MAJOR MANAGEMENT

CHALLENGES AND

PROGRAM RISKS

Departments of

Defense, State, and

Veterans Affairs

Statement of David M. Walker

Comptroller General of the United States

United States General Accounting Office

GAO Testimony

Before the Subcommittee on National Security, Veterans

Affairs, and International Relations, Committee on

Government Reform, House of Representatives

For Release on Delivery

at 10:00 a.m., EST

Wednesday,

March 7, 2001

GAO-01-492T
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Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss major management challenges and program

risks confronting selected federal agencies. As requested, my testimony today will focus

on (1) the range of governmentwide challenges and opportunities the 107th Congress and

the new administration face to enhance performance and accountability of the federal

government, (2) the major management challenges and program risks facing three key

agencies--the Departments of Defense (DOD), State, and Veterans Affairs (VA)--who fall

under the jurisdiction of this Subcommittee, and (3) whether these departments are

meeting performance and accountability goals and measurements that are required

under the Government Performance and Results Act of 1993 (GPRA). Appendix I lists

the major management challenges for each of the three key agencies.

Our testimony is derived, in part, from a special series of reports we recently issued on

this subject entitled Performance and Accountability Series: Major Management

Challenges and Program Risks in January of this year. The series, listed in appendix II,

contains separate reports on 21 agencies--one on each of the cabinet departments and on

most major independent agencies as well as the U.S. Postal Service. As a companion to

this series, we have also issued our High-Risk Series: An Update, which discusses those

government operations and programs that our work has identified as “high risk” because

of their greater vulnerabilities to waste, fraud, abuse, and mismanagement.

MAJOR MANAGEMENT CHALLENGES:

THE GOVERNMENTWIDE PERSPECTIVE

Mr. Chairman, I want to commend you for holding this hearing at this particular time and

discussing these issues because we are engaged in three important transitions. First, we

are ending one presidential administration and beginning another. Second, we are at the

outset of the 107th Congress. Third, we are at the dawn of a new millennium. As our

nation moves into the 21st century, the 107th Congress and the new administration face an

array of challenges and opportunities to enhance the performance and assure the

accountability of the federal government for the benefit of all Americans. Increased

globalization, rapid technological advances, shifting demographics, changing security

threats, and various quality of life considerations are prompting fundamental changes in

the environment in which the government operates. These trends are placing a premium

on increasing strategic planning, using integrated approaches, enhancing resultsorientation, improving responsiveness, and ensuring accountability within the federal

government.

At the same time, the current projected trend of budget surpluses presents both an

opportunity and an obligation for the legislative and executive branches of government

to look at a range of fundamental policy and fiscal issues in advance of the forthcoming

demographic tidal wave associated with the retirement of the “baby boom” generation.
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This includes comprehensively reassessing what government does and how government

does business in the 21st century. It also includes focusing on the longer term fiscal

implications of current programs and policies and a range of existing and emerging

major management challenges and program risks confronting the federal government.

For example, entitlement programs currently represent approximately 41 percent of the

federal budget, up from 31 percent in 1962. At the same time, defense spending currently

represents about 16 percent of the federal budget, down from about 50 percent in 1962.

Some of these changes can be explained by the end of the Cold War, but not all of them.

One of the less publicized stories is that most of the decline in defense spending over the

years has been used to pay for additional health spending (for example, Medicare and

Medicaid). Our most fundamental long-range budget challenge is how to control

mandatory spending, which now accounts for about two-thirds of all federal spending,

up from about one-third in 1962.

We have many initiatives underway to help the Congress and the executive branch meet

the challenges to the well-being and financial security of the American people, address

security threats facing our nation, and deal with the issues raised by global

interdependence.

With regard to improving overall government performance and accountability, the main

actions needed to shape an efficient and effective federal government for the 21st century

are as follows:

• First, give high priority to fully implementing existing legislative reforms essential to

modernizing performance management, financial accountability, and information

technology practices.

• Second, address the urgent need to revamp the federal government’s entire strategic

approach to human capital (people) management before the erosion of government’s

capacity to perform more dramatically undermines agencies’ abilities to efficiently

and effectively serve the American people.

• Third, continue to attack government activities at particular risk of fraud, waste,

abuse, and mismanagement in order to save billions of dollars, improve services and

programs, and strengthen public confidence and trust in government.

• Fourth, confront critical challenges facing individual departments and agencies in

carrying out their missions.
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• Fifth, pursue organizational approaches that recognize the reality of evolving global,

technological, workforce, and other dynamics and needs associated with a transition

to a knowledge-based economy.

Beyond addressing this fundamental management foundation, however, lie certain added

dimensions to the challenge of governing in the 21st century. Among these are

• promoting a more sustainable longer term budget and economic outlook to help

safeguard the ability of future generations to afford the commitments of today and

make decisions regarding the role of the federal government in the future given our

aging society; and

• taking advantage of the window of opportunity presented by the current

improvement in the federal government’s financial position not only to reassess fiscal

policies, but also to (1) review options for improving the efficiency and effectiveness

of individual federal programs, (2) thoroughly reassess what government does and

how government does business, and (3) revisit targeting approaches that distribute

assistance to beneficiaries by recognizing the differences between wants, needs, and

affordability.

