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27–091 PDF 2006

U.S. FISCAL OUTLOOK AND THE FISCAL YEAR

2005 GOVERNMENTWIDE FINANCIAL STATEMENTS

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

FINANCE, AND ACCOUNTABILITY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MARCH 1, 2006

Serial No. 109–133

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

JEAN SCHMIDT, Ohio

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

DAVID MARIN, Staff Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, FINANCE, AND ACCOUNTABILITY

TODD RUSSELL PLATTS, Pennsylvania, Chairman

VIRGINIA FOXX, North Carolina

TOM DAVIS, Virginia

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

EDOLPHUS TOWNS, New York

MAJOR R. OWENS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

EX OFFICIO

HENRY A. WAXMAN, CALIFORNIA

MIKE HETTINGER, Staff Director

TABETHA MUELLER, Professional Staff Member

ERIN PHILLIPS, Clerk

ADAM BORDES, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on March 1, 2006 .............................................................................. 1

Statement of:

Walker, David M., Comptroller General of the United States, U.S. Government Accountability Office; and Donald V. Hammond, Fiscal Assistant Secretary, U.S. Department of the Treasury ....................................... 18

Hammond, Donald V. ................................................................................ 62

Walker, David M. ...................................................................................... 18

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

Hammond, Donald V., Fiscal Assistant Secretary, U.S. Department of

the Treasury, prepared statement of ........................................................... 65

Platts, Hon. Todd Russell, a Representative in Congress from the State

of Pennsylvania, prepared statement of ...................................................... 3

Towns, Hon. Edolphus, a Representative in Congress from the State

of New York, prepared statement of ........................................................... 15

Walker, David M., Comptroller General of the United States, U.S. Government Accountability Office, prepared statement of .............................. 21

(1)

U.S. FISCAL OUTLOOK AND THE FISCAL YEAR

2005 GOVERNMENTWIDE FINANCIAL STATEMENTS

WEDNESDAY, MARCH 1, 2006

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

FINANCE, AND ACCOUNTABILITY,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

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

(chairman of the subcommittee) presiding.

Present: Representatives Platts and Towns.

Staff present: Mike Hettinger, staff director; Dan Daly, counsel;

Tabetha Mueller, professional staff member; Erin Phillips, clerk;

Adam Bordes, minority professional staff member; and Jean Gosa,

minority assistant clerk.

Mr. PLATTS. This hearing of the Government Reform Subcommittee on Government Management, Finance, and Accountability will

come to order. Our ranking member, Mr. Towns, will be joining us

shortly.

Because of upcoming floor votes, Comptroller General’s schedule,

other committee meetings going on for the ranking member and

myself, we are going to try to push through as quickly as possible

to get into the substance and allow everyone to meet their other

obligations as well. But we appreciate your being here.

The 2005 Financial Report of the U.S. Government and accompanying audit, completed by the Government Accountability Office,

was released on December 15th. This marks the 9th year that the

Department of Treasury has published the report in its current

form, and again, this year the report shows fundamental weaknesses in the Departments of Defense and Homeland Security,

problems with financial systems, and an inability to reconcile exchanges between agencies.

Today, in addition to focusing on these continuing weaknesses,

we hope to explore how the information in the 2005 financial report

could be used to inform the annual budget debate and spending decisions made by Congress and the President. One of the concerns

that led to the passage of the CFO Act, was that reporting at the

time did not accurately disclose the current and probable future

cost of operating and investment decisions. The authors of the CFO

Act and the Government Management Reform Act, envisioned the

financial report as a tool for analyzing long-term obligations and

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spending revenue trends. I would like to see us move more in that

direction in the years to come.

Perhaps the most important benefit of the audit process is learning how to correct systematic weaknesses. We have seen improvement since the initiation of the Governmentwide audit in 1997.

However, we won’t benefit from the full value of this report until

we can be assured that the reporting information is accurate and

GAO can issue a clean opinion. The Government Reform Committee has a responsibility to support sound financial management

through proper oversight, and this hearing is an important part of

that ongoing effort.

Our witnesses here today will provide the subcommittee with insight on the audit findings of the consolidated financial statements,

and discuss how the numbers in this report affect our fiscal future.

We certainly are honored to again have with us the Hon. David

Walker, Comptroller General of the United States; and Donald

Hammond, Fiscal Assistant Secretary at the Department of Treasury.

We appreciate your written testimonies and look forward to testimonies here in person today.

I now yield to our ranking member, the gentleman from New

York, Mr. Towns, for the purposes of an opening statement.

[The prepared statement of Hon. Todd Russell Platts follows:]

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Mr. TOWNS. Thank you very much, Mr. Chairman. What I would

like to do is to put my opening statement in the record and to move

directly to hear from the witnesses.

Mr. PLATTS. So ordered, and your ears were ringing when I said

we are going to keep moving this along, because of your schedule,

and our witnesses’ schedules as well.

Mr. TOWNS. Thank you very much.

[The prepared statement of Hon. Edolphus Towns follows:]

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Mr. PLATTS. If we could swear in our witnesses, and then we will

proceed right to your testimony.

[Witnesses sworn.]

Mr. PLATTS. The clerk will note that the witnesses both affirmed

the oath.

Comptroller General Walker, we will go right to your testimony.

STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED STATES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; AND DONALD V. HAMMOND, FISCAL ASSISTANT SECRETARY, U.S. DEPARTMENT OF THE TREASURY

STATEMENT OF DAVID M. WALKER

Mr. WALKER. Chairman Platts, Ranking Member Towns, thank

you very much for the opportunity to be back before you on the status of financial management in the Federal Government. Let me,

for the record, and as noted in my statement, commend this subcommittee for the fact that you have consistently been committed

to this subject matter. I think it is a critically important subject

matter. Since you have already entered my entire statement into

the record, I will use a few of these visuals to make a few key

points, and then we can move on to Mr. Hammond, and then on

to Q&A.

The first visual notes the results of the fiscal year 2005 financial

statement audits for various departments and agencies, and you

will note several things from this chart. First, a significant majority of the agencies received an unqualified opinion on their financial statements. However, an overwhelming majority of agencies

had one or more material control weaknesses and/or noncompliance

with certain applicable laws and regulations. And last, seven agencies had to restate their fiscal year 2004 financial statements as

part of the issuance of their fiscal year 2005 financial statements.

Let me be clear, Mr. Chairman and Mr. Towns, that when someone has to restate their prior financial statements, it means they

did not deserve a clean opinion on their prior year financial statements. There are some that don’t seem to understand that, and we

are looking to possibly modify the Yellow Book requirements to

make that point clear, when new reports are issued.

