statements are difficult 

problems to address. And we are committed to supporting the recommendations that OMB has for addressing the Department of Defense and are willing to help in any way that we can in order to 

move that process along. 

Senator CARPER. Good. Thanks so much. Dr. Coburn. 

Senator COBURN. Well, thank you for your testimony. One of the 

things my staff did this spring is we took all the GAO reports, all 

the IG reports, all the CBO reports, and all the CRS reports on 

government waste, and we combined them. You know what the 

total came to on an annual basis? Waste and fraud, $300-plus billion a year. 

Put up the supplemental. 

If, in fact, we had Congress working as hard on waste as they 

work on earmarks, all these supplementals could have been paid 

for. That is the trend line on supplementals. Supplementals are 

borrowed—every penny of it is borrowed. Agree? Anybody disagree 

with that? Every penny of it is borrowed money. It is supplemental 

funding that we do not have outside of the budget 302s. It is money 

that we are going to go and borrow. 

So had we worked—you all are doing the basic background of 

creating the systems and the measurement with which we can 

manage. But had we worked to not allow supplementals—in other 

words, to make the hard choice, what do we get rid of if we are 

going to spend, like we did in 2005, $140 billion of which $96 billion of that was on the war. But $54 billion was not on the war— 

$54 billion just was a way to get—Senator Carper mentioned 

PAYGO. If we really had PAYGO and we really enforced it—which 

we do not. We only enforce it when it is convenient politically. But 

if we really had PAYGO and we applied it to supplementals, what 

would happen is we would not see that and we would get rid of a 

good portion of the $300 billion worth of waste, fraud, and abuse 

because we would be forced to, kind of like when you are a governor and you have to operate under a Balance Budget Act. 

So the question I have, and mainly it is directed to my favorite 

quarterback, Mr. Werfel, is this Administration refuses to force the 

18 

Congress to make hard choices on supplementals, and so they 

had—— 

Senator CARPER. Before you ask this question, let me say, won’t 

it be a great day when that famous quarterback will at some time 

be mistaken for this guy? 

Senator COBURN. I am sure he is all the time. [Laughter.] 

Senator CARPER. And he will pretend he is here to try to get better rooms in hotels—— 

Senator COBURN. Look at him ruin my point. I do not even know 

where I was now. [Laughter.] 

Senator CARPER. Your favorite quarterback. 

Senator COBURN. But why is the Administration sending 

supplementals up here and saying, ‘‘I want this money spent outside of the budget,’’ when they know this same number is $300 billion worth of waste, fraud, and abuse. Why not send a supplemental and say, ‘‘We want a supplemental within the budget’’? 

The last time Congress did a rescission was 1995. And the assumption behind that for the American people is everything is running efficiently, we do not have any waste, we do not have any 

fraud. And, by the way, if we have some hiccup come along, we are 

not going to make hard choices. We are just going to put a credit 

card in the machine and send it on down the road so that we go 

not from $9.8 trillion—by the way, the debt is rising $1.2 million 

a minute as we are sitting in here, $1.56 billion a day. Instead, we 

just do not make the hard choice. 

Why do you keep sending requests up here for supplemental 

spending when you know there is waste there and you do not force 

the Congress to make the hard choices? You enable the Congress 

to fail by not requesting that it be within the budget guideline. 

That is a question. 

Mr. WERFEL. OK. I am ready. Well, Senator, I would answer that 

by saying that I think the Administration’s position is that what 

we are asking for in supplemental appropriations are funds that 

are absolutely necessary to meet obviously mission-critical priorities related to the current global war on terror and other priorities. And what we try to do is make sure that we are putting forward responsible plans that are meeting those needs. And those 

proposals to happen separately and apart from the President’s 

budget which happens in February. And, again, with the President’s budget, we are trying to do the same exact thing, is put forward a budget, a responsible budget that meets our needs. 

I am not sure that—and it is possible that making sure that both 

of those things are happening on the same track will lead to the 

type of tough decisions that need to be made. But I think it is hard 

to go through both the President’s budget and the supplemental 

that are submitted by the Administration and find things that are 

not critically important for the health and welfare of the American 

people. 

Senator COBURN. Quite frankly, I will say that is a disappointing 

answer because every family in this country right now has supplemental emergency needs based on the price of gasoline. And you 

know what they are doing? They are making hard choices about 

priorities. And when the Administration knows that we have a supplemental request at least for $80 billion a year the last 5 years 

19 

and does not put it in their budget, what they are saying is the 

rules do not apply to government that apply to every other taxpayer in this country. And I think it is almost criminal that we 

continue to say in something that we know is going to be at least 

$80 billion next year in the budget, that we put it outside of the 

budget so we do not have to do the hard work. And, unfortunately, 

there is not enough of us in Congress that want us to do that, and 

absent the leadership to that, what we are doing is we are continuing to waste the $300 billion a year. 

And this Administration knows at least that $80 billion is going 

to get spent next year on the war. They knew that 3 years ago. And 

to not have that in the budget says the rules are different for the 

people who take your taxes than for the people who pay them. And 

the reason the American public has an 11-percent rating for Congress and slightly higher than that for the President is this very 

issue. There is a double standard. When OMB sends a budget up 

here and a request that is not within the confines of the reality 

that everybody else lives in, what we do is perpetuate—we can do 

all the work we want to do as far as GAO and OMB and the Treasury in terms of trying to fix the management, but when the underlying principle for that is we are going to spend it. 

The other point I would make is every time we pass a supplemental, what does that do to the baseline? We all know the answer 

to that. The one that is getting ready to come is going to have over 

the next 2 years $60 billion in extra spending in it. The one that 

is going to hit the floor this week, $28 billion this year. That raises 

the baseline on every one of those programs so that we start at a 

higher level, $28 billion. If it is truly an emergency, then we ought 

to find some of the waste to get rid of it. 

I know I am kind of preaching to the choir. I know you are not 

in opposition to that. But the point is if we are ever going to handle 

the big problems, the demographic problems, the Medicare problems, the Medicaid problems, the Social Security problems, the interest problems, we have to have the confidence of the American 

people that we are handling the small problems right. And I would 

put forward that we are not. 

As a percentage—who had the chart on the percentage of qualified statements? Would you put that chart back up for a minute. 

That is a percentage of the statements. That pie chart looks pretty good. But when you put it as a percentage of the total spending, 

what does it look like? 

Mr. DODARO. Basically, the net costs combined by the red portions of the five agencies is about 28 percent of the total net cost. 

Senator COBURN. OK. So it does reflect the net cost, not the percentage of agencies that have—— 

Mr. DODARO. No. This is for the agencies. My point—— 

Senator COBURN. That is showing 18 percent, right? 

Mr. DODARO. Yes. My point with the chart, Senator was a couplefold. I was under scoring the fact that we have 19 agencies right 

now that have unqualified opinions. In 1996, there were only six 

when we started. 

Senator COBURN. Right. 

20 

Mr. DODARO. Point one is that it is important for the next Administration to continue to make progress and not slip back from 

the 19 there. 

The second point is that the five that did not get there are large 

agencies, DOD being a particularly large one. 

Senator COBURN. Agriculture. 

Mr. DODARO. Agriculture, Department of Homeland Security, 

State Department, and NASA are the other four. They are all large 

agencies. This is not meant to represent the cost percentages. 

Senator COBURN. Right, OK. First of all, thanks to Senator Carper, I am sure we are going to keep doing this. So no matter who 

the President is, I feel confident that we have an agreement that 

the pressure is going to stay on from this Subcommittee that we 

are going to keep looking at this and holding it accountable. 

Rather than take more time, Mr. Chairman, I am going to submit a series of questions to each of you, if you wouldn’t mind answering them, and a timely answer would be great so we can get 

it back. 

I thank you very much for the time. 

Senator CARPER. You bet. Thank you. Senator Voinovich. 

Senator VOINOVICH. Yes, thank you. When do you think you are 

going to have an unqualified audit from the Defense Department? 

Mr. DODARO. Senator, I really do not know. They are projecting 

2017 that they believe they will be in a position to be ready. If they 

execute their plans and implement the proposals that they have 

going forward, that may be possible. But I would have to wait to 

see what kind of incremental progress they make each year. 

Senator VOINOVICH. Have you looked at their plan in order to accomplish it and commented on whether you think it is a real plan 

or smoke? 