It is also important to reach a consensus on needed changes and forge

executive/legislative partnerships to promote effective implementation of agreed upon

goals--both on the policy front and with regard to certain management reforms that are

central to strengthening the performance and accountability of our federal government.

For example, progress achieved to date in improving financial and information

management and a results-oriented focus has only been attained through the use of a

solid legislative framework and concerted, sustained executive and congressional

attention. In this regard, congressional oversight is essential to further progress. Now is

the opportune time to review, revise, and reinvigorate the oversight process to help

address today’s challenges and prepare our country for tomorrow.

In many government agencies, the transition to modern performance management, and

along with it, to strategic human capital management, will require a cultural

transformation that will take time. Changing what agencies do and how they do business

is tough work. Many government organizations need to become less hierarchical,

process oriented, stove piped, and inwardly focused than they have in the past. They

will need to be more partnerial, results oriented, integrated, and externally focused in

the future. To change in a meaningful and lasting manner, most people believe that one

needs to have a “burning platform.” Stated differently, we must convince people that

they and their organizations must change or there are likely to be serious consequences.
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For the three agencies we are focusing on today--Defense, State, and VA--we have

identified and reported management challenges that have hampered the economy,

efficiency, and effectiveness of their support functions in carrying out their missions. To

their credit, each of the agencies has implemented a number of changes to improve their

operations, but much more needs to be done, especially in connection with the Defense

Department. These challenges, many of which have been long-standing in scope, also

underscore the critical role that the principles of performance-based management, as

embraced in GPRA, can play in successfully providing the products, services, and results

that taxpayers expect.

CHALLENGES FACING THE DEPARTMENT OF DEFENSE

While DOD has the most effective warfighting force in the world, the same level of

excellence is not evident in many of the business processes that are critical to the

achievement of the Department’s mission in a reasonably economical, efficient, and

effective manner. In addition to the governmentwide challenges in the human capital

and computer security areas, we consider all or part of six areas relating to DOD’s

financial management, information technology, acquisitions, contracts, support

infrastructure, and logistics to be high risk.

Performance and Accountability Challenges

• Developing strategic plans that lead to desired mission outcomes

• Hiring, supporting, and retaining military and civilian personnel with the skills to

meet mission needs

• Establishing financial management operations that provide reliable information

and foster accountability

• Effectively managing information technology investments

• Reforming acquisition processes while meeting military needs

• Improving processes and controls to reduce contract risk

• Creating an efficient and responsive support infrastructure

• Providing logistics support that is economical and responsive
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Strategic Planning Shortfalls

Sound strategic planning is needed to guide improvements to DOD’s operations. It also

sets the fundamental direction of the agency, its purpose, what it hopes to achieve, and

how it will do it. Without strategic planning, decisionmakers and stakeholders may not

have the information they need to ensure that the Department has strategies that are well

thought-out for resolving ongoing problems, achieving its goals and objectives, becoming

more results oriented, and ensuring its accountability for the several hundred billion

dollars annually allocated to the Department. While the Department has improved its

strategic planning process, its strategic plan is not tied to desired mission outcomes. As

noted in several of the other key challenges, sound plans linked to the Department’s

overall strategic goals are critical to achieving needed reforms. Inefficiencies in the

planning process have led to difficulties in assessing performance in areas such as

combat readiness, support infrastructure reduction, force structure needs, and the

matching of resources to program spending plans.

Since the mid-1980s, we have reported that DOD employs overly optimistic planning

assumptions in its budget formulation. As a result, DOD all too frequently has too many

programs for the available dollars, which often leads to program instability, costly

program stretch-outs, and program reductions and terminations. Moreover, optimistic

planning makes defense priorities unclear because tough decisions and trade-offs

between needs and wants are avoided. Until DOD presents realistic assumptions and

plans in its future budgets, the Congress will lack the accurate and realistic information

it needs to properly exercise its decision-making and oversight responsibilities. To help

overcome inefficiencies in DOD’s strategic planning processes and to promote more

realistic budgeting, DOD must follow results-oriented management principles in

performing the next Quadrennial Defense Review in 2001. To provide a clear picture of

DOD’s performance, we also recommend that DOD include more qualitative and

quantitative goals and measures in its annual performance plan and report to gauge

progress toward achieving mission outcomes.

Human Capital Challenges

Given the large number of military and civilian personnel within the Department, human

capital management represents a huge challenge that impacts virtually every major

activity. DOD is dealing with military personnel issues such as shortages of junior

officers for the career force, problems in retaining certain skills (such as intelligence

analysts, computer programmers, pilots, and acquisition workforce personnel), and the

military services’ failure to meet recruiting goals. The Department also faces significant

challenges in managing its civilian workforce. For example, the sizable reduction in

civilian personnel since the end of the Cold War has led to an imbalance in age, skills,

and experience that is jeopardizing certain acquisition and logistics capabilities within

DOD.
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Moreover, over a third of DOD’s current employees are more than 50 years old and

approaching retirement. According to a February 2000 Defense Science Board Task

Force study on Human Resources Strategy, approximately 58 percent of DOD’s civilian

workforce will be retirement eligible by 2005. The net effect is a workforce that is not

balanced by age or experience and that risks the orderly transfer of institutional

knowledge. Although we cannot say what the appropriate balance between younger and

older employees should be, the continuing increase in the number of retirement-age

employees could make it difficult for DOD to infuse its workforce with new and creative

ideas and develop the skilled civilian workers, managers, and leaders it will need to meet

future mission requirements.