I think the other thing that has happened over the last few years

is that there has been a tremendous acceleration in the timing of

the work that has been done and the issuance of these annual reports. We have a situation now where agencies are reporting by

November 15th, and the consolidated financial statements and related audit report are coming out by December 15th. I think that

is a huge accomplishment, and everybody involved should be complimented for that.

Next is to show you a few numbers. Let me note that in the interest of space, I have dropped zeroes, but these numbers are in

billions of dollars, and therefore, one would have to add nine zeros

behind these numbers in order to really get a sense for what is

going on here.

What I would like to do is to point your attention to the second

to the last line that says the unified deficit. This is the number

that consistently gets a lot of media attention, as well as emphasis

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in the legislative branch and the executive branch. It represents

the largely cash-based results of operations for the fiscal year. You

will see that in fiscal year 2005 it was negative $319 billion, a deficit of $319 billion. That is down from $413 billion. But let me say

for the record, that is misleading. While it is technically accurate,

it is misleading, because on an accrual basis, as you will note in

the financial statements of the U.S. Government which uses an accrual basis and which virtually every private sector company does,

our net operating costs or annual based deficit went up $144 billion

from fiscal year 2004 to fiscal year 2005. Specifically, it went up

from $616 billion to $760 billion, at a time where we had one of

the strongest economic growth rates of any industrialized nation.

We haven’t been in a recession since November 2001, and the costs

associated with Iraq, Afghanistan, incremental Homeland Security

costs was only about $100 billion of that number.

We are deep in a hole, and it is going to get worse if we don’t

start doing something about it.

In the last 5 years alone, we have gone from over $20 trillion—

now there are 12 zeros behind a trillion, it is just unbelievable—

from about $20 trillion in liabilities and unfunded commitments to

over $46 trillion in 5 years! $46 trillion, in terms that we might be

able to better relate to, is $156,000 for every man, woman and

child in the United States, $375,000 for every full-time worker, and

$411,000 for each household in America. You compare that to the

average wage and average net worth. It is over 90 percent of the

entire net worth of every American in the United States, including

Bill Gates and Warren Buffett. And the number is going up every

second of every day continuing deficits, because of compounding interest costs and known demographic trends.

We need more visibility on this. This slide was prepared using

information in the consolidated financial statements of the U.S.

Government, but you would have a hard time pulling together all

of this to show exactly where we are, and that is part of our problem. We have numbers in MD&A, management discussion analysis.

We have numbers on the face of the financial statements. We have

got numbers in the footnotes. But we are not pulling these things

together enough. I know that Don Hammond, the Secretary of the

Treasury, the Director of OMB, myself, and others are working to

try to see if we can improve existing financial reporting to convey

this information more clearly and concisely.

By the way, a significant part of this increase is related to the

Medicare Prescription Drug Bill, the cost of which is almost double

Social Security’s unfunded obligation.

Next, please. I won’t spend a whole lot of time on these. This is

based upon CBO’s assumptions for what the fiscal future looks like

out to 2040. Unfortunately, these are based on certain unrealistic

assumptions the CBO is required to make by law: No. 1, no new

laws will be passed; No. 2, discretionary spending will grow by the

rate of inflation for the next 10 years; No. 3, AMT, alternative minimum tax won’t be fixed; and No. 4, that all tax cuts will expire

in their entirety, that none will be extended in whole or in part.

Even on that basis, we have a long-range imbalance because if the

bar is above the line, that is a deficit.

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Next one. This is an alternative scenario. Discretionary spending

grows by the rate of the economy—it has been growing faster—and

all tax cuts are made permanent. The future is probably somewhat

in between those two, but both of them say that we are on an imprudent and unsustainable fiscal path, and we need to get serious

soon, because nothing less than the future of the republic is at

stake.

With that, let me just say that in my statement, I include a summary of the areas where there continue to be challenges to rendering a clean opinion. They are threefold: No. 1, the Department of

Defense; No. 2, intragovernmental transactions, transactions between Government agencies; and No. 3, the actual preparation of

the consolidated financial statements.

I also note in my statement a number of areas where we think

additional progress is necessary with regard to financial reporting

and related matters.

Finally, I also note in my statement, areas where the most

prominent material control deficiencies and weaknesses still exist.

I thank you again, Mr. Chairman, and Mr. Towns, for your interest in this matter. It is critically important, and more of your colleagues need to be involved here because the stakes are very high.

[The prepared statement of Mr. Walker follows:]

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Mr. PLATTS. Thank you, Comptroller General Walker, and again,

appreciate your frank testimony. One of the most important roles

in Washington is yours, in trying to get the truthful and honest assessment of the financial state of our Nation today and in the future. Your charts do a good job, and we will get into it further with

questions of bringing it all together. As you said, that is one of the

challenges because there are numbers all over. And, truly, as a

parent of a 6-year-old and 9-year-old, to think they will be in their

mid forties in 2040, and you look at those numbers, and a third of

our expenditure is just going to be interest. What is left for truly

critical programs of the Federal Government? It is a scary picture.

Mr. WALKER. Mr. Chairman, you are doing it the right way, because this is about a lot more than numbers. It is about values, it

is also about the future of the country, our children and our grandchildren. You are looking at it the right way, what burdens are

your children going to have to bear under the path that we’re on?

What kind of tax levels? What kind of other burdens? What kind

of choices are they going to have if we don’t start making some

changes?

Thank you.

Mr. PLATTS. I have a good friend in the State house, he would

look at that and say what you are setting our Nation up for is

inter-generational divide, between those on Social Security and

Medicare, families and children, and if we don’t make some

changes now there is no ability to accommodate the needs and interest of all of those different groups. So, again, your frank assessment is much appreciated, and hopefully, well-shared publicly. We

certainly are doing our best to allow your data to be known.

Mr. Hammond.

STATEMENT OF DONALD V. HAMMOND

Mr. HAMMOND. Thank you, Mr. Chairman, Ranking Member

Towns. I appreciate the opportunity to be here today to talk about

the financial report of the Government for fiscal year 2005. And

echoing the Comptroller General’s comments, the committee’s sustained attention over the years to these matters has really led to

significant progress and improvements. We greatly appreciate that.

I would ask that you include the full text of my statement in the

record.

Mr. PLATTS. Without objection, so ordered.

Mr. HAMMOND. With my time I would like to just briefly touch

on a few high points from that written statement, briefly, the results themselves from fiscal year 2005, the actions we are taking

to resolve the auditors’ finding and recommendations, our plans to

make the report more useful, and what I think are the important

next steps in the future of Federal financial reporting.