Mr. DODARO. We have started to look at the new plan. We are 

going to spend more time focused on it and provide them some 

more detailed comments going forward. But, again, this plan has 

to be adopted by the next Administration and then executed going 

forward. And so our plan would be to try to put this on the radar 

screen of the new leadership of the Department, in addition to 

working with the current people until they leave, and to try to 

make sure that it gets implemented properly. 

We have seen in a number of areas at the Department of Defense 

a lot of good plans over a wide range of issues, and I know you 

have been involved very heavily in some of the high-risk areas. 

Part of the problem is that they have a lot of good plans, but they 

are not executed very effectively. So, part of this is having a good 

plan. We will look at it. We will give them a lot of comments. But 

they are going to have to execute it. 

Senator VOINOVICH. Well, I would like to suggest to this Subcommittee that GAO stay on it and that there be a comment on 

whether or not it is a real plan or not so that at least we can have 

metrics to stay on top of it to see if there is any progress that is 

being made. 

Senator COBURN. Would you yield for a second? 

Senator VOINOVICH. Sure. 

21 

Senator COBURN. You said they do not have any audit now, and 

the question was about an unqualified audit. In their plan, when 

will they get their first audit, real audit? 

Mr. DODARO. Well, they have—and maybe Mr. Werfel will want 

to comment on this. They have parts of the Department being audited, but there is no—— 

Senator COBURN. Yes, but I mean a complete audit. 

Mr. DODARO. No, they do not have a complete audit right now. 

Their plan calls for trying to have an unqualified opinion on the 

entire set of financial statements for the Department like the other 

ones we talked about by 2017. 

Senator COBURN. I did not make my point clear. When will they 

have a complete audit of the thing, whether it is qualified or unqualified? 

Mr. WERFEL. The action plan—it is called a FIAR plan, Financial 

Improvement and Audit Readiness—actually does not provide the 

level of specificity out in the 2014, 2015, 2016, 2017 range to indicate when at a consolidated level they will be ready for an audit 

opinion, whether that audit opinion is clean or qualified. So we do 

not have an answer. 

One thing I would point out in the interest of looking at this 

glass as half-full is that when we started this process, at least 

when I got involved at the start of the Administration, the Defense 

Department was pointing to a fiscal year 2007 date as when they 

were going to get a clean audit opinion. But, of course, as you 

peeled back the onion on that, you could not find the path forward 

that would get them a clean audit opinion in 2007. 

And so what we did was we worked with them, a lot of help from 

Congress putting pressure through legislation and GAO, to say put 

together a realistic plan, because right now you do not have a realistic one because there is no path to 2007. That is unrealistic. 

What they came up with, the FIAR plan, puts it out to 2017. But 

there is a lot of detail at the start of that plan. If you look at the 

plan, there is a lot of detail between now and, let’s say, 2012. But 

beyond that, it starts to get more and more white spaces in the 

pages as you go on. 

But, I think there is a positive in that this is a more realistic 

time frame. Even though it is frustrating, we now have a realistic 

time frame of 10 years or about a decade, and can start to look for 

opportunities to accelerate within that. But when the plan was 

2007, there was not a lot to work with. 

Senator COBURN. Thank you. 

Senator VOINOVICH. We need to know what the plan is. We need 

to look at metrics to determine whether or not there is progress on 

the plan. I would like to also know who is responsible for the plan 

in terms of people that are on civil service or how involved is someone that is going to be appointed. 

That gets back to transformation of the whole Department, and 

I have been arguing, frankly, because of the recommendation from 

the Government Accountability Office of having a CMO over there 

and try to get Gordon England to do that. And I thought we were 

almost there, and then he chickened out, as far as I am concerned. 

And now we have somebody that is in charge of transformation, or 

a CMO, but there is no term connected with it, so you do not get 

22 

the continuity. And anybody that knows anything about transformation, whether it be in a screwed up Department like Defense 

or another screwed up one like the Department of Homeland Security, knows that it is not going to happen overnight. And I would 

like you to comment on how important you think it is that we get 

involved here and get that CMO, give him or her a title, and have 

them be able to work on it. 

Now, we have come a long way—I do not know if you know this 

or not. In the Department of Homeland Security, we now have a 

Deputy Secretary on the same level as the Deputy Secretary—one 

is management and one is operations. But that person that has got 

the management has no term. And so there is no chance—I mean, 

depending on how it all works out, we are not going to get—well, 

you comment. I would like to hear what you have to say about how 

important you think it is for us to get this change that we need 

to have here. 

Mr. DODARO. I think for the Department of Defense and for the 

Department of Homeland Security, it is very important that these 

positions get enacted because you have basically huge management 

challenges in both of those Departments, and as you point out, they 

are not going to be solved overnight. They need sustained and fulltime attention. You need to have a person that is going to span Administrations to basically solve these problems. 

So we think it is critical. Not every Department needs that, but 

the large Departments that have these intractable problems definitely need it. We think it is very important. 

Senator VOINOVICH. I would like to just comment also on what 

Senator Coburn was talking about, emergency spending. The ability to know how much money that you are going to spend on this 

war in Iraq is obvious, and you can get people right now that will 

sit down with you and tell you that even if we go down to 30,000 

troops, it is going to cost us, I do not know, $100 billion a year. 

And we constantly keep getting requests and they are emergency, 

and I think, frankly, the reason for it is that they want to kind of 

hide the fact how much this is costing so that the budget is going 

to be—would show, the figures would show that the budget is a lot 

more in balance than what it does, and the way around that is just 

call it emergency spending. 

It is the same thing when I came here in 1999, we had a big deal 

about the on-budget surplus and—what is it?—the uniform budget. 

And we started separating, letting folks know that the on-budget 

surplus includes the money we borrow from ourselves. Now, you 

just said $200 billion. That never shows up. The public does not 

understand just how much in debt that we are. And this year, if 

we keep going and look at all the things, it is going to be about 

$756 billion—— 

Senator COBURN. More than that. 

Senator VOINOVICH. You think more—that is just going to go on 

the debt. And I think it is maybe too late for this Administration, 

but it seems to me that the next Administration ought to invoke 

a new policy. 

I will never forget, we spent $3 billion for the Department of 

Homeland Security because everybody in the Senate was taking 

the heat because of the immigration bill, and it was a hot potato. 

23 

And so to make everybody feel good, they put another $3 billion 

into the Department of Homeland Security to take care of—what 

is it?—the CBP. And I got a hold on some folks over at OMB, and 

I said this is outrageous. You guys came in with a gigantic increase 

in your budget for the Department of Homeland Security. The committee that has that, the authorization committee, they increased 

it substantially over that. Unbelievable increase. And this thing, 

when you put the $3 billion, I think it is about a 52-percent increase. And they said, Well, we do not really like it, but you know 

what? It is emergency spending. 

Now, pretty cynical. And I think part of the reason why we are 

in the jam we are in is that when it came time for controversial 

spending around here, we chalked it up on emergency spending. I 

really think that is the reason why we have not paid for this war, 

because we fool the American people, and not a dime—not a dime 

for the war. It has all been—most of it, emergency spending. Hide 

it from the public. Maybe what we should do is make this report 

mandatory to get out to every single citizen in the United States 

and maybe educate them about how bad the situation is, and 

maybe if they understand it, maybe we would start to see some action around here, both in Congress and with the Administration. 

Senator CARPER. A couple of questions for this panel. And if Dr. 

Coburn and Senator Voinovich have questions, they are certainly 

welcome to ask them, and then we will excuse you and move to our 

second panel. 

The three of us spent some time together yesterday. The full 

Committee on Homeland Security and Governmental Affairs was 

meeting, and we were conducting what we call a markup of a number of bills that were on the agenda. One of the bills that was on 

the agenda is something that Dr. Coburn and I and Senator 

McCaskill and our staffs and other folks, too, have worked on for 

some time, and that is to take the original improper payments legislation and to make it better. I always like to say if it is not perfect, make it better. Well, it is not perfect, and we are trying to 

make it better. 

Dr. Coburn and I and Senator McCaskill, I think we actually had 

a pretty good bill, and there is one area that we have been still unable to close, completely come to agreement on, and I am just going 

to mention it to you and ask you all to put on your thinking caps 

and maybe not necessarily right here right now, but over the next 

week give us your ideas. 

How do we make sure that agencies actually comply with the improper payments law? And some do. Too many do not. And Dr. 