The Department has initiatives to address military and civilian human capital issues.

However, to guide individual initiatives and link them together, we recommended that

DOD assess the relative success and cost-effectiveness of the services’ recruiting

strategies and put tools in place for measuring success in reducing attrition.

Also, in recent testimony, we noted that DOD should better align its civilian human

capital management with its strategic planning and core business practices. For

example, during our work on the early phases of the DOD downsizing, some DOD

officials voiced concerns about what was perceived to be a lack of attention to

identifying and maintaining a balanced basic level of skills needed to maintain in-house

capabilities as part of the defense industrial base. Others have registered concerns about

the fairness of the competitive sourcing process and whether a level playing field exists

for competition between the public and private sector. In that regard, I have been

legislatively mandated to convene a panel of experts to study the transfer of commercial

activities currently performed by government employees to federal contractors, a

procedure commonly known as “contracting out” or “outsourcing.”

Financial Operations Reforms

While improved in recent years, financial management remains a high-risk area for DOD.

For fiscal year 2000, none of the military services or the Department as a whole passed

the test of an independent financial audit because of pervasive weaknesses in its

financial management systems, operations, and controls, including an inability to

compile financial statements that comply with generally accepted accounting principles.

Also, despite genuine progress, ineffective asset accountability and lack of internal

controls continue to adversely affect visibility over weapon systems and inventories.

Further, unreliable cost and budget information negatively affects DOD’s ability to

effectively measure performance, reduce costs, and maintain adequate fund control. As

we recently testified, we are concerned that many of the planned financial management

improvement initiatives are designed to result in a one-time, year-end number for

financial statement purposes. As such, they will not result in the production of timely,

reliable, and useful financial and performance information for ongoing use by

management. In addition, the Department’s financial management deficiencies, taken
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together, continue to represent the single largest obstacle to achieving an unqualified

opinion on the U.S. government’s consolidated financial statements.

To address these deficiencies, in the short term, DOD needs to focus on improving its

basic processes and controls to better manage its every day operations. In the long term,

a sustained commitment from the highest levels of DOD leadership will be needed to

overhaul DOD’s financial systems and to ensure that personnel throughout the

Department share the common goal of establishing financial management systems and

processes that can not only produce financial statements that can withstand the test of

an audit, but more importantly routinely generate timely and reliable financial

information for day-to-day management purposes.

Information Technology Challenges

Effective management of information technology is also key to implementing many of

DOD’s planned management reforms. However, significant management weaknesses in

this area place the ultimate success of many reform initiatives at risk. Effective systems

modernization requires the Department to implement fundamental management

controls, such as integrated enterprise architectures, disciplined investment

management practices, and mature system development and acquisition processes, that

ensure mission performance and accountability. However, this is not occurring on a

systematic basis within DOD. The Department recognizes that improvements are needed

in information technology management, such as comprehensive and integrated

enterprise architectures to guide and direct its modernization efforts and structured and

disciplined processes for selecting and controlling business technology options. Equally

important, we have also recommended that the Department ensure that corrective

actions are taken to address identified computer security vulnerabilities and more

accurately and realistically define the responsibilities, mechanisms, and expected

outcomes of its efforts to manage and integrate information assurance throughout DOD.

These vulnerabilities could seriously jeopardize operations and compromise the

confidentiality, integrity, or availability of sensitive information.

Acquisition Reform

Acquiring modern, effective, reliable, and safe weapons for the military forces is central

to accomplishing DOD’s mission. However, the weapon systems acquisition process

continues to be a high-risk area. Notwithstanding ongoing reform initiatives, the process

is still too slow and costly. Pervasive problems persist regarding the process to acquire

weapons; cost, schedule, and performance estimates; program affordability; and the use

of high-risk acquisition strategies such as acquiring weapons based on optimistic

assumptions about the maturity and availability of enabling technologies. Our work also

shows that leading commercial firms are getting the kinds of outcomes from their

development of new products that the Department seeks. Specifically, these firms are

developing increasingly sophisticated products in significantly less time and at a lower
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cost than their predecessors. Valuable lessons can be learned from the commercial

sector and applied to the development of weapon systems. Leading commercial firms

expect that their program managers will deliver high quality products on time and within

budget. We believe DOD should be required to apply these types of practices in its

acquisition management processes except in cases where there is a clear and compelling

national security reason not to.