I am pleased that this year, for the second time, we were able

to issue the report on December 15th. Even as important, every one

of the CFO Act agencies, all 24 of them, issued their reports by November 15th. So timeliness, acceleration in particular, has become

not only a priority but it has become a reality. These much more

timely submissions are evidence that both Treasury and the agencies have improved their processes, systems and data. Yet, as you

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have already heard, evidenced by the GAO’s audit report, more

needs to be done.

The financial report stated that the Government’s fiscal year 2005 net operating cost was $760 billion. You have seen the comparable numbers. The Comptroller General has a chart, as you

have seen this afternoon, that displays 2004, evidencing the increase in the net operating costs, while at the same time the budget deficit declined year over year. I think this highlights the importance of financial reporting. It highlights the need to look at things

in different ways, and use the different methods of accounting.

They complement each other, and it is an important aspect that we

need to pay attention to, reinforcing the value of this hearing.

In addition to reporting the financial results of the past year, the

financial report provides information on our long-term financial

commitments and obligations for programs such as Social Security

and Medicare. This information is presented in the report, in the

Statement of Social Insurance, which will be a primary statement

subject to audit in fiscal year 2006, this coming year.

My written statement includes a summary of these important

calculations. Due to longstanding material weaknesses, GAO was

unable to express an opinion on the statements, and 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 of the Government’s fiscal position.

We are in agreement with GAO on these principal material

weaknesses. Across Government we have been addressing these

challenges and we are making progress. The Department of Defense is making headway in improving its systems to correct its financial reporting problems, however, this will be a long time consuming effort. In addition to Defense, Homeland Security and

NASA also have significant financial issues, particularly as they relate to property, plant and equipment.

Another significant material weakness is the out-of-balance condition that results from intergovernmental transactions when two

agencies record and report differently on a transaction between

themselves. We are addressing this critical issue on many fronts,

including the active involvement of the CFO Council and agency

auditors. I believe that this full array of actions and attention will

lead to an improved recording of these transactions and help correct imbalances.

Regarding GAO’s findings and recommendations on the preparation of the report, we continue to take steps to address these. We

have developed detailed, multi-year corrective action plans and are

addressing the material weaknesses. Treasury continues to meet

with GAO regularly to discuss the findings and recommendations

in detail, and this past year we initiated a process to formally communicate the recommendations that we believe are closed, and will

continue this ongoing dialog with GAO. This is the second year

that we have used the GFR system to prepare the report, and it

has provided us with the opportunity to allow the agencies to take

ownership and responsibility for the data provided into the report.

This has proved to be a very effective and useful element of the

compilation process, and one that I think will bring dividends for

years to come.

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I should note that each agency was able to meet and report its

information into the system this year on time, meeting all the applicable deadlines, which was in and of itself quite an accomplishment. With regard to what is actually disclosed in the report, I testified last year that the Federal Accounting Standards Advisory

Board undertook a project to provide explicit consideration of disclosures tailored to the financial report. They have issued an exposure draft, and we expect that if the exposure draft becomes a

standard, it will resolve many of the remaining disclosure-related

findings.

We have now reached an appropriate point to ask whether our

financial reports are useful, and whether they serve as an informative report to the citizens. Clearly, if we want to publish Government financial information that is used more broadly, not just by

the dedicated reader, we need to do some things differently. The

first question we need to ask is who is our audience? That answered, we need to think seriously about what we have in the report that is of value to them. We must then act to provide them

with a better product in order to meet those needs.

I welcome this challenge, and I am frankly committed to doing

exactly that. For example, we recently reached outside Treasury for

suggestions and ideas for improving the Governmentwide report,

seeking advice from a wide range of interested parties. Those discussions were both productive and very informative.

I am also committed to working with OMB and the Chief Financial Officers’ Council on developing the Government’s financial

management strategy for the near future. The improvements in financial systems and business processes that many agencies have

made has led to better underlying financial data. We’re looking for

improved efficiency in the future. To better focus on these objectives, the CFO Council has recently changed its committee structure. As part of this effort, I will co-chair a transformation team

that will be devoted to Treasury reporting issues, both budgetary

and financial.

I believe that this effort will lead to both near-term efficiencies,

and set the stage for changes over the longer term. Agencies are

also putting in place improved internal controls, which are essential for improving data reliability and fostering improved reporting

and accountability. The improved systems and processes and better

internal controls should help reduce restatements and lay the

groundwork for further improvements and efficiencies. These enhanced processes can in fact serve as the basis of opportunity for

more frequent financial reporting, development of cost accounting

data useful to program managers and decisionmakers and other

advanced financial management practices.

In conclusion, I want to thank you again for your sustained interest. I am very proud to have been part of the significant progress

that has been made over the last few years in Government financial reporting, but as you have heard, we still have a long way to

go.

Thank you again, and I am happy to answer any questions the

committee may have.

[The prepared statement of Mr. Hammond follows:]

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Mr. PLATTS. Thank you, Mr. Secretary, we appreciate your testimony and the work of you and your staff day in and day out

throughout the year.

Jumping to questions, Mr. Walker, you touched on it with your

opening statement, just the way things are reported, it takes some

effort under the current model to bring it all together. I know you

have shared in the past some specifics. If you want to get into some

details of how to rework the model to give a more honest assessment to the American public, so that it is easier to understand as

opposed to having to bring everything together, but it is just laid

out from the get-go. If you want to expand on that, that will be

great.

Mr. WALKER. Well, first let me say I am disappointed to have to

say that very, very few individuals read the annual financial report

of the U.S. Government. I give many speeches inside and outside

the beltway during a given year, and one of the things that I have

done recently is to ask for a show of hands as to how many individuals have read the financial statements of the U.S. Government. It

is well less than 1 percent of all of the audiences that I have addressed, and some of those audiences were comprised exclusively of

financial professionals. So that is very disappointing.

Frankly, I think one of the problems is, in today’s world, where

we have information overload, we need to make this much more

user friendly, and there are three projects in particular that the

principals of the Joint Financial Improvement Program are working on right now that are relevant to your question, Mr. Chairman.

The first is, I believe very strongly that we need to publish a summary annual report that is both useful and used. When I was a

trustee of the Social Security and Medicare Trust Funds from 1990

to 1995, myself and my other public trustee, endeavored to do this

on our own. We started something back then that has stood the

test of time, and now all the trustees are involved. It is a plain

English, bigger print, charts and graphs, bottom-line oriented document that is widely distributed and read.