Coburn came up with an idea to try to put in sort of an escalating 

schedule of compliance sticks, if you will, for those agencies that 

were not doing a very good job of complying. Keep me out of trouble on this, Senator Coburn, but the first year an agency did not 

comply, we would authorize them to move money around within 

their agency so they would have more money for financial management the first year. The second year without compliance, I think 

we said we mandated that they move money around within their 

agency to provide for better financial management. The third year 

if they still were not in compliance, we did, I think, up to 5 percent—yes, 5 percent of their budget would be moved over to help 

24 

address their financial management deficiencies. And the fourth 

year would be—basically they would be pretty much out of business, and we would really hammer them bad, take away their ability to spend money for their mission. 

There was unease in our Subcommittee, and outside of the Subcommittee. I think we talked with OMB and GAO about this as 

well. But there was some unease about pulling the trigger like 

that, especially in the fourth year. And what we are trying to come 

up with is an approach that will better ensure compliance and the 

status quo but maybe not in the terms of one of our colleagues who 

said—they called it, I think, the ‘‘death penalty,’’ year four, would 

avoid the death penalty. 

Put your hats on and think about that, and just come back to us 

within the next week or so, to our respective staffs, and give us 

some good ideas. If you will do that, when we have our next markup sometime by the end of July, we will be able to pass, I think, 

a very strong bill. 

Another one, I think this may fall into your jurisdiction more, 

Mr. Carfine, than others, but Dr. Coburn and I have thought a 

whole lot about the idea that a bunch of folks owe taxes in this 

country and they are not paying them. Many of us are, but too 

many are not. And there is a big tax gap out there. Here is $300 

billion or more per year, monies that are owed and not being collected. And I understand that—what can we do about it? What are 

you all doing about it, and what can we do to help you? 

Mr. CARFINE. Well, the issue relating to—— 

Senator CARPER. Sort of like the flip side of the improper payments deal. It is on the revenue side. What can we do to help? 

What are you all doing, and what can we do to help? 

Mr. CARFINE. Well, the issue regarding the tax gap is an important issue for all of us, and I know that the Department is working 

with the Internal Revenue Service on aggressively addressing the 

issues related to the tax gap. 

There have been some proposals in the 2008 and 2009 budgets 

on how to deal with that. But I have to say this is a little bit out 

of my area of expertise. If you have some specific questions, I 

would be glad to take them back and get answers for you. 

Senator CARPER. Good. Thanks. Mr. Dodaro. 

Mr. DODARO. Basically, the tax gap is a very important issue. 

Right now the net estimated tax gap is $290 billion. I think that 

when decisions start being made to deal with some of the harsh fiscal realities that we have been talking about this afternoon, questions will come up about whether people are paying their fair share 

that they owe right now. We are doing a series of reports at GAO 

trying to identify different areas of noncompliance. 

For a number of years, IRS was not doing the research necessary 

to understand the nature of the tax gap and the size of it. Now that 

they have done that, we are beginning to have the tools available 

to delve into these areas more, and determine whether it is sole 

proprietorships or different types of taxpayers, paying community, 

etc., and to dissect it a little bit better. I would be happy to provide 

for the record the work that we have done to date and what we are 

planning to do. 

25 

Senator CARPER. That is good. I do not know if we have scheduled it, but we were thinking about maybe having a roundtable as 

opposed to maybe a straight out hearing that would focus on the 

tax gap. 

Mr. DODARO. Yes, I think that is very important. 

Another area we have highlighted in the tax area are tax expenditures, which in any 1 year can be as large as the discretionary spending of the budget. The tax expenditures are largely off 

the radar screen for regular review. We think that this is another 

area that could need some attention as well. 

Senator CARPER. Good. We would like to work with you on that. 

That is great. Thanks. Mr. Werfel. 

Mr. WERFEL. I just wanted to supplement some of Mr. Carfine’s 

comments, and I have a little bit more detail in the President’s 

budget. We do have 16 targeted tax law change proposals in the 

President’s budget that would close about $36 billion over the next 

10 years of the gap, which is a healthy downpayment on the gap. 

And those proposals, just to give you an overview of them, they involve getting more information from taxpayers in terms of trying 

to validate that we are getting the right amounts. And there is always that balance between needing more information and imposing 

taxpayer burden. But we think that the proposals that we have 

chosen to promote in the President’s budget achieve that balance. 

Of course, we are always open to looking at additional proposals, 

and this is a very important issue and one that can have an impact. 

Senator CARPER. We are told—and we have been holding a series 

of meetings within my own office and staff with different folks who 

have a lot of insight into the tax gap. And one of the things we 

have learned, in situations where there is withhold, there is actual 

withholding, there is about 99 percent compliance. In situations 

where there is reporting, a 1099, there is maybe 90 percent or better compliance. In situations where it is basically a cash economy, 

maybe 20 percent, if we are lucky. 

One of the things that we have, I said a bit earlier in this hearing, my staff spent much of this morning trying to figure out what 

we need to focus on to get done in this year, before the Congress 

goes home and hang it up. But what do we absolutely want to get 

done? And one of the things we want to get done is to identify just 

a handful of niches, if you will, that fall within the tax gap umbrella that we can focus on. 

Dr. Coburn and I focused on in the last couple years something 

called ‘‘cost-effective airlift in the 21st Century’’ and found out that 

we could actually save a couple billion dollars within the defense 

budget. And ultimately, I think with our encouragement, that actually took place. But we found a niche within the defense budget 

where we had some jurisdiction, and we worked with the committee of jurisdiction and got it done. 

What I hope we will do is a similar kind of thing with respect 

to the tax gap, and not try to address it all—it is huge. It is too 

big for us—but to find some niches that work for us so we can just 

go after something, drill down and just not give up so that it is sort 

of unrelenting. And we look forward to working with you on that. 

26 

I have some other questions, and I will submit those for the 

record. 

Senator CARPER. Let me just turn to my colleagues. Dr. Coburn, 

anything else you would like to ask these fellows before we excuse 

them? 

Senator COBURN. No, I am fine. We really appreciate your service. I would just say that sometimes we get a little wound up because we have a certain amount of passion on what is getting 

ready to happen to the next two generations in this country. But 

without your service, we could not be doing what we are trying to 

do, and we know you are sitting there holding the line. So please 

continue what you are doing. Thank you. 

Senator CARPER. I would certainly agree with that. Senator 

Voinovich, please. 

Senator VOINOVICH. For several years now, I have been very disturbed with the way that we do our appropriations and have the 

omnibus appropriations bill. Would any of you like to comment on 

the negative impact that this way of operating has on the management perhaps of your own respective agencies or on other agencies? 

Because it is just mind-boggling to me that we do not do—and this 

year probably, people are coming to me and they want to know how 

much money am I going to have or how is it going to work out, and 

I tell them, according to the grapevine, we probably will not pass 

the omnibus appropriation bill. Maybe we will pass a couple of appropriations bills, but it will not happen until after the next President is sworn into office. So that means October, November, December, January, February, and I know—and I am sure—I was 

going to say Senator Carper agrees with me—as a governor that 

if we did not get our job done on time and pass our State budgets 

or as the mayor of Cleveland, if I did not get my appropriations 

and budget done on time, the people would have run me out of office. They would say this is outrageous. Every newspaper in the 

State would editorialize. 

I would like your comments on it, what that does to try to manage properly. 

Mr. DODARO. It makes it difficult to predict. From GAO’s standpoint, over the last 10 years, in seven of those years we have operated for part of the year under continuing resolutions, some for a 

few days, some for several months. A lot depends on the nature of 

the continuing resolution and also whether or not there have been 

marks established with the Appropriations Committees ahead of 

time. 

If you have some general idea where you think you are going to 

end up at the end of the day, you are in a better position to try 

to manage toward that than if you have no general idea. A lot depends on what the status was of the appropriations process prior 

to the execution of the continuing resolution. 

But, in an optimal world, it is difficult to manage within any degree of uncertainty, and so it makes it a bit of a challenge. The extent of the challenge depends on the nature of the CR and what 

you know in advance. 

Mr. WERFEL. I would agree with that. I do not think the metric 

exists, but a cost of operations that is incurred by a continuing resolution environment. I know from working with the Federal CFO 

27 

community very closely, we see instances that are very upsetting 

to us, where we have to, for example, stop a contract that is flowing well and moving well and wait until the appropriation has been 

passed, then restart up again. And there is a tremendous cost that 

goes into that type of delay or pause in the action. 

I think it is something that we hope we can get more transportation over time to Members of Congress that the continuing resolution environment is having negative impacts on the taxpayer. 

Senator Carper, can I just clarify one point for the record? 

Senator CARPER. Yes, sir. 