Contract Management Reform

Closely related to the weapon systems acquisition process is the contracting for goods

and services. This is also a high-risk area at DOD. Over the last few years, several broadbased changes, including the establishment of key metrics, have been made to

acquisition and contracting processes and management to improve Department and

contractor relationships and rules. But we and the DOD Inspector General continue to

identify risks in contracting, including (1) improving oversight and accountability in the

acquisition of services, (2) preventing erroneous and improper payments being made to

its contractors, (3) implementing commercial practices for contract pricing, and (4)

managing health care contracts. Without effective control over its contract management

activities, DOD will continue to risk erroneously paying contractors millions of dollars

and perpetuating other financial management and accounting control problems.

Weak systems and controls also leave the Department vulnerable to fraud and improper

payment. For example, DOD continues to overpay contractors, although the full extent

of overpayments is not known. Under current law, contractors are not required to

inform DOD of the overpayment or to return the money prior to DOD issuing a formal

demand letter requesting repayment. In effect, the overpayment provides an interest free

loan to the contractor. Contractors should be required to notify the government of

overpayments when they become aware of them and to return the money promptly upon

becoming aware of the overpayments. If they do not return the money promptly, there

should be some economic consequence. We have testified that the application of

commercial best practices, such as the use of more cost-effective buying strategies for

commercial spare parts, can improve acquisition and contracting processes and help

reduce contract risk.

Support Infrastructure Inefficiencies

Regarding specific operations challenges, DOD has to address inefficiencies in its

support infrastructure. Again, while progress has been made in this area, more needs to

be done if the Department expects to reduce infrastructure costs and improve business

operations through its reform initiatives. After the Cold War, the defense force structure

and military spending were reduced, and the Department realized it must make its

operations and support infrastructure smaller, more efficient, and more responsive to

warfighter needs and to create savings for other needs like weapons modernization.

Although the Department has reduced its forces by about 25 percent and closed many
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bases, the percentage of its budget spent on support infrastructure has remained

relatively constant. Because of continued inefficiencies in its support infrastructure, this

continues as a high-risk area for the Department. The effectiveness of many civilian

agencies has also been undermined by outmoded organizational structures that drain

resources needed to make improvements to mission delivery capabilities. We

recommended that the Department develop and implement a comprehensive, integrated,

and long-range plan to sustain and fully implement its reform initiatives and also rightsize and recapitalize its facilities infrastructure.

Addressing facilities infrastructure will also require DOD to reach an agreement with the

Congress regarding the need for additional base realignment and closure rounds. The

Secretary of Defense and other officials have expressed concern that the Department

continues to retain more infrastructure than needed, despite four base closure rounds

between 1988 and 1995. Defense officials have proposed two additional rounds of base

closures and estimates new savings of $3.4 billion a year once realignment and closure

actions were completed and the costs of implementing these actions were offset by

savings. Our work has shown that, despite limitations in precision, past base

realignment and closure recommendations will result in substantial savings once

implementation costs have been offset and net savings begin to accrue. Further, we also

found that the majority of communities surrounding bases that were closed from 1988

through 1995 were faring well economically in relation to the national average. For

example, as of 1997, 68 percent of the communities had average or lower unemployment

compared with 60 percent in 1988. The infrastructure problems in civilian agencies also

suggest the possible relevance of a civilian facility closure and realignment process.

Logistics Support Inefficiencies

Providing economical and responsive logistics support is also central to achieving the

Department’s mission. While the system gets the job done, it is often described as a

brute force process that is uneconomical and inefficient. Although DOD has progressed

in improving logistics support, especially through the application of best inventory

management practices, serious weaknesses persist throughout its logistics activities, and

it is unclear to what extent its ongoing reengineering management improvement

initiatives will overcome them. A key area of the logistics process that remains high risk

is inventory management. The Department continues to spend more than necessary to

procure and manage inventory. As of September 30, 1999, DOD records showed that the

Department had inventory on order valued at about $1.6 billion that would not have been

ordered based on current requirements. At the same time, DOD has experienced

equipment readiness problems because of a lack of key spare parts. For years,

insufficient spare parts have been recognized as a major contributor to aircraft

performing at lower mission capable rates than expected. Again, sound integrated plans

for achieving logistics reforms are central to making improvements.
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To enhance DOD’s reengineering efforts, we have recommended that DOD develop an

overarching plan that integrates the individual service and defense agency logistics

reengineering plans to include an investment strategy for funding reengineering

initiatives and details for how DOD plans to achieve its final logistics system end state.

We also recommended that DOD reassess its schedule for testing, evaluating, and

implementing the initiatives; establish a methodology showing the savings or

improvements that come from reengineering concepts; and reassess its approach for

addressing various combat command concerns, such as the presence of increasing

numbers of contractor personnel on the battlefield. Also, to improve inventory

management, we recommended that DOD make more use of supply-chain best

management practices similar to those used in the private sector to help cut costs and

improve customer service.

Observations on DOD’s GPRA Performance Plan and Report

DOD has made substantial progress in improving its GPRA reporting. For example, DOD

identified and discussed the roles of federal agencies in crosscutting activities, added

more information on its efforts to ensure the credibility of its performance information,

and included initial goals and performance measures for financial management.