I think we need to do the same thing in connection with the consolidated financial statements, and the Treasury Department has

the lead on trying to come together with a proposal for consideration in that regard. That does not take any changes in law if people do it voluntarily. On the other hand, if we can’t make progress,

it is something that may be worth considering as part of your review of financial management in the Federal Government.

Second, if we look at the numbers, even on a cash basis, a lot

of what is going on in Government deals with earmarked revenues,

revenues for things like payroll taxes for Social Security and Medicare. Those are spoken for. They are supposed to be dedicated solely for the purpose of meeting the obligations under those programs.

Now, in reality what happens, we take in the money and we

spend the money. The trust fund is not really a trust fund. It is

a subaccount of the general ledger. We replace the loss with a bond

that is backed by the full faith and credit of the U.S. Government,

guaranteed as to principal interest, but, one tha is not really marketable does not have any economic significance at all. It has legal,

political, moral significance. When you think about how we are presenting in the financial statements the difference between what is

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going on in the operating accounts of the Government, or the onbudget, versus what is going on with regard to these earmarked

revenues or so-called trust fund accounts, you will see that the

cash-based budget deficit was about $175 billion bigger last year

because we spend every dime of the Social Security surplus on

other operating expenses. That is not new. We have been doing it

for years.

That issue is being looked at by OMB. Namely, to take a look

at how we might present this information in a clearer manner.

A third has to do with what I call a burden statement. It is the

numbers that I showed you before, where if you end up taking the

liability numbers off the financial statements, certain numbers off

the Statement of Social Insurance, and others from different places,

you can pull together something that is more meaningful, to get a

sense for where we stand and where we are headed. We need to

have something that shows where we are on our total burdens—

that means liabilities and unfunded commitments—how we are

trending, and we need to translate those numbers into per capita

numbers, percentage of GDP, and use various other benchmarks

where people can get a better sense of our position.

The other thing we need to do is what you touched on, Mr.

Chairman. We need to talk about the inter-generational applications of the path that we are on. We need to be able to demonstrate

that if you are 6-years-old and we continue to go on the path that

we are, then what kind of tax burdens are you likely to have to

bear when you are 40-years-old. This type of information would be

much more meaningful to users of financial statements down the

road.

I have other examples on pages 5 and 6 of my statement. The

only other one that I will mention right now is this country forgoes

$700 to $800 billion a year in revenue due to deductions, exclusions, exemptions and credits under the Internal Revenue Code.

You will not find this number in the financial statements of the

U.S. Government. You also won’t find it in the budget or appropriations process of the U.S. Government. We need to have more transparency over these tax expenditures, because, in effect, what is

happening, is they represent back-door spending. If you can’t

achieve something through a direct spending program, there is an

incentive for people to create a tax incentive to get it off the books,

outside the budget process, but it really does have an impact on the

bottom line. It may or may not work because we don’t know whether a lot of tax preferences were working or not, and we don’t know

if a lot of our spending programs are either. Those would be a few

examples, Mr. Chairman.

Mr. PLATTS. And those examples, as they relate to the general

public understanding the fiscal realities, and also to Congress and

the executive branch having information that we actually rely on

when we act, and the example here would be, as one who has supported the Medicare Part D, when I see that bottom number of

$8.77 trillion in the next 30 years to come, our liability that we

have now incurred for benefits that we are going to pay out in the

decades to come, that puts it in a different perspective.

Mr. WALKER. That is an important point. Other than the financial reporting, I would respectfully suggest that the budget process

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and the legislative process needs to be revised. For example, when

the Congress is considering a new entitlement benefit or a new

spending program, or a new tax preference, or extending an existing tax benefit, I think the Congress needs to not just know what

the 1-year, 5-year and 10-year cash-flow cost is. For the big ticket

items, for the ones that are really big and typically get more expensive beyond the 10-year horizon, I think Congress needs to know

what the discounted present value cost of that is. That is what the

$8.7 trillion Medicare Part D number is. That is how much money

you would have to have today invested at treasury rates to close

the hole that has been created—not the donut hole—to be able to

deliver on the Government’s for the next 75 years. None of you had

that number, and I would respectfully suggest that if you did, the

outcome might have been different. The irony about the Medicare

Prescription Drug Benefit is, we were in the hole $15 to $20 trillion

for Medicare before that bill. The bill added $8 to $9 trillion more,

which is almost double Social Security.

Mr. PLATTS. Two other specifics in this type of reform, and then

I want to get to Mr. Towns.

On the entitlement, is it something that we should look at the

way we actually fund entitlements? Now it is an automatic, next

year 7.6 percent more or whatever, and so unless we take action

to change it, it just happens. Should it be the same as discretionary

so every year we are forced to look at the realities of these numbers, rather than just being on autopilot unless we do something

proactive?

Mr. WALKER. Mr. Chairman, we issued a report within the last

several months, which I will make sure that both of you have the

benefit of, that talked about what can be done to gain better visibility over and control of mandatory spending programs. If you look

at the current budget, over 60 percent of the budget is on autopilot,

and it is going up every year. We need some reconsideration triggers based upon the percentage of budget, the percentage of GDP,

or various other factors so that Congress is forced to reconsider

these programs at least periodically, because if we don’t do that,

then the Government is not going to be able to do much more than

pay interest on the debt and maybe a few other mandatory programs in the out-years.

The other thing we need to do is we need to recognize that we

don’t just need to do this with regard to direct spending programs,

we also need to reconsider some of these tax expenditures that are

off the radar screen because they involve a lot of money too.

Mr. PLATTS. One other specific—and I am not familiar with your

latest report that you reference, and would be glad to get that and

take a look at it. And it is more specific on the discretionary side.

I am a believer, having come out of the State house, you balance

budgets, and one of the ways you ensure that is a line item veto.

Is that something that has been in your discussions that you have

looked at on the discretionary side?

Mr. WALKER. The difficulty, Mr. Chairman, as you know, with

the line item veto is that would involve a significant give-up of constitutional power from the legislative branch to the executive

branch. There are pros and cons to it, but I know who my client

is. My client is the legislative branch. I do think there are things

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that can and should be done that we have not even done yet. Hopefully, we could pursue some of those actions, and that might end

up helping. If those are inadequate, then you can look at more dramatic actions that could end up involving a more fundamental redistribution of power under our current constitutional scheme.

Mr. PLATTS. As a member of the legislative branch, but, obviously, not an appropriator on the legislative branch, I think that

we look at our States as laboratories of democracy and what works

out there, and I think it is all but three or four States have balanced budget and line item requirement. I sought an action at the

State level in Pennsylvania and thought it helped bounce back executive and legislative responsibility. So if it is to be done, it certainly is a constitutional issue.