Mr. WERFEL. Going back to the question on supplementals—and 

I do not pretend to have all the answers. But one point I did want 

to make, just to make sure that it is clear, is that government 

spending, whether through supplemental or otherwise, is captured 

in both the President’s budget deficit total and the statement of net 

operating cost total that tracks funds going in and out. So at the 

end of the day, there is some transparency, important transparency, into what the government is spending versus what it is 

taking in that is capturing all outlays, whether they are occurring 

as a result of the supplemental or not. 

Now, I am not saying that satisfies your question, which is a 

very good one, but I just want to point out that there is public 

transparency into all Federal funds that are flowing in and out of 

the government. 

Senator COBURN. So in the budget request for the President this 

year, the cost of the war is included in that budget request, it is 

included in the supplemental and it—no, see, and that is my point. 

It is not transparent because that $80 billion, which is going to be 

$126 billion this year, is going to add to the debt. And that is not 

captured in the President’s budget. And so, therefore, we are playing funny numbers with the American people. And we know that 

because that makes us look better when we do not put it in the 

budget. 

I am not saying it is right or wrong. I am just saying if any other 

business had a recurring cost that they knew was going to be there 

and you went to your chief executive or the chief financial officer 

and said here is a cost, but, oh, this is not here, we do not want 

to show you that, we will look a whole lot better here. And that 

is exactly what we are doing with the American public. 

So I am not saying there is an intentional sleight of hand. What 

I am saying is that it is a poor way to run the government. 

Mr. WERFEL. And just a final point on that is the point that I 

was making is if the President sends a target to balance the budget 

by 2012, that accounts for any of the funds that are going out the 

door through the supplemental. But your point is well taken. 

Senator CARPER. All right. I think your point is well taken, too. 

I am glad you made it twice. [Laughter.] 

Senator COBURN. Sometimes points have to be made twice 

around here, and three times and four times and five times. 

Senator CARPER. Before we excuse this panel, I also want to 

come back to a point that Senator Voinovich was making referring 

to our days in our last jobs in our respective States, and if we did 

not pass our budgets, if we did not get our budgets passed, then 

people would be looking for a new governor in our States. 

28 

The other thing that they would—if I as governor of Delaware, 

and I suspect as governor of Ohio, if we had come into the legislature and said this is our budget, it is way out of balance, this is 

what our spending plan is, you balance it, they would run us out 

of Dover and Columbus, respectively. That is just not the kind of 

leadership we need from the Executive Branch. Any time I have 

ever seen government bodies, small, local, State, Federal, actually 

be fiscally responsible, the chief executive—it just is inherent, it is 

incumbent that they provide the strong leadership, because it is 

not the nature of legislative bodies to just do it on our own, unfortunately. 

Let me just say, Mr. Dodaro, have you testified before this panel 

before? 

Mr. DODARO. Not this particular panel, but I have testified before 

Congress many times. 

Senator CARPER. In a sidebar conversation, I said to Dr. Coburn, 

‘‘That guy Dodaro is not bad, is he?’’ [Laughter.] 

David Walker is a tough act to follow, but you did a nice job 

today. And, Mr. Werfel, you always do. Mr. Carfine, it has been a 

pleasure to have you before us as well. You may have some questions, some follow-ups from us, and maybe from some others that 

are not here, and we would just appreciate you giving it your attention and responding to us forthwith. 

Last, on our improper payments legislation, we are trying to find 

a good compromise, something that will really help this work in 

terms of compliance. Help us with that within the next week or so, 

that would be much appreciated. 

Senator COBURN. Both of us. 

Senator CARPER. Yes. 

Mr. DODARO. Will do. 

Senator CARPER. Good Gentlemen, thank you all very much. You 

are excused. 

Dr. Coburn has asked me if I know what our vote status is. Let 

me just take a moment just to share what I know, and I will look 

over here to John Kilvington for clarification. We are told there 

might be a vote on some judges between 4 and 4:30 p.m. Is there 

anything that changed that? So we are still looking maybe to have 

that. My hope is that we can hear from this panel before have to 

break for those judges and then come back. 

Let me just briefly welcome our panel. It is great to see all of 

you again, and our first witness needs little introduction. David 

Walker, in addition to providing great leadership at GAO for many 

years, is today testifying as CEO and President of the Peter G. Peterson Foundation. He was our Comptroller General I think for— 

was it 10 years? 

Mr. WALKER. Nine and a half. 

Senator CARPER. Nine and a half. Well, we will round it up. 

Mr. WALKER. Yes, that is right. Close enough. 

Senator CARPER. Good to see you. Welcome back. 

Robert Bixby, known to some as David Bixby? 

Mr. BIXBY. Not by too many. 

Senator CARPER. Not to be confused with. Now Executive Director of the Concord Coalition, a position he has held for over 10 

years, I believe. And prior to his work with the Concord Coalition, 

29 

1The prepared statement of Mr. Walker appears in the Appendix on page 114. 

Mr. Bixby practiced law and served as chief staff attorney of the 

Court of Appeals of Virginia. 

Our third witness is James Horney—do I have that correct? 

Mr. HORNEY. Yes. 

Senator CARPER. All right. Director of Federal Fiscal Policy at 

the Center on Budget and Policy Priorities, and previously, I am 

told, you served as Deputy Democratic Staff Director at the Senate 

Budget Committee. Who was the chairman then when you were 

there? 

Mr. HORNEY. Kent Conrad. 

Senator CARPER. All right. Good. And as chief of the Projections 

Unit of the Budget Analysis Division of the Congressional Budget 

Office. 

And last, but not least, the Hon. Maurice McTigue, Vice President of the Mercatus Center at the George Mason University, Director of the Center’s Government Accountability Program. Prior to 

joining Mercatus, Mr. McTigue served as a New Zealand Member 

of Parliament, a cabinet member, and as the Ambassador to Canada. I would just say by way of introduction, at the Commonwealth 

Awards Dinner in Wilmington, Delaware, several months ago, your 

former Prime Minister was recognized. We recognized a number of 

people for their work in science, journalism, government, and so 

forth, and your Prime Minister who just stepped down in the last 

year was recognized and honored right there. Quite an impressive 

performance by the country of New Zealand. We are delighted that 

you are here. 

Mr. MCTIGUE. Thank you. 

Senator CARPER. With that, the bells just went off. It does not 

say there is a vote. It says we are in a quorum call. So, with that 

having been said, your entire statements will be made a part of the 

record. We invite you to summarize. Again, as I said to the first 

panel, if you can stick fairly close to 5 minutes, that would be good. 

If you cannot, try to stay fairly close. All right? 

Welcome, one and all. We are delighted that you are here. Thank 

you for coming. 

TESTIMONY OF DAVID M. WALKER,1 PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, PETER G. PETERSON FOUNDATION 

Mr. WALKER. Thank you, Chairman Carper, Dr. Coburn, and 

Senator Voinovich. It is a pleasure to be back before this Subcommittee, this time as a private citizen. 

Before I address the Nation’s fiscal challenge, I would like to reemphasize a couple of points with regard to the fiscal year 2007 financial statement audit, and I had the pleasure and the honor to 

sign the audit opinion on behalf of GAO. There were two noteworthy accomplishments. 

First, it was the first time that an opinion has ever been expressed on any statement within the consolidated financial statements, namely, the Statement of Social Insurance, which has the 

largest numbers in the financial statements. 

Second, the publication of the first Summary Annual Report, although personally I prefer this Summary Annual report, which 

30 

every Senator and Member of Congress should have received a copy 

of by now. By the way, it fits in your coat pocket, so it is very easy 

to be able to take with you, and I encourage you to take it with 

you the next time you have a trip, because I think it will be illuminating. 

As has been said, the Department of Defense is the tail on the 

dog, and ultimately, as I note in my statement, I think the GAO 

is going to have to assume responsibility for auditing the Department of Defense. They are going to need the help of the Inspector 

General. They are going to need contractor assistance. And they 

are going to need additional resources and support from the Congress in order to be able to do that. 

This document, which is ‘‘The State of the Union’s Finances,’’ has 

a lot of nice-looking graphics in it. The problem is that it paints 

a very ugly fiscal picture. The problem is not the present. The problem is not the past. The problem is the future. And basically we 

are moving towards Third World status from the standpoint of debt 

to GDP unless we start making some touch choices soon. 

As I note in my testimony, we need to improve transparency with 

regard to our current accounting and budgeting systems. We also 

need to change our financial reporting, and I have a number of specific recommendations in my testimony to that regard. We also 

need to reimpose tough budgetary controls from a statutory standpoint on both the spending and tax sides of the ledger. And in my 

view, we are going to need some type of capable, credible and bipartisan commission or task force to make recommendations to the 

next Congress and the next President, ideally for an up or down 

vote on at least four things: First, on statutory budget controls; second, on comprehensive Social Security reform; third, on round one 

of tax reform; and, fourth, on round one of health care reform. 