However, the extent to which DOD has achieved the key program outcomes is not

completely clear in its fiscal year 1999 performance report and fiscal year 2001

performance plan. One of the reasons for the lack of clarity is that most of the key

program outcomes DOD is striving to achieve are complex and interrelated and may

require a number of years to accomplish. Another, however, is that DOD did not provide

a full assessment of its performance. The report does not include any performance goals

and measures related to several key outcomes. Also, reported measures often did not

address a cost-based efficiency aspect of performance, making it difficult for DOD to

fully assess the efficiency as well as effectiveness of its performance. Additionally,

DOD’s performance report and plan did not include goals or measures to assess progress

in overcoming a major management challenge confronting the Department, namely

contracting. We recommended that the Secretary of Defense enhance DOD’s fiscal year

2002 performance plan and fiscal year 2000 performance report by considering

additional qualitative and quantitative information in the areas cited by our analysis.

CHALLENGES FACING THE DEPARTMENT OF STATE

In carrying out its mission, the Department of State faces a number of significant

performance and accountability challenges, as our work has shown. In addition to the

governmentwide challenges in the human capital and computer security areas, the State

Department’s challenges cover a wide spectrum of U.S. government operations around

the world affecting Americans at home and abroad.
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Performance and Accountability Challenges

• Improve the security and maintenance of U.S. facilities overseas

• Help decrease the level of illegal drugs entering the United States

• Address the threats illegal immigration continues to pose to Americans at home

• Address additional challenges to building a high-performing organization

Embassy Security

State’s most critical infrastructure need is to enhance the protection of U.S. embassies

and other overseas facilities in response to the increased threat due to terrorism. State

has taken many steps to upgrade security at its diplomatic missions around the world

since the 1998 bombings in Africa. These improvements include deploying hundreds of

additional security agents overseas and enhancing physical security through a variety of

means. In addition, State has begun replacing some of its most vulnerable embassies and

consulates with more secure facilities. State estimates that it will cost $15 billion over 10

to 15 years for projects in more than 180 locations. Our work has shown that State will

face several challenges in administering this extensive security construction program,

including right-sizing its overseas posts; improving long-term planning for the program;

and working with the Congress in charting the future course, priorities, and funding

levels for the program. Right-sizing of overseas posts, which may include use of

relatively large regional or “hub” embassies, with smaller embassies in other locations,

may have potential for reducing overall security costs and vulnerabilities. We

recommended that State develop a long-term, capital construction plan to assist

decisionmakers in reaching consensus on the program. Successful implementation of

overseas security enhancements and construction activities will improve the safety and

security of U.S. employees working abroad.

Drug Control

Illegal drugs, primarily cocaine and heroin, continue to threaten the health and wellbeing of American citizens. The principal source of cocaine and heroin entering the

United States is South America, and specifically Colombia. In 1993, the United States

developed a policy designed to reduce the production of illegal drugs in South America

and stem their flow through Latin America and the Caribbean. Our work has shown that

billions of dollars invested by the United States and foreign countries to carry out this

policy have resulted in the arrest of major drug traffickers and the seizure of large
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amounts of drugs, but the availability of drugs in the United States has not been

materially reduced. To continue to attack this problem, the Congress recently provided

more than $1 billion in counternarcotics assistance to Colombia, which State will largely

oversee. In October 2000, we reported that State had experienced difficulty effectively

managing past assistance to Colombia and recommended that State develop

implementation plans to ensure that the new assistance is well managed and used

effectively. We also noted that a sustained long-term commitment will be necessary to

notably reduce the level of illegal drugs entering the United States. Ultimately, to

successfully implement an international drug control strategy, State will have to

coordinate with numerous agencies, including Defense, Justice, and Treasury.

Illegal Immigration

State is responsible for providing expeditious visa processing overseas to qualified

applicants. State, in conjunction with the U.S. Immigration and Naturalization Service,

must also prevent the entry of those who are a danger to U.S. security or are likely to

remain in the United States illegally. Over the years, State has introduced new

technologies, equipment, and controls designed to improve visa processing and reduce

the incidence of fraud. However, based on our work and that of State’s Office of

Inspector General, visa processing remains a significant challenge for the Department.

The reasons for these problems include staffing shortages, inexperienced staff,

insufficient staff training, and difficulties in managing visa antifraud programs. State

recognizes that it must remain vigilant in these areas to further reduce the vulnerability

of the visa system and has several initiatives underway or completed to counter visa

fraud.

Additional Challenges

In addition to the specific performance challenges cited previously, State faces several

other agencywide performance and accountability challenges that hamper its ability to

become a high-performing organization. These challenges are (1) better utilizing the

1993 Government Performance and Results Act process to help achieve its objectives,

(2) enhancing communication and information technology and security, (3) improving

financial management, (4) adopting modern human capital practices, and (5)

restructuring the U.S. overseas presence to improve the efficiency and effectiveness of

operations. State has recognized these challenges and has demonstrated a commitment

to addressing them, as follows:

• State has improved its strategic and performance planning to better capture its goals

and measures, but its performance reporting needs to better demonstrate progress

toward meeting its goals.
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• State has implemented many of our information technology and security

recommendations; however, new challenges have emerged as State embarks on

developing an interagency technology platform with its inherent security risks.