Mr. WALKER. Can I mention one thing, Mr. Chairman, on that?

As you properly pointed out, the States are a laboratory for experimentation, and we need to learn what works for them and what

doesn’t. One example is, I believe 49 of 50 States—and I will double check it for the record—but I believe 49 out of 50 States have

a balanced budget requirement.

Mr. PLATTS. I believe that is correct.

Mr. WALKER. However, it depends upon how you define a balanced budget. There is one very large State on the West Coast,

which I won’t mention, that defines a balanced budget as balancing

cash-flows. If it turns out that expenditures are higher than revenues, then they just go out and borrow the difference and that is

deemed to be a balanced budget. I would respectfully suggest that

is not a balanced budget. That is balancing cash-flows.

Mr. PLATTS. That is more this approach of you are not accounting

for what your future liabilities are, I mean, as far as——

Mr. WALKER. It is similar to what we are doing, which ultimately

will catch up to you.

Mr. PLATTS. Rather than us learning from what is working out

there, they are learning what is not working here in their approach.

Mr. WALKER. Unfortunately, the Federal Government is not leading by example in this regard.

Mr. PLATTS. Exactly.

Mr. Towns.

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

Let me begin with you, Mr. Hammond. The weaknesses in tax

collection activities and system efficiencies have been notable in

practically every year on the consolidated statement. Can you update us on efforts to improve the internal controls of the Treasury

to ensure efficient operation in the area of collection activities?

Let me just be quite clear, that I understand that if you get more employees, that every time you spend $1, that you are able to collect an additional $4. And I also would like to add I understand

that you did not request additional staff in your last budget. So

could you respond to those three things?

Mr. HAMMOND. I will give you a very high-level, kind of departmental-wide perspective, but I would respectfully suggest that I am

not the right person at Treasury to be speaking to those specific

questions. The Assistant Secretary for Management and Chief Financial Officer for the Department, or the Commissioner of the InVerDate 11-MAY-2000 13:57 May 25, 2006 Jkt 000000 PO 00000 Frm 00083 Fmt 6633 Sfmt 6633 D:\DOCS\27091.TXT HGOVREF1 PsN: HGOVREF1
80

ternal Revenue Service, would probably have, would certainly have

more specific responses. We are looking at an environment where

enforcement at the IRS is indeed a high priority, and I know that

the Commissioner has reallocated resources within the Service to

highlight the importance, capitalizing on the efficiencies that he

has generated internally in the organization through electronic filing, for example, and being able to redirect those resources toward

enforcement activity because they do in fact realize the substantial

payoff related to additional enforcement work, so long as it is done

consistent with the standards that were laid out a few years ago

respecting taxpayer rights.

Mr. TOWNS. Right. Can you update us on the development and

efforts under way in recovering improper payments referred to you

for collection? Is there any hindrance in your way to effectively recoup these funds? Is there anything that the Congress should do

in order to make it easier for you to be able to recoup this money?

Mr. HAMMOND. We actually do have a couple debt collection proposals, legislative proposals that are in the President’s budget this

year, having to do with somewhat technical aspects, the ability to

offset different payment streams, the ability the collect debts on behalf of States where a debtor may cross State lines, and I would

refer you to those in the budget. We can get you more specific information on those legislative proposals.

In general, the debt collection program is running extraordinarily

well. Last year we collected over $3.2 billion in delinquent debt,

some of that Federal, some of that State child support, some of that

State income tax debt. There are a couple aspects of that program

where we continue to enhance things, the most significant of which

is making sure that all vendor payments are included in the process. That is really much more of an issue of fairness, frankly, than

of large dollars. Vendor payments are not a significant payment

steam, but nonetheless—and there are complexities bringing them

into the collection process. But it is something that is a high priority for us, and we have made a lot of progress in the last year or

so addressing.

Mr. TOWNS. Mr. Walker, what do you suggest either we should

do in order to deal with the public, because those numbers you

gave us, I mean, they are very alarming, you know. I want you to

know that—and I am not an emotional person, but you brought

tears to my eyes. [Laughter.]

What should we do here? Tell it from a legislative standpoint. I

mean, there must be something here. I mean something is missing.

Mr. WALKER. Well, Mr. Towns, first, there are several suggestions in my testimony, and I am happy to provide additional ones

for the record. There are two issues.

One issue is, what needs to be done in order to be able to obtain

better control over our fiscal future? The first thing that I would

say is we need to learn the first rule of holes, and that is, when

you are in a hole, stop digging. We haven’t learned the first rule

of holes.

In that regard, it means that we need to be more truthful and

transparent about where we are and where we are headed. As the

chairman mentioned before, we need to consider what the longterm affordability and sustainability of certain legislative proposals

81

are before they are enacted into law. I would respectfully suggest

that we need to have reasonable spending caps, and pay-as-you-go

rules on both sides of the ledger, both the spending side and the

tax side. I understand that is controversial, but when you are trying to control the bottom line, you shouldn’t exempt one half of the

ledger. Afterall, some tax cuts stimulate the economy, all tax cuts

do. In addition, very, very few, if any, tax cuts pay for themselves.

I have not found an economist who can show me one that did yet.

So we have to do that. We also have to be able to look at mandatory spending. How are we going to get control over mandatory

spending? It is not just entitlement programs. It is also other

areas. One of the biggest differences between the cash-based budget deficit and the accrual-based budget deficit is pensions and

health care for civilian and military employees and veterans. There

is a lot that has happened in recent years. The costs are going up

dramatically, and we are not going to have to pay them until the

future years, but we can see what is coming right now.

I would be happy to provide some more specifics for you, if you

want, for the record, but I have testified on numerous occasions on

some of the things that I think that the Congress should respectfully consider either through legislation and/or through modifying

your own rules. After all, Congress creates its own rules, its own

points of order, what goes into the budget resolution each year and

things of that nature.

Mr. TOWNS. I am just thinking that when we look at Medicare

Pard D, now, should we modify it? Is there anything that we need

to do here, Congress itself, because based on your numbers, it is

a mess.