I think if it is done the right way, you can achieve a $10 to $15 trillion downpayment on the $53 trillion imbalance. That is a pretty good downpayment. But that $53 trillion goes up by $2 trillion 

every year. 

In addition to publishing this guide, the Foundation has also purchased a I.O.U.S.A documentary that will be coming to theaters in 

August of this year. We will have a private showing for Members 

of Congress on July 9 at the Library of Congress. All of you and 

a number of your colleagues will receive invitations. I urge you to 

attend. But, with your permission, Mr. Chairman, now that I have 

2 minutes left, I have a 2-minute trailer on the film that I would 

like your permission to show. 

Senator CARPER. That would be great. 

Mr. WALKER. Thank you. 

Senator CARPER. Thank you so much. So this is PG? 

Mr. WALKER. This is PG. You are OK. [Laughter.] 

Senator CARPER. That is good to know. 

Mr. WALKER. Except for the numbers. 

[Videotape shown.] 

Mr. WALKER. Thank you, Mr. Chairman. 

Senator CARPER. Thank you very much. I have been wondering 

for months who was going to portray you in this film. [Laughter.] 

Mr. WALKER. I had a pretty realistic double. 

Senator CARPER. I thought it might be Sting, but—— 

31 

1The prepared statement of Mr. Bixby appears in the Appendix on page 124. 

Mr. WALKER. As you know, we were born on the same day. 

Senator CARPER. Same day, month, and year. 

Mr. WALKER. Month and year, that is right. 

Senator CARPER. And Sting’s real name is David Walker—no, not 

really. All right. Thank you very much. 

Mr. Bixby. 

TESTIMONY OF ROBERT L. BIXBY,1 EXECUTIVE DIRECTOR, 

THE CONCORD COALITION 

Mr. BIXBY. Thank you. Well, that might be appropriate because 

Mr. Wakler has been described as the rock star of the Fiscal WakeUp Tour, so maybe it is true. 

Chairman Carper, Senator Coburn, and Senator Voinovich, 

thank you for inviting me to discuss the 2007 Financial Report of 

the U.S. Government and our Nation’s long-term fiscal challenges. 

As has been observed, the good news in the 2007 report is that the 

Statement of Social Insurance received a clean opinion from the 

Government Accountability Office. That means the numbers are reliable. But, of course, that leads to the bad news, which is that the 

unqualified numbers paint such a stark picture of future promises 

that cannot be sustained by the level of dedicated revenues. The 

detailed numbers have already been laid out, so I need not go into 

those. 

Why do we have this problem? Well, there are two basic facts, 

two basic factors that stand out: Demographics and health care 

costs. And these facts are not—it is not a matter of ideology. It is 

a matter of arithmetic. Over the next 30 years, the number of 

Americans aged 65 and over is expected to grow from about 13 percent today to about 20 percent. And as a result, the ratio of workers paying into Social Security and Medicare relative to the number of beneficiaries will fall by roughly one-third. 

But demographics is only part of the problem. Rising health care 

costs is another big part of the problem, and actually a bigger problem as you go out in time. Health care costs have consistently outpaced economic growth by about 2.5 percentage points annually 

since 1960. If you assume that the same growth rate maintains 

over the next 40 years as has happened for the past 40 years, you 

would find that just two programs—Medicare and Medicaid—would 

take up about as much of our GDP as the entire Federal budget 

does today. 

Now, some people will say that the government should be tax 

and spend at about 18 percent of GDP, and some people would say 

it would be acceptable to both tax and spend at about 30 percent, 

or 20 percent to 30 percent of GDP. No reasonable person would 

suggest that we could tax at 18 percent of GDP and spend at about 

25 or 30 percent of GDP. And yet that is the track that we are 

headed on if we do not change course. 

Improving this outlook will require hard choices on both spending and tax policy. As a framework for action, the Concord Coalition has recommended that the incoming President and the new 

Congress commit to a balanced budget; incorporate long-term projections and controls into the budget process; take steps to conVerDate Aug 31 2005 09:16 Mar 19, 2009 Jkt 044120 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 P:\DOCS\44120.TXT SAFFAIRS PsN: PAT
32 

1The prepared statement of Mr. Horney appears in the Appendix on page 148. 

strain the rising cost of heath care and retirement programs—Social Security and especially Medicare; and acknowledge that ultimately taxes cannot be cut unless programs are cut commensurately. There is no free lunch. 

Just to say a word about each, balancing the budget would be a 

very good first step, but we have to keep in mind that even if we 

had a balanced budget, we would still have an unsustainable policy 

over the long term. So bringing a long-term perspective into the 

budget process is very important. One way to do that is we have 

recommended perhaps putting some long-term targets into the annual budget process. You could make that even stronger by adding 

some triggers that might automatically adjust spending or revenues or premiums for these programs if the targets were missed. 

The Financial Report itself might also help to combat myopic 

budget planning by including a Statement of Fiscal Sustainability 

or other similar assessment of our long-term trends. The Statement 

of Social Insurance is very good, but it could go further with sort 

of an assessment of the long-term trends. 

Entitlement reform is obviously very important. There is going to 

have to be some combination of scaling back the promises that 

were made or, if we do not do that, having to raise revenues to pay 

for them, because, again, there is no free lunch. 

We cannot treat taxes and spending as separate deals. In the 

final analysis, government revenues must be sufficient to pay its 

costs. 

I want to close by emphasizing the importance of public engagement. As you know, I have been out on the Fiscal Wake-Up Tour 

with David Walker; people from Brookings and Heritage have 

joined us on that. And we think that it is very important to get the 

public involved in this. We have been to your State, Mr. Chairman, 

and your State, Mr. Voinovich. And perhaps in 2009, we will be to 

your State, Dr. Coburn. 

Senator COBURN. I have been on the Fiscal Wake-Up Tour for 

the past 31⁄2 years. 

Mr. BIXBY. Well, we disagree on some things, but we all agree 

that current fiscal policy is unsustainable, that there are no easy 

solutions to this, that the best way to make the hard choices is 

through a bipartisan process, that public engagement is very important, and, finally, and most importantly, we all agree that this 

is not about numbers. Fundamentally, it is a moral issue about the 

legacy that we will leave to future generations. Thank you. 

Senator CARPER. Governor Voinovich said under his breath, as 

you made that last comment about a moral obligation, he said, 

‘‘That is absolutely right. I agree.’’ 

Mr. Horney, please proceed. Thank you for coming. 

TESTIMONY OF JAMES HORNEY,1 DIRECTOR, FEDERAL FISCAL 

POLICY, CENTER ON BUDGET AND POLICY PRIORITIES 

Mr. HORNEY. Chairman Carper, Dr. Coburn, and Senator 

Voinovich, thank you for allowing me to come here today to talk 

about the long-term problem that is facing this Nation. And as a 

33 

former staffer for Kent Conrad, I appreciate you making me feel at 

home with the budget charts. 

I wanted to make four points here today, a couple of them that 

I do not need to say very much at all. The first one is that we are 

on an unsustainable path. The Center on Budget has produced detailed, long-term projections. We come to the same conclusion that 

GAO, CBO, and the Administration come to, which is eventually 

we would have debt rising so rapidly, it would do serious harm to 

the economy. Something has to be done about that. 

The second point is that the real keys here are Medicare and 

Medicaid and revenues. The point has already been made that we 

have a demographic problem that drives Social Security, but that 

is much smaller than what is driving Medicare and Medicaid, 

which is a combination of demographics and, much more importantly, the per person growth of the cost of providing health care. 

One point I do really want to make, though, is that the rising 

cost per person of Medicare and Medicaid is not due to any flaw 

in those programs, that basically for the last 30 years, that socalled excess growth in Medicare and Medicaid has mirrored the 

excess growth in the private health care system. And as CBO Director Peter Orszag has testified a number of times, the main reason for this growth is the advancement in medical technologies and 

medical treatments. That is not to say there are not some inefficiencies in the system, but the reason for the growth has been that 

we have all of these new drugs, treatments, and so on. And most 

experts think without changes in policies for the health care system, this is going to continue going forward. And, in particular, it 

makes the point that if we want to bring health care costs of Medicare and Medicaid under control without creating a dual system, 

we need to bring down the cost of health care, providing health 

care overall. I know David Walker, when he was Comptroller General and since, has made that point many times, and he is absolutely right. 

