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[Senate Hearing 107-39]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 107-39

                       NOMINATION OF SEAN O'KEEFE

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                 ON THE

NOMINATION OF SEAN O'KEEFE TO BE DEPUTY DIRECTOR, OFFICE OF MANAGEMENT 
                               AND BUDGET

                               __________

                           FEBRUARY 27, 2001

                               __________

      Printed for the use of the Committee on Governmental Affairs

                    U.S. GOVERNMENT PRINTING OFFICE
71-299 cc                   WASHINGTON : 2001
_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402

                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
SUSAN M. COLLINS, Maine              CARL LEVIN, Michigan
GEORGE V. VOINOVICH, Ohio            DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico         RICHARD J. DURBIN, Illinois
THAD COCHRAN, Mississippi            ROBERT G. TORRICELLI, New Jersey
JUDD GREGG, New Hampshire            MAX CLELAND, Georgia
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
                                     JEAN CARNAHAN, Missouri
             Hannah S. Sistare, Staff Director and Counsel
                        Robert J. Shea, Counsel
                       Johanna L. Hardy, Counsel
     Joyce A. Rechtschaffen, Democratic Staff Director and Counsel
                 Deborah C. Lehrich, Democratic Counsel
         Peter A. Ludgin, Democratic Professional Staff Member
                     Darla D. Cassell, Chief Clerk

                            C O N T E N T S

                                 ------                                
                                                                   Page

Opening statements:
    Senator Thompson.............................................     1
    Senator Stevens..............................................     3
    Senator Lieberman............................................     5
    Senator Domenici.............................................     7
    Senator Voinovich............................................     8
    Senator Bennett..............................................    11
    Senator Levin................................................    24

                               WITNESSES

Hon. James T. Walsh, a Representative in Congress from the State 
  of New York....................................................     4
Sean O'Keefe to be Deputy Director of the Office of Management 
  and Budget.....................................................    12

                     Alphabetical List of Witnesses

O'Keefe, Sean:
    Testimony....................................................    12
    Prepared statement...........................................    27
    Biographical and financial information.......................    29
    Pre-hearing Questions and Responses..........................    40
    Additional Pre-hearing Questions and Responses from Senator 
      Lieberman for Mr. O'Keefe..................................    70
    Additional Pre-hearing Questions and Responses from Senator 
      Lieberman for Mr. O'Keefe..................................    76
    Post-hearing Questions and Responses from Senator Lieberman 
      for Mr. O'