Mr. WALKER. I would respectfully suggest, Mr. Towns, that Medicare Pard D is a poster case for two things. No. 1, only considering

the short-term cost, not considering the long-term affordability and

sustainability of new commitments; and second, the fact that I

think most reasonable people would say that certain portions of the

Medicare population need help with prescription drugs, and that

any modern health care system for seniors would involve some assistance for prescription drugs in appropriate circumstances. At the

same point in time, what was done was we just layered on top of

Part A and Part B, which by the way, is based largely on Blue

Cross/Blue Shield 1965, which has not been modified and reformed

in a dramatic way since 1965, already had an unfunded commitment of $15 to $20 trillion, and what we did was we added another

$8 to $9 on top of that without really reforming the program. And

one of the things that is going to have to happen is I think that

Congress—and I have said this publicly—should reconsider Medicare Part D as to the scope, as to the timing, and as to who benefits, because I think you are going to have an extremely difficult

time delivering on this promise over time.

Mr. TOWNS. Thank you very much. Mr. Chairman, I yield back.

Mr. PLATTS. Thank you, Mr. Towns.

Secretary Hammond, you mention in your testimony, and it is in

both of the written prepared notes, the fact that this year will be

the first time we audited the Medicare and Social Security Trust

Funds. Can you go into some detail of what we should expect from

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that audit and how it will likely impact the financial report for

2006?

Mr. HAMMOND. I think the short-term answer is we don’t expect

a fundamental change in the report. The schedule itself will stay

the same. Its placement will move, I think, maybe a page or so. So

the real question is, what will the scope of the audit reveal or what

will it indicate?

The Social Security program was audited on these types of estimates a number of years ago, and received, I think—by

PriceWaterhouseCoopers at the time—and received a very favorable report. I am not aware of whether or not HHS and the Medicare program had been exposed to the same level of scrutiny. So

the result may be that we get some additional information about

some of the preparation and the assumptions processes going forward, but I don’t expect any startling results.

Mr. PLATTS. Mr. Walker, any insights?

Mr. WALKER. You are correct in saying this is the first year in

which the numbers that are in the Statement of Social Insurance

will be subject to independent audit, and PriceWaterhouseCoopers

is the independent audit firm that is responsible for auditing both

Social Security, as well as CMS, and therefore, they will be on the

front line of these responsibilities we will also have to get comfortable with these numbers because we are the auditors for the

consolidated financial statements.

They will look at the appropriateness of the methodology and the

reasonableness of the assumptions. We will have to wait until they

are done but I would be surprised if there are any more big findings here although they may wish to point out in their report the

fact that there is a considerable degree of uncertainty with regard

to some of these numbers. In part, because when you are dealing

with health care, only God knows what future health care costs are

going to be, and God is not telling us. So there is a much greater

degree of uncertainty with regard to health care costs than there

is on Social Security, because with Social Security, you have a defined dollar benefit.

Under Medicare, the way that it stands right now, is that you

have a defined level of coverage. Therefore, you need to determine

what is it going to cost to provide that level of coverage to the applicable population? That is a much more complex process.

Mr. PLATTS. And that, in some degree, relates to, as we are trying to get that transparency and honest discussions of the coming

debts, what we are going to have in the future, when we talk about

Medicare Part A, B and D. The assumptions, if Part D works as

intended, people get their prescription drugs, that perhaps there is

a savings in Part A because there are less serious illnesses and

hospitalizations. There is no assumption of that at this point in the

outlooks?

Mr. WALKER. The actuaries for Medicare, it is my understanding,

considered that when they came up with these numbers, they did

not believe that there would be any material savings in Part A.

The laws of economics haven’t proved to be too valid in connection

with health care, because the way that our health care system is,

everybody wants unlimited health care and access to the newest

procedures and technologies, especially if somebody else is willing

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to pay for it. Ultimately what we are going to have to do, and we

have some work on this too, Mr. Chairman, we are going to have

to engage in a much more fundamental discussion about health

care and the appropriate division of responsibilities between Government, employers and individuals for health care. Right now, the

biggest driver to a long-range imbalance is health care. The second

is demographics, but health care is really the biggest driver to a

long-range imbalance, and it is not just an issue to the Federal

Government. As you know, having been in the State legislature.

Medicaid is the fastest-growing cost in State government. It is also

the No. 1 competitiveness challenge to the private sector in the

United States right now.

Mr. PLATTS. You look at the private sector competing in a world

economy, and the expectations of employees from decades of having

it provided either at no cost, minimal cost and ability to compete

now, where every dollar counts as far as staying in business, you

are right, it is not just a Federal and State government challenge,

it is a national challenge, public and private.

Let’s turn maybe to some of the specifics of the report, and how

it presents to the various departments, and this being my 4th year

as chairman, and over the 4-years we have had 11 different departments, agencies, that got unqualified opinions. One of the issues

specifically I wanted to touch on, was referenced in one of the

charts, the number of restatements that have been occurring, 5 in

2003, 11 in 2004, 7 again this year. You know, we are down from

11 to 7, but still, almost a third of the CFO departments and agencies are restating, which means that when we look at the ones that

are restating, it looks 4 maybe out of 7, had supposed unqualified

opinions last year—my eyes need to be checked here. So it’s not a

good sign.

And the fact that we have seven restatements again this year,

does that mean that we are not moving forward as well as we

would like to believe in getting more focus on financial accountability and financial disclosure, or should I read something different

from those seven?

Mr. HAMMOND. Let me offer a perspective on that. I actually

think that the volume of restatements that we have seen in the

last couple of years is a good thing, while recognizing that it is a

bad accounting outcome. The reason that is a good thing is that it

has, I think, injected even more discipline and seriousness into the

process. What has happened is, as agencies have improved their

systems, gotten more experienced in the financial statement preparation process, so too have their auditors. I don’t think, when we

started the financial reporting on an audited statement basis, that,

frankly, the level of audits that agencies received at the Federal

level was comparable to what you would see in the private sector.

And I think that as the agencies have gotten better, the auditors

have gotten better, and the sophistication of the process itself is becoming more intense, and it is finding things that perhaps should

have been found a long time ago.

I, frankly, think that is a healthy sign of a process taken very

seriously by both parties.

Mr. PLATTS. Why are we not finding them the first time around?

Because that’s how I look at the restatements, that we are 7 times

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this year, 11 times last, we are finding it, but after the fact in a

sense, and going back in——

Mr. HAMMOND. That is right. I am not sure there is a complete

pattern that, you know, you are seeing the same kinds of restatements in all circumstances, the reasons for the restatements vary.

I do think that there is a question of audit funding, in some circumstances, and experienced audit staff. That makes it a little bit

harder to go forward. Now that most agencies—in fact, I think almost all, maybe all but 1—of the 24 CFO Act agencies now have

independent public accounting firms doing the audits. That helps.