Just very quickly, we have to keep in mind, as Bob Bixby said, 

revenues have to be part of the consideration here. Obviously, it is 

one-half of the deficit equation. We have got to raise money to pay 

for what we want to spend. 

One thing I really do want to say—and, again, this mirrors some 

of what has already been said, which is it is absolutely going to 

take leadership from the President to make this happen. It is also 

going to take leadership from the bipartisan leadership in Congress. That is the only way we are going to make progress in this 

problem. They are going to have to work together, have to decide 

that deficit reduction is a very high priority, a high enough priority 

to give in and compromise on strongly held beliefs that people have 

against raising taxes and against cutting spending. 

I do want to address one point that Senator Voinovich had asked 

in his opening statement about a commission and what we thought 

about a commission. And David Walker said a commission would 

be a good idea. I do not think there is any substitute for the President and the bipartisan leadership of Congress coming to the point 

where they think we have to make these tough choices and we 

have to be willing to compromise. I do not think establishing a 

34 

commission or setting budget targets with automatic cuts will force 

them to do that. 

Now, let me just give a couple of historical examples of why I 

think this is true. 

In 1994, there was frustration, just like now, and certainly I 

sympathize with the frustration of everybody here with the unwillingness so far of the leaders in the Executive Branch and in Congress to address this problem. There was frustration that led to the 

appointment of the Kerrey-Danforth Entitlement Commission. But 

there was no consensus among the President, and leadership in 

Congress at that time in either party that this was a time to move 

forward, this was a time to make hard choices. And the Commission was a total failure. They could not agree on anything. They 

did not move the process forward. 

Now, in contrast, people often point to the 1983 Social Security 

Solvency Commission and say, look, that is an example of a commission that worked. That is absolutely right. That was a very 

helpful commission, but it is important to remember in 1983, President Reagan, Speaker Tip O’Neill, and most of the bipartisan leadership in the House and Senate had already reached agreement 

that we needed to take some pretty serious steps to make Social 

Security solvent, we needed to address both revenues and spending, and they decided that a commission would be a useful way to 

negotiate the details of that and to help build public support for the 

plan. So the President, through an Executive Order—this was not 

legislation—through an Executive Order appointed a commission 

and then used the members of that commission—Bob Ball, Alan 

Greenspan, and others—to facilitate the negotiations and build 

support for this. 

Now, one other important point about that was the proposal of 

the Commission was considered through the normal legislative 

process. It went through markups in the House and Senate; it went 

through the amendment process in the House and Senate. And that 

turned out to be very important because one of the key elements 

of the final plan that was enacted, which was moving back the normal retirement age for Social Security, was not in the proposal that 

came out of the Commission. It was added by an amendment on 

the floor of the House. 

So you need to be careful, I think, of thinking that commissions 

can do too much. I also would urge you not to automatically accept 

that forcing Congress to take an up or down vote on whatever a 

commission puts out is the best way to go. 

Just one more point, which is that in 1990, we had the current 

President’s father and most of the bipartisan leadership of Congress decide we really need to do something about a deficit. They 

decided they did not need a commission. They decided they could 

go straight to negotiations face to face at Andrews Air Force Base. 

And they came together and they worked out a deficit reduction 

package that reduced deficits by $500 billion over 5 years—a very 

strong thing. So you need a consensus. We need to do everything 

we can, whether it is films, whether it is the Fiscal Wake-Up Tour, 

the papers that the Center on Budget writes, everything we can to 

convince the President and bipartisan leadership we need to take 

action. But we need to develop that consensus before we start putVerDate Aug 31 2005 09:16 Mar 19, 2009 Jkt 044120 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 P:\DOCS\44120.TXT SAFFAIRS PsN: PAT
35 

1The prepared statement of Mr. McTigue appears in the Appendix on page 157. 

ting in place commissions, procedures, or anything that might play 

a part in getting to where we want to go. Thank you. 

Senator CARPER. Thank you very much. You gave us a lot to 

think about. Thank you. 

Mr. McTigue, welcome. Please proceed. 

TESTIMONY OF MAURICE P. MCTIGUE,1 VICE PRESIDENT OF 

THE MERCATUS CENTER, AND DIRECTOR, GOVERNMENT ACCOUNTABILITY PROJECT, GEORGE MASON UNIVERSITY 

Mr. MCTIGUE. Thank you, Mr. Chairman. and thank you for the 

invitation to be present in front of your Subcommittee once more. 

Balancing the budget five times in 40 years by any reasonable 

person would be considered to be irresponsible behavior, and that 

is really the record of the U.S. Government over the last 40 years. 

That period spans seven Republican Administrations, five Democrat Administrations, and a House predominantly controlled by 

Democrats, but not all the time; a Senate split fairly evenly between Democrats and Republicans. So it is no good accusing other 

parties of being sinful. Everybody has been. 

So where might we look for solutions? I have spent some time 

looking at other countries that have had a similar culture of overspending and they have cured that culture and reversed their process of overspending. I found three countries that are similar in 

background to the United States—New Zealand, Australia, and 

Great Britain. 

The interesting thing that we can learn from these countries is 

that they have adopted a fairly similar philosophy to change their 

culture of overspending, and that philosophy is based around accrual accounting, making certain that the financial picture of the 

country is fully transparent, and statutes that define fiscal responsibility. In the case of New Zealand, it’s new law was called the 

Fiscal Responsibility Act of 1994. In the case of Australia, it was 

the Budget Honesty Act. I like that term. And in the case of Great 

Britain, it was the Code of Fiscal Stability. 

Interestingly, each of those countries, immediately on the implementation of those statutes, went to surplus. New Zealand is now 

in its 16th year of surpluses. Last year, its surplus amounted to 7.5 

percent of GDP; the current year, 5.5 percent of GDP. When I was 

in the Cabinet we posted our first full accrual set of accounts, 

which actually disclosed that New Zealand had negative equity 

equivalent to about 20 percent of GDP. We thought that was sort 

of an esoteric figure that nobody would be interested in, except to 

our surprise the media and the public picked up on it and related 

to it as the Government of New Zealand being financially insolvent 

or bankrupt. And each succeeding year they watched that figure 

until it went from negative net worth to positive in 1996. And 

today New Zealand has positive net equity of about 67 percent of 

GDP. 

When we look at Australia and Great Britain, they have been 

doing it for a shorter period of time. New Zealand, in my view, has 

been irresponsible in running surpluses that are far too high. But 

in Australia and the United Kingdom, they have settled on surVerDate Aug 31 2005 09:16 Mar 19, 2009 Jkt 044120 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 P:\DOCS\44120.TXT SAFFAIRS PsN: PAT
36 

pluses that are around about the 1 percent of GDP. Australia has 

had an average since 1998 of about 1 percent surplus of GDP. It 

has retired a lot of its debt, and it has brought it down to a much 

lower level than the United Kingdom. 

The United Kingdom has averaged around 0.1 of 1 percent of 

GDP, and it has determined that fiscal responsibility is a debt level 

around about 34 or 35 percent of GDP. 

What actually caused these changes, in my view, is that no politician can afford to be portrayed as being fiscally irresponsible. And 

by setting down in statute what the criteria was for responsibility, 

then you actually made or created incentives that made politicians 

abide by those determinations of fiscal responsibility. 

I have five recommendations that I think the U.S. Congress 

could do and do almost straight away. 

The first is require that budgets and financial reports cover a 

much longer time horizon, at least 10 years forward, but preferably 

even more, say 15 or 20 years, and 4 or 5 years backwards, so that 

every time you look at the budget accounts you get a picture over 

time. One of the interesting things that the Government of Australia and the United Kingdom have done is that they have required of their government agencies what they call 

‘‘intergenerational reporting.’’ In the case of Great Britain, that 

means every 3 years they have to project forward 40 years and 

show what the consequences of current policy will be 40 years out. 

That is both in outcomes and in financial cost. In the case of Australia, the review is once every 5 years, and they go forward 50 

years. Those are innovations that I think could easily be put in 

place. 

The second is return the supplementary appropriation process to 

one that allows emergency spending only. That is in the hands of 

Congress. Define emergency. In my view, emergency should be defined as an unpredictable event. If the spending proposal is not 

something that occurred as a result of an unpredictable event, do 

not allow it. It is interesting to go back and look at war spending 

since the Second World War we see that nearly all of that spending 

was included in normal budgets, not supplementary budgets. 