• State has made progress toward its goal of improving financial systems but still needs

to bring its systems into full compliance with federal financial systems requirements

and resolve internal control weaknesses. Unlike previous financial reports, State was

on time in issuing its financial statement report that contained an unqualified opinion

on its fiscal year 2000 financial statements. However the auditors reported that

State’s financial management systems were not in compliance with the Federal

Financial Management Improvement Act of 1996, which requires federal agencies to

implement and maintain financial management systems that comply substantially

with federal financial management system requirements. Further, a material

weakness and several reportable conditions in its internal controls remain

unresolved.

• Consistent with our studies of best practices in high performance organizations,

State’s in-house studies highlighted the importance of developing a human resource

strategy that is in line with its mission. For example, the Overseas Presence Advisory

Panel convened by the Secretary of State concluded that State needed to reform its

human resource practices because it does not currently have the flexibility,

resources, or strategic organization required to support its mission.

• Over the years, we have recommended that State reassess its overseas structure in

light of changing political, economic, security, and technological requirements, and,

this effort is currently underway.

We believe that addressing these issues will be critical to State’s ability to effectively

carry out U.S. foreign policy.

Observations on State’s GPRA Performance Plan and Report

As required by GPRA, State has clearly articulated its strategic and diplomatic readiness

goals of regional security, economic growth, and more. Our review of State’s

performance plans for fiscal years 1999 through 2001 indicates that State continues to

improve its planning but additional improvements are needed to measure and assess

performance in a meaningful way. State’s fiscal year 2001 performance plan provides

much more detail on its intended performance compared to prior years’ plans. However,

State’s approach of listing individual performance goals and measures by bureau does

not lend itself to assessing the agency's performance as a whole. Further, the

Department has not developed overall priorities for achieving its strategic goals, and,

consequently, has no overall basis for allocating resources to priorities.
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The Department’s fiscal year 1999 performance report, the first one required under

GPRA, lists numerous foreign policy accomplishments from the signing of peace

agreements to trade agreements, but it does not adequately demonstrate State’s level of

success or participation in achieving the desired outcomes. Additionally, it was unclear

how much the Department contributed to some of the outcomes it discussed or how

unmet goals would be achieved in the future. For example, under the regional stability

strategic goal, the performance report states that "U.S. access to Persian Gulf oil

resources continued uninterrupted" but does not identify how the Department has

contributed to that positive outcome. Under expanding foreign markets, State did not

indicate how it would meet its unmet targets for completing bilateral investment treaties

with target countries.

CHALLENGES FACING THE DEPARTMENT OF VETERANS AFFAIRS

The Department of Veterans Affairs’ mission reflects the nation’s historic commitment to

care for veterans, their families, and their survivors. VA administers a variety of

programs, including one of the world’s largest health care systems. The Department

estimates that, in fiscal year 2000, it spent about $42 billion--more than 80 percent of its

total budget--to provide health care services to 3.6 million veterans and to pay disability

compensation and pensions to over 2.5 million veterans and their families and survivors.

In addition to the governmentwide challenges in the human capital and computer

security areas, VA faces several performance and accountability challenges.

Performance and Accountability Challenges

• Ensure timely and equitable access to quality VA health care

• Maximize VA's ability to provide health care within available resources

• Process veterans' disability claims promptly and accurately

• Develop sound agencywide management strategies to build a high-performing

organization

Health Care Access

Over the past several years, VA has undertaken many initiatives to improve veterans’

overall access to VA-provided health care, such as shifting its emphasis from inpatient to

outpatient primary care and increasing the number of outpatient clinics it operates. VA

has also undertaken efforts to improve the quality of the care it provides, including
Page 15 GAO-01-492T

introducing patient safety initiatives. However, several areas require continued

emphasis if VA is to achieve its goals. For example, VA cannot ensure that veterans

receive timely care at VA medical facilities. Nor can it ensure that it has maintained the

capacity to provide veterans who have spinal cord injuries, serious mental illnesses, or

other special needs the care that they require, as mandated by the Congress. VA must

also assess its capacity to provide long-term care for its aging veteran population and

respond to emerging health care needs, such as treating veterans for hepatitis C. At the

same time, VA is facing a potential shortage of skilled nurses—if nationwide projections

for the next several years bear out, which could have a significant effect on VA’s quality

of care initiatives.

To begin to respond to these concerns, VA must address long-standing weaknesses in the

quality and reliability of its workload and cost data. Without good data, VA cannot link

its strategic planning to areas that need improvement or emphasis, appropriately budget

for and allocate funds and other resources, or measure its performance in providing care

for all veterans enrolled in its health care system. We have made recommendations

related to improving data on waiting times and services for disabled veterans. More

specifically, we recommended that VA determine the extent and causes of waiting times

and then develop a spending plan with initiatives that would solve the identified

problems, as well as enhance monitoring of potential service delivery problems for

veterans.