Sarbanes-Oxley influences and the emphasis on internal controls

has certainly helped surface things that may have been just one

level below.

It is a bad outcome on an annual basis, but I think it is a healthy

sign for what we hope to get out of it going forward.

Mr. PLATTS. Mr. Walker.

Mr. WALKER. It is my understanding, Mr. Chairman, that a couple of common denominators from the misstatements that we have

had in the last couple of years are that some of the agencies have

been implementing new financial management systems, and they

have had difficulty in that implementation process. Second, within

the last couple of years we have had the new statement of budgetary resources, where you reconcile the cash-based budget deficit

and the accrual-based budget deficit. Some agencies, and their

auditors, had difficulties with it. That is not something you see in

the private sector.

I would say it is obviously to everybody’s benefit that to the extent that there is a misstatement, that it be identified, hopefully

as soon as possible. I think it is good that auditors recognize their

professional responsibilities to note that and to restate those numbers. I do, however, believe that this is a high percentage, higher

than should be acceptable, and that when an agency has to restate

its financial statements, it should not be green on financial management under the President’s management agenda because it

means you didn’t deserve a clean opinion if you received a clean

opinion in the prior year.

Mr. PLATTS. Is that something that the administration is looking

at or willing to look at?

Mr. HAMMOND. I would have to ask my colleagues at OMB as

to—I know they look at the criteria for the scoring on the President’s score card periodically. It is certainly a question I will take

back to them.

I would also note though that this is a trend that—and while the

numbers and the percentages certainly are not the same—but it is

a trend for increased restatements. It is something we are seeing

in the private sector as well. So I think there is a level of seriousness going to the audit process that is, frankly, new in many respects.

Mr. WALKER. If it can, Mr. Chairman, it is true that the number

of restatements going in the private sector have gone up post Sarbanes-Oxley, in large part because of the accountability failures

that have occurred in the private sector and the relative risk associated thereof, as well as the additional oversight and scrutiny that

85

is being imposed by the Public Company Accounting Oversight

Board, among other things.

However, the percentage of financial statements that have to be

restated in the public is way, way, way higher than it has ever

been, and much higher than it is ever likely ever to be in the private sector. I mean this would not be anything near an acceptable

outcome in the private sector.

Mr. PLATTS. If we had a third of the private sector, it would be

front-page news and there would be a lot of concern out there.

Mr. WALKER. Well, in fact, I am going to send you, Mr. Chairman, an opinion piece that recently was published, about the audit

report of the consolidated financial statements of the U.S. Government, noting that if the audit report had been on any major corporation in the United States, it would have been on the front page

of every major paper, and yet, it didn’t even make most papers,

much less on the front page. That is a problem.

Mr. PLATTS. That goes to really one of the challenges as Chair

of this committee for 4 years, is how to get an appreciation, beyond

a small circle, of the importance of the issues discussed in this committee and through your efforts at GAO within the administration.

What we are talking about here ultimately impacts everything else

going on out there in the sense of the financial realities of our Federal Government. I guess we need to have a major league baseball

player sitting next to you, when giving your testimony, give his

opinion.

Mr. HAMMOND. That would be great.

Mr. WALKER. I played on a national championship high school

football team, but that is not good enough.

Mr. PLATTS. We didn’t have that in your bio to get the national

media attention. [Laughter.]

It is getting that appreciation and focus beyond just a small

group, because otherwise it is hard to overcome the historic practices here.

There was a mention—I think, Mr. Hammond, I think you mentioned Sarbanes-Oxley. You may have both mentioned it. How does

that impact your read on it just from a human resource—I guess

it is two part. When I look at those restatements, is there a human

resource aspect here of just staffing within the departments or

agencies? And also the expedited deadlines, does that impact, that

there is a rush to get done, and maybe to miss something because

of that, and if so, is that still less important that we are getting

more timely information?

Mr. HAMMOND. I think it is less a resource issue and more related to a business process issue.

Mr. PLATTS. Internal controls and——

Mr. HAMMOND. And legacy systems. The Comptroller General

mentioned, for example, systems conversion efforts. Bringing in

new financial systems is a good thing. It is also really hard to do

when you are not just upgrading from a good version to the next

version of a good system, but in fact, taking a collection of legacy

systems, trying to put them together in an environment, and frankly, the Federal Government never had to do accrual-based reporting before these recent initiatives.

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These systems were never designed to capture a lot of this information, and there are practices that are unique to the Federal Government, for example, property in the hands of contractors, which

if not properly tracked and accounted for during the year with good

internal controls, is an absolute reporting nightmare at the end of

the year. I think some of what you are seeing is symptomatic of

that type of change that is just going on at the agency level.

Mr. PLATTS. Maybe no one better exemplified that than at DOD,

as we try to get a handle on their financial management systems,

the thousands of different systems. And I will probably misstate

the names here, but in the most recent example, their new pay system, the Forward Compatible Pay system where I think we spent

$52 million at DOD, and scrapping it and starting over, in essence.

I mean that type of trying to modernize, but needing it to be done

responsibly, and thinking through everything up front before we

keep spending this money with no results. That really leads into,

DOD, clearly is the 600-pound gorilla, that unless we fix it, we are

never going to get to an unqualified opinion. Your assessment, both

of you, on how you view DOD’s progress or lack thereof, as specific

or general as you like.

Mr. WALKER. First let me make a comment with regard to the

general issue that you talked about, and that is, financial management systems improvement efforts. There are many examples of

hundreds of millions of dollars being wasted on failed financial

management systems improvement efforts. A recent one, the Navy,

several followup projects dealing with an ERP project, $1 billion

down the drain. One of the fundamental problems that we have is

who is being held accountable? The answer is, all too frequently the

answer is no one.

Mr. PLATTS. If I could stop you there. On that example, are you

aware of any person demoted, fired, funds recouped?

Mr. WALKER. We have not done a study of that, but I asked the

question coming up here, as to whether or not some of the same

people who are responsible for the failed system are responsible for

the new system, and the answer was yes.

My point is—and, frankly, that is a shared responsibility, Mr.

Chairman. It is not just a responsibility of the executive branch, it

is a responsibility of the legislative branch.

Mr. PLATTS. Our oversight.

Mr. WALKER. We can’t continue to have these deja-vu all over

again problems, as Yogi Berra used to say. There have to be consequences to these types of failures.

But with regard to DOD, I hope that by the end of my 15-year

term, which is October 2013, which mean that it would have to be

the 2012 financial statements, I hope that by then the Department

of Defense has an opinion on its financials, even if it is qualified,

such that we might be in a position to be able to render some type

of an opinion other than a disclaimer on the consolidated financial

statements.