The third, pass a law that requires the American Government to 

operate in a fiscally responsible manner and define ‘‘fiscal responsibility.’’ 

The fourth, move the whole of the Federal accounting process to 

full accrual accounting. 

And the fifth, introduce an appropriation process that is based 

upon the purchase of outputs designed to produce given outcomes 

instead of a process that is designed around allocating bulk funds 

of money to a particular issue with no real understanding of exactly what the government gets in return for those expenditures. 

Certainly at the time of appropriation, there is no indication that 

those expenditures will buy this reduction in hunger, this reduction 

in poverty, or this improvement in military superiority or readiness. Thank you, Mr. Chairman. 

Senator CARPER. Thank you very much. 

I am just going to start, if I could. Our vote has not started. We 

were expecting it to start by now. I am told we have two judicial 

37 

votes, maybe more voters later tonight. But let’s go as far as we 

can quickly. 

Mr. McTigue, you shared with us there the advice to Congress 

in five pieces, and I think that was in your testimony. But I think 

those are much welcome, much appreciated. What advice would 

you have in terms of things that the Executive Branch needs to do? 

Mr. MCTIGUE. The solution to this problem, in my view, does not 

belong with the departments or the agencies. The solution belongs 

on Capitol Hill and at 1600 Pennsylvania Avenue. Unless those two 

groups are prepared to buy into the solution, it is not going to happen. 

Senator CARPER. I understand that, but the advice that you gave 

was directed to the Congress. What advice would you have for the 

chief executive? 

Mr. MCTIGUE. Abide by those rules that the Congress will actually implement. 

Senator CARPER. Should the chief executive’s responsibilities include suggesting these rules or some variations of these rules, encouraging? 

Mr. MCTIGUE. However you can get the job done, I would buy 

into it. 

Senator CARPER. I would suggest that it would be helpful to 

have—when I look at Delaware’s—we used to have the worst credit 

rating in the country, all the 50 States. We were the best in the 

country in terms of overestimating revenues and underestimating 

spending. I was in the Navy for 23 years. I have seen drunken sailors spend. And we were pretty much the counterpart of that in 

State government in my State. We had great leadership from our 

former governor, Pete du Pont, and working with the legislature, 

we are really providing strong moral suasions. So I keep coming 

back to that, I know, but I appreciate very much the advice you 

have given to the Congress. I would remind us all that it is helpful 

to have a chief executive who believes this stuff is important and 

pushes for it. 

Let me just ask the other three panelists, react, if you will for 

us, to the list of recommendations that Mr. McTigue has been good 

enough to provide. 

Mr. WALKER. I think they are generally consistent with some of 

the ones that I have in my testimony, and I also have an exhibit 

that has a number of other recommendations in it as well. 

If you do not have a President that is going to provide leadership 

on this, you are not going to get much progress. I mean, the country only has one chief executive officer, and that is the President 

of the United States. The Congress is a co-equal branch of government, but it is a committee, and you cannot lead by committee. 

And, therefore, you need a President who will make it a priority, 

and you need them to be able to work on a bipartisan basis, and 

you have to have the support of bipartisan leadership. But you 

need a few people who care, and I think the three of you are it. 

The last thing I would say is, we talk a lot about waste. We 

ought to define it. And after we define it, we can try to measure 

it, and then we can create more visibility. I would respectfully suggest that waste is the failure of the taxpayers as a whole to receive 

reasonable value for money due to an inappropriate act or omission 

38 

by anybody with discretionary control over government resources. 

That could be a Member of Congress. That could be somebody in 

the Executive Branch. That could be a contractor. And if you define 

it on that basis, it accounts for a lot of money. 

Senator CARPER. Thank you. Are there other comments on Mr. 

McTigue’s suggestions? Please. 

Mr. BIXBY. Just one of the things that he mentioned that I very 

much agree with is the idea of the long-term perspective on the 

budgets, and that was one of our recommendations as well, whether it is 50 years or whether you put a target on it or whether you 

do triggers or something, those are all details. But I think some 

mechanism of injecting the long-range view into the budget process 

is really very important. 

Senator CARPER. Is there any disagreement on that point on this 

panel? 

Mr. HORNEY. No. I think it is very important to look very hard 

at the long term. I would point out that, in fact, the President’s 

budget already includes projections over the long term in the Analytical Perspectives Volume. Now, it does not get highlighted as 

much as it should, so perhaps one thing to do is just highlight that 

more. But it is in the President’s budget. The Congressional Budget 

Office does long-term projections. They have been doing them every 

2 years. I think Director Orszag has now committed that they will 

do those at least annually. So I think trying to highlight those 

long-term projections is a good idea. 

Trying to build them into the budget process I think could 

present a lot of difficulties in the same way that trying to make 

the budget a fully accrual budget I think has some downsides that 

you need to be careful about. 

My memory of that was in the fiscal year 1992 budget that OMB 

Director Darman proposed and got included in the President’s 

budget a proposed change in the treatment of the Pension Benefit 

Guaranty Corporation to put it on a net present value or accrual 

basis, which certainly has some conceptual appeal to it. But what 

he did was he said let’s change the accounting for PBGC; by the 

way, let’s put in place some changes in PBGC that will start taking 

effect 10 or 20 years from now. And they save on a net present 

value, $1 billion. Oh, and by the way, that will pay for the tax cut 

that we want to put in place this year. 

So just a warning that I think trying to integrate some of this 

stuff into the budget and scorekeeping process has some hidden 

problems that need to be very carefully considered. 

Senator CARPER. Good. Thank you. Let me see if this is a vote 

starting. Yes, it is. All right. I have some other questions, but I 

want to yield to Dr. Coburn, if I may. Thank you. 

Senator COBURN. Well, thank you for your testimony. I just finished reading an economic treatise on the percentage of GDP to 

government, what would have happened in this country if total 

government expenditure had been 20 percent instead of the 35 percent. We would have produced 65 more—we would have a GDP of 

$65 trillion right now, not $13 trillion. So I do not think it is as 

important that we have a percent. I think what is important is that 

we manage what we do. 

39 

Being an accountant, I cannot—even though it gets gamed—and 

you are very accurate in that. I can get gamed. But we game in 

everything now. Accrual accounting is the only way you can accurately reflect what is happening and what is going to happen. What 

we need to do is put in the—if we put in accrual accounting, make 

sure you cannot game it. That I think was basically your point. 

They used accrual accounting so they could look better to cut taxes. 

The point is we want accrual accounting so it accurately reflects 

where we are going and accurately measures where we have been. 

I think what we have seen, both the Concord Coalition and several others do, along with David Walker, is raising the level of 

awareness in this country about the significance of our problems. 

Washington does not change until it is demanded to be changed by 

the American people. And I think you are on the right track in 

doing that. I am intrigued by Mr. McTigue’s recommendations, especially the intergenerational report card, because that is part of 

that communication process. And I wonder what you all would 

think about that. I know what Mr. McTigue thinks. 

Mr. WALKER. When I was Comptroller General, we recommended 

several years ago to create a new financial statement that would 

be for fiscal sustainability and intergenerational equity. And I 

think that is critically important because we are mortgaging the future of our kids and grandkids, and that is not only fiscally irresponsible, it is morally reprehensible. 

Senator COBURN. OK. One of the things we hear all the time is 

what we cannot do because of the Budget Act and the rules and 

how we score it. What are your thoughts about dynamic scoring 

versus static scoring? 

Mr. HORNEY. First of all—— 

Senator COBURN. You have a lot to say on that, I am sure. 

Mr. HORNEY. It is something I have been involved in for a long 

time working at CBO and other places. 

First of all, I just want to be clear that, in fact, both the Congressional Budget Office and the Joint Committee on Taxation do not 

do purely static scoring. They take behavioral effects into account, 

so they take into account that if excise taxes on cigarettes are increased, people will smoke less. So they take that into account. 

What they do not do is take into account the macroeconomic effects. They assume that total GDP, real and nominal, is not 

changed. While conceptually everybody understands that the things 

we do can have effects on the macro economy, there are two big 

problems with trying to integrate that in. 

One is the models are not very good about exactly what those effects are. They give you a wide range of results. They also generally show that on most of the kinds of changes that the Congress 

and the President are considering, the effects are pretty small. 

The other thing is that it really depends on how they are paid 

for. For instance, the Treasury did a study last year of the macroeconomic effects of extending the President’s tax cuts. They agreed, 

the same way that many other models do, that macroeconomic effect, is pretty small, but even that small effect they only got because they assumed that the extension of the tax cuts would be 

fully paid for by reductions in spending. 