Health Care Resource Utilization

To expand care to more veterans and respond to emerging health care needs, VA must

continue to aggressively pursue opportunities to use its health care resources--including

its appropriation of about $20 billion--more wisely. VA has reduced its per-patient costs--

one of its key performance measures--by 16 percent, but it could achieve additional

efficiencies by realigning capital assets and human capital based on changing

demographics and veterans’ health care needs. For example, VA needs to further modify

its infrastructure to support its increased reliance on outpatient health care services and

expand its use of alternative methods for acquiring support services, such as food and

laundry. VA spends as much as one-quarter of its annual health care budget to operate

and maintain about 4,700 buildings and 18,000 acres of property. Savings achieved from

eliminating or reducing unneeded facilities could be reinvested toward providing more

and better care to veterans. However, the ability to close unneeded facilities may not

totally be within VA’s control and, ultimately, a nonpartisan commission similar to DOD’s

base closure process may be necessary.

VA also needs to pursue additional opportunities with DOD to determine cost-effective

ways to serve both veterans and military personnel, including sharing services and

facilities. For example, opportunities exist to jointly procure pharmaceuticals, medical

supplies, and equipment that each now procures separately. In addition, VA must ensure
Page 16 GAO-01-492T

that it collects the money it is entitled to from third-party payers for health care services

they have provided to veterans whose conditions are not service-connected.

To start to realize these efficiencies, VA has committed to systematically assessing its

future infrastructure and health care services needs within its 22 Veterans Integrated

Service Networks as well as continuing to involve key officials in its strategic planning

efforts and decision-making processes. We have made several recommendations to VA

that would help improve its infrastructure planning, provide more cost-effective support

services, and enhance sharing with DOD.

Disability Compensation

VA must also turn around its long-standing difficulties in ensuring timely and accurate

decisions on veterans’ claims for disability compensation. Veterans with a broad array of

conditions, ranging from combat injuries to chronic illnesses (such as diabetes) incurred

or aggravated while on active duty, are eligible for compensation. VA has improved its

quality assurance system in response to our recommendations, but large and growing

backlogs of pending claims and lengthy processing times persist. Moreover, veterans are

raising concerns that claims decisions are inconsistent across VA’s 57 regional offices.

VA is taking steps to improve its information systems, performance measures, training

strategies, and processes for reviewing claims accuracy. However, VA also needs better

analyses of its processes in order to target error-prone types of cases and identify

processing bottlenecks – as well as determine if its performance goals are realistic. In

addition, although VA disability payments are intended to compensate for potential

losses in earnings capacity, VA’s outmoded rating schedule reflects the industrial

economy of 1945 rather than today’s knowledge-based economy.

VA also needs to be vigilant in its human capital strategies to ensure that it maintains the

necessary expertise to process claims as newly hired employees replace many

experienced claims processors over the next 5 years. VA’s human capital problems can

be seen as part of a broader pattern of human capital shortcomings that have eroded

mission capabilities across the federal government.

Management Capacity

Finally, VA has much more work to do to become a high-performing organization and

increase veterans’ satisfaction with its services. It must revise its budgetary structure

and develop long-term, agencywide strategies for ensuring an appropriate information

technology infrastructure and sound financial management. If its budgetary structure

linked funding to performance goals, rather than program operations, VA and the

Congress would be better positioned to determine the Department’s funding needs. VA’s

information technology strategy, which aims to provide veterans and their families

coordinated services, must be successfully executed to ensure that VA can produce

reliable performance and workload data and safeguard financial, health care, and
Page 17 GAO-01-492T

benefits payment information. Last, similar to most other major agencies, VA’s financial

management strategies must ensure that its systems produce reliable cost data and

address material internal control weaknesses and Federal Financial Management

Improvement Act requirements. In this regard, VA received an unqualified opinion on its

consolidated financial statements for fiscal years 2000 and 1999. However, the auditor

identified computer security and integrated financial management system and control

issues as material internal control weaknesses and reported that VA was not in

substantial compliance with federal financial management systems requirements under

the Federal Financial Management Improvement Act of 1996.

Observations on VA’s GPRA Performance Plan and Report

Overall, VA’s fiscal year 1999 performance showed progress in providing quality health

care at a reasonable cost. On the other hand, VA has not made significant progress in

restructuring its health care infrastructure. The performance goals were objective,

measurable, quantifiable, and generally results-oriented. For cases in which goals were

not met, the performance report provided means and strategies for achieving future

goals. In addition, the report provides means and strategies for achieving future goals

that VA considers most important. VA revised its health care performance goals and

measures for fiscal years 2000 and 2001 to reflect actual fiscal year 1999 performance as

well as VA’s latest evaluation of how to best measure its success. VA also made other

changes, including dropping and adding performance goals, because some goals were

unrealistic, too many goals made it difficult to focus on the more outcome-oriented ones,

and some goals were met early.

VA failed by substantial margins to meet its fiscal year 1999 performance goals for timely

and accurate processing of veterans’ disability compensation and pension benefit claims.

The performance reports explained why it failed to meet its goals and provided means

and strategies for meeting its future goals. VA also revised its performance goals for

fiscal years 2000 and 2001 to make them more realistic. Although its goals are objective,

measurable, and quantifiable, VA is still developing results-oriented goals for the

compensation and pension programs.