I know there are a lot of people who are working hard to try to

deal with this. I know they are now trying to take an approach of

looking at various line items across the Department, horizontally,

and looking at various units within the Department—vertically, to

try to make progress one step at a time. They have abandoned

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their prior plan of having an opinion on DOD by 2007, which was

totally unrealistic. You need to have goals and milestones, there is

no doubt about that. It is fine to make them aggressive, but they

have to be attainable, because if they are not, they are not credible

and nobody will pay any attention to them.

I still have not seen a consolidated plan yet that says that the

game plan is that over X number of years, we are going to be able

to get to the point where we think we can have some opinion that

these line items in year X and these entities by year Y, accumulating toward some department-wide outcome. I have not seen that

yet, and I don’t know that it exists. According to my staff, they

don’t have one yet. As you know, you have to have a plan or you

are going nowhere fast.

Mr. PLATTS. Mr. Hammond, comment on DOD, your perspective?

Mr. HAMMOND. Just let me add that we have found that the financial management community at DOD to be some of the most

engaged and supportive people across Government, as far as meeting the needs that we have and pulling together consolidated financial reports. So I think the current situation that they find themselves in is not reflective of the commitment to trying to do this,

but I do think that they have a task that is quite challenging.

Mr. PLATTS. My read is there have been a lot of dedicated people

trying over there, but it is kind of just a machine just kind of eventually chews them up and spits them out because it is so overwhelming. The Secretary has made the commitment to focus on

this, and now with the Deputy Secretary taking the lead on the

business transformation and trying to raise the priority of it, but

in my 4 years, I am hard pressed to say I can see true progress

being made. Effort, yes. Progress I think is something else.

Mr. WALKER. One of the things that we recommended, among

many, last year about this time was that the Congress seriously

consider requiring that the Department of Defense have a Level 2

Deputy Secretary for Management, in order to separate the policy

and military transformation in fighting the global war on terrorism

role from the business transformation process. After all, the Department of Defense was created in 1947 and yet it still has 8 or

25 high-risk areas on its own. It shares 6 others, so that it represents 14 of 25. One of the biggest problems that DOD has is that

it lacks a person who is responsible and accountable, with the requisite level of experience, at the right level, who is there long

enough in order to get these things done, who can deal directly

with the unders, who can deal directly with the service secretaries,

who can cross the silos, and who has direct access to the Secretary

on a day-to-day basis as necessary to get this job done.

A year ago we recommended that. I think the world of Deputy

Secretary England. He is an extremely capable professional, and I

think that he could do either one of these jobs and do them well.

However, I question whether any human being on the planet can

do both of them. Secretary England said a year ago to give him a

year, and see how it goes with one person trying to do both jobs.

I am anxious to hear what he thinks now because our view stands.

Namely, that despite how capable and how high a regard we have

of him, this is something that has to be addressed, because by definition, Gordon England only has a recess appointment, and even

88

if he ends up getting a full appointment, this administration

doesn’t even have 3 years left. You are not going to get anywhere

close to fully addressing some of these issues in 3 years. It is going

to take many more.

Mr. PLATTS. I think that is one of the benefits of the proposal,

that fixed term, whether it is 7 years or, to know, as with your position, that there is going to be continuity, and truly focus on seeing it through, as opposed to this kind of revolving door of—again,

whoever is there is making the effort, but the ability to make

progress in this Department is just overwhelming.

Mr. WALKER. It makes a difference not only for the person who

has the job, it makes a difference for the people who are working

with the person who has the job. For example, take Commissioner

Everson of the IRS, who is a friend of mine, and who was the

former Deputy Director of OMB for Management. One of the things

that he has said publicly about the commissioner job of IRS, which

is what he has now, is not only is it a No. 1 job rather than a No.

2 job, but it is a term appointment. Therefore, he has more certainty as to how long he is going to be there no matter what happens politically, and the people who are working with him and for

him have a higher degree of certainty that he is going to be there,

and that makes a big difference.

Mr. PLATTS. I apologize. With the vote that is going on now, but

I also know, especially Comptroller General Walker, I know you

need to go as well, I don’t want to recess and have you wait. So

is there anything that you want to make sure we have part of the

record that we did not touch on, that you want to highlight before

we wrap things up?

Mr. HAMMOND. No. I think just one point I would like to make,

which is going forward, one of the things that we are going to need

to do in order to raise the infrastructure that supports all of this

and gets us to more useful reporting or more practical information,

is to find ways to better integrate the budgetary and the financial

reporting information streams. Today budgetary reporting is important, and everybody does it well, everybody does it right. There are

significant penalties if you mess it up. Financial reporting has always been kind of a weaker cousin to budgetary reporting, and by

bringing those together into the same systems, into the same business processes, into the same management chains in some cases,

I think gives us an incredible opportunity to drive some of the

changes that we want to do from a reporting standpoint.

Mr. PLATTS. That is somewhat reflected just in committee assignments, those who flock to be on the Financial Reporting Oversight

Subcommittee versus, perhaps, the Budget Committee, or especially Appropriations, where they are giving the money out, you

know, it is that challenge that we have in the sense of raising the

level of understanding on the importance of these issues, and that

both of you seek to do every day. It is something that we need to

chip away at as an elected official, and as father of T.J. and Kelsey,

I look at those graphs on what the decades to come will bring, and

it is really staggering in the challenge that we are putting on future generations, what they are going to have to deal with.

Comptroller General Walker, did you have anything you want to

add?

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Mr. WALKER. The only thing I would say, Mr. Chairman, is

thank you again for holding this hearing. I would love to have the

opportunity at some point in time, if you want, to sit down and talk

about some of these issues, and what is the best way forward.

Mr. PLATTS. And one that we have talked about and how to try

to approach, and we know that it is not well received within the

administration, but the CMO issue at DOD and getting our CFO,

you know, the Chief Management Officer over there, how to go

after DOD, because we need to keep chipping away at all the departments and agencies, but that one is just so huge that unless

we jump start it somehow, we are just going to keep spinning our

wheels I think long term.

Mr. WALKER. I know you are also interested in possibly relooking

at the financial management legislation, and I would be happy to

sit down and talk to you about issues of mutual interest at some

point.

Mr. PLATTS. We would welcome your insights.

If there is any additional information, we will keep the hearing

record open for 2 weeks if you want to submit. Our appreciation

to you and your staffs for your preparation and appearance here

today.

This hearing stands adjourned.

[Whereupon, at 3:13 p.m., the subcommittee was adjourned.]

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