40 

So in order to do it, you have to know what is going to happen— 

is it going to be paid for or not?—and then trying to figure out the 

exact models. And so people who say conceptually it makes sense, 

I think almost all the Joint Committee on Taxation and CBO, and 

I think even the Administrations in general have said it is not 

ready to be put into the scoring system. It is something, certainly, 

that should be considered when legislation, big major legislation is 

being considered. 

Senator COBURN. That is a great comment, but I note with certain consistency how inaccurate CBO is when we see what their estimates were and then we look back and see the effect. So I do not 

know that we have got a good handle on that either historically or 

static or dynamically. 

Mr. Walker. 

Mr. WALKER. Obviously, you have to make a lot of assumptions 

when you do dynamic scoring. I think it is fine to use as a supplemental disclosure, but just understand that dynamic scoring can 

work for or against you. 

For example, if you assume that we continue on our present 

path, tax at roughly the same percentage of GDP that we have 

been, and do not reform our entitlement programs, do not constrain 

spending, then that means that debt levels will mushroom, causing 

a drag on the economy, and causing upward pressure on interest 

rates. So dynamic scoring can work for you or against you. 

The last thing I would say is that in order to achieve change, the 

pain associated with doing nothing has to be more acute than the 

pain incurred by doing something. And, therefore, one of the concepts that we are exploring at the Peterson Foundation is identifying all those members who are tacitly sponsors of the ‘‘do nothing’’ plan and to demonstrate what the ‘‘do nothing’’ plan will do 

to America. It’s not a pretty picture. 

Senator CARPER. Let me just interrupt for a moment. We have 

probably about 14 minutes to go before time runs out entirely, and 

if it is agreeable to my colleagues, we may want to consider concluding here, finish asking our questions, but yielding then to Senator Voinovich for his questions, and then complete this. 

Senator COBURN. I will just have one more question. 

Senator CARPER. Go ahead. 

Senator COBURN. I read with interest, Mr. Horney, your statement on health care. The problem I have with that is, as I look at 

health care, I do not think we are spending too little on health 

care. I think we are spending too much. And I think when we look 

at the health care outside of the government as well as the health 

care inside the government, what we have is a model that is highly 

inefficient. There is no market forces that truly play because we do 

not have a true market anywhere in health care. 

The other thing is nobody talks about health care from the prevention paradigm. We talk about it in terms of the treatment paradigm. And we will never get out of the problem of health care until 

we switch our paradigm to prevent the chronic diseases that consume 75 percent of our health care dollars. 

So anything we do in terms of health care, we have to do two 

things: One, we need to let competitive forces work to allocate the 

resources better; but, two, we have to change our paradigm to 

41 

where we emphasize prevention rather than emphasizing treatment. And in 15 years, we will start to see this tremendous—with 

the demographic shift, we will start to see this 9-percent average— 

or it may be less than that. You said 2.5 percent, I think, above— 

but, anyhow, the only thing that is above it is higher education. 

And it is the same thing. There is not a good enough competitive 

model there. 

So my hope is that as you all carry this message, you incorporate 

the fact is that we have to change the paradigm under which we 

do health care in this country. And countries that have done that 

are achieving good savings today on the downside of that. 

With that, I would end. Thank you. 

Senator CARPER. Great questions. Senator Voinovich. 

Senator VOINOVICH. How do we get the Presidential candidates 

involved, make it an issue in their campaigns about doing something about that entitlement? 

Mr. BIXBY. Well, we have been to Iowa and New Hampshire and 

South Carolina and Florida and a lot of places like that. I think 

we put out a statement—the Fiscal Wake-up Tour did—of questions for the Presidential candidates that we brought to all of the 

media markets in those areas. 

I mean, ultimately, you cannot force them to address this issue, 

but you can try to make it as much of a public issue as you can. 

I know that is what we are doing with the Fiscal Wake-Up Tour. 

Mr. WALKER. One of the reasons that we are releasing the film 

in August is that it directly precedes the Presidential election cycle. 

We are also going to be part of film festivals at both the Democratic and Republican National Conventions. We are also going to 

release an 8-minute version that we are going to send to every political program to encourage them to use some of the material that 

is in it and to ask tough questions. We are going to send it to debate moderators. We are going to analyze all of the positions of the 

Presidential candidates on the issues of interest to the foundation, 

and we are going to publicize those results as well. 

It is nice to be able to have a fair amount of money to be able 

to focus on some of these issues, because, frankly, having been involved in the Fiscal Wake-Up Tour for 21⁄2 years, the American 

people are smarter than people give them credit for. When you 

state the facts and speak the truth, they get it. They get it pretty 

quick. 

Senator VOINOVICH. Well, I am just saying—go ahead, Mr. 

Horney. 

Mr. HORNEY. I would love to see a full-blown debate between 

Presidential candidates about what to do. I am not sure I think, 

given the way campaigns work, that is going to happen. My hope— 

and I think it is a little more realistic—is that neither candidate 

will take pledges, ironclad pledges that lock them into positions 

that make it hard to do what needs to be done after they are elected. I hope that at least. 

Senator VOINOVICH. Yes. Well, one of the thoughts that I had 

was that we have—and I am running out of time, but Mr. Bixby 

and General Walker have been working on—we have the SAFE legislation over in the House, SAFE in the Senate, and we have the 

Commission on Fiscal Responsibility that Kent Conrad—and I 

42 

know you do not like commissions, but the fact of the matter is 

that my thought is that if you could get us to form the commission 

that is made up of legislators but for two people in the commission, 

fiscal commission, legislation—I think SAFE has got a couple of 

other people on it. 

I think the Government Accountability Office and—but, anyhow, 

the point would be that if you could get the Presidential candidates—they are both in the Senate—to sign onto this and say 

that if the commission is put in place, I will appoint my treasurer, 

I will put my head of OMB on there so we could get started with 

this. And then the neat thing about this is that you have expedited—you tell the people on the committee that if three-quarters 

of them agree that you get expedited procedure and you are going 

to get an up and down—now, maybe you could provide for some 

amendments or something like that. But nobody is going to really 

work on this unless they know that after they do their work, something is going to happen. And we do not want to have happen what 

happened to Connie Mack and to John Breaux where they went out 

and I think they did a halfway decent job—in fact, I am tempted 

to just take their work product and stick it in, just introduce it. 

There are some controversial things, but they did a great job. And 

it was dead on arrival at the White House after the White House 

had pledged themselves that they were going to do something 

about entitlements and about that. 

You have to have something to force this to happen, or we will 

be here 5 years from now still talking about it. Mr. Walker. 

Mr. WALKER. Let me say something quickly. I had the opportunity to testify before the House Budget Committee a couple of 

days ago, and one of the things that I was asked is what we should 

expect from the Presidential candidates. And I said five things that 

are in my testimony, one of which is that they should endorse a 

capable, credible, and bipartisan commission or task force to make 

recommendations to the next Congress and the next President. 

That also keeps them from being able to get too specific with regard to what proposals, but it provides a mechanism in which we 

hopefully can make some progress. 

Thank you. 

Mr. BIXBY. The dean at my law school once used to tell us that 

water does not run uphill without a pump, and cutting taxes—cutting these programs or raising taxes is sort of the equivalent of expecting water to run uphill. 

So the purpose of the commission, I agree with Mr. Horney that 

if there is not a political consensus to address these issues, no commission is going to help. But I think there is a developing political 

consensus as we see on the Fiscal Wake-Up Tour, that there is a 

problem to be dealt with, and maybe the commission can help provide the pump for water to run uphill. 

Senator CARPER. Mr. McTigue, just one minute and we need to 

go. 

Mr. MCTIGUE. My very brief response to you, Senator Voinovich. 

Perhaps if somebody was to look at the British, the Australian, or 

the New Zealand legislation, introduce a bill shaped on that on fiscal responsibility, and invite the participation of the candidates, 

you might actually get them to take a position. 

43 

Senator CARPER. Good point. 

I just want to conclude. Sometimes we have these hearings, and 

we come to the conclusion, and we are ready to leave, and the witnesses are, too. In this case, I am not ready to leave, but we have 

other responsibilities that we need to meet. 

I just want to say thank you for being part of this excellent session, and we know that you have been working these venues for 

a long time—frankly, so have we. We are going to continue to do 

our dead level best, and we know that you are as well. 

Thank you so much for joining us today, and that said, this hearing is adjourned. 

[Whereupon, at 4:50 p.m., the Subcommittee was adjourned.] 

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