SUMMARY

This is a particularly opportune time to look at the management challenges facing the

federal government and especially as we did today, the challenges facing the

Departments of Defense, State, and Veterans Affairs. This is a time of transition for the

Congress and the administration. As our nation moves into the 21st century, the 107th

Congress and the new administration face an array of challenges and opportunities to

enhance the performance and ensure the accountability of the federal government for

the benefit of all Americans. We should seize the opportunity to address the

governmentwide challenges, including addressing such issues as what the government

does and how the government should do business in the 21st century. At the same time,
Page 18 GAO-01-492T

we have an obligation to look beyond the near term to prolonged fiscal challenges

including such things as the long-term implications of today’s decisions and the impacts

of the coming demographic tidal wave.

Specifically, as it relates to DOD, State, and VA, the agencies have taken actions to

address the various challenges we have identified. However, as we have noted today,

much more needs to be done and this is particularly the case for DOD. For example,

DOD is working to improve its weapon systems acquisition process, but it still needs to

create a better environment for starting and managing weapon systems development

programs. Similarly, State is working to improve security at its diplomatic missions

around the world by deploying hundreds of additional security agents overseas and

replacing some of its vulnerable embassies and consulates with more secure facilities,

but faces several challenges in administering the extensive security construction

program. In addition, VA is working to improve veterans’ overall access to VA-provided

healthcare, but it still must continue to aggressively pursue opportunities to use its

health care resources more wisely.

Effectively addressing governmentwide and specific challenges will require sustained

attention by the Congress and the administration over a period of years. In our report on

Major Management Challenges and Program Risks: A Governmentwide Perspective, we

lay out various approaches that have provided effective oversight of key management

challenges such as the year 2000 challenge and implementation of key legislation on

government performance results, financial management, and information technology

management. We also suggest other mechanisms that could be used to facilitate

oversight.

The stakes are high, and we stand ready to help the Congress and the administration to

address these management challenges by providing professional, objective, and

constructive assistance. Mr. Chairman, this concludes my statement. I will be happy to

respond to any questions you or other members of the Subcommittee may have.
Appendix I Appendix I

Page 19 GAO-01-492T

MANAGEMENT CHALLENGES

 Acquisition X

Contracts X

 Logistics X

 Embassy Security X

 Drug Control X

 Illegal Immigration X

 Health Care X X

 Disabilities Programs X

DOD STATE VA

Strategic Challenges

 Planning X X X

 Human Capital XXX

 Information Technology X X X

 Financial Management X X

 Infrastructure X X X 

 Interagency Coordination XXX

Operational Challenges

Note: Bold ìXî indicates all or a portion of this area was deemed to be

high risk in GAOís January 2001 High-Risk Series update (GAO-01-

263). The Human Capital and Information Technology challenges are

in bold to indicate that they are governmentwide high-risk areas..

Source: GAOís Performance and Accountability and High-Risk Series

and Government Performance and Results Act reports.
Appendix II Appendix II

Page 20 GAO-01-492T

PERFORMANCE AND ACCOUNTABILITY SERIES

Major Management Challenges and Program Risks: A Governmentwide Perspective

(GAO-01-241).

Major Management Challenges and Program Risks: Department of Agriculture (GAO-01-

242).

Major Management Challenges and Program Risks: Department of Commerce (GAO-01-

243).

Major Management Challenges and Program Risks: Department of Defense (GAO-01-

244).

Major Management Challenges and Program Risks: Department of Education (GAO-01-

245).

Major Management Challenges and Program Risks: Department of Energy (GAO-01-246).

Major Management Challenges and Program Risks: Department of Health and Human

Services (GAO-01-247).

Major Management Challenges and Program Risks: Department of Housing and Urban

Development (GAO-01-248).

Major Management Challenges and Program Risks: Department of the Interior (GAO-01-

249).

Major Management Challenges and Program Risks: Department of Justice (GAO-01-250).

Major Management Challenges and Program Risks: Department of Labor (GAO-01-251).

Major Management Challenges and Program Risks: Department of State (GAO-01-252).

Major Management Challenges and Program Risks: Department of Transportation (GAO01-253).
Appendix II Appendix II

Page 21 GAO-01-492T

Major Management Challenges and Program Risks: Department of the Treasury (GAO-01-

254).

Major Management Challenges and Program Risks: Department of Veterans Affairs

(GAO-01-255).

Major Management Challenges and Program Risks: Agency for International

Development (GAO-01-256).

Major Management Challenges and Program Risks: Environmental Protection Agency

(GAO-01-257).

Major Management Challenges and Program Risks: National Aeronautics and Space

Administration (GAO-01-258).

Major Management Challenges and Program Risks: Nuclear Regulatory Commission

(GAO-01-259).

Major Management Challenges and Program Risks: Small Business Administration (GAO01-260).

Major Management Challenges and Program Risks: Social Security Administration (GAO01-261).

Major Management Challenges and Program Risks: U. S. Postal Service (GAO-01-262).

High-Risk Series: An Update (GAO-01-263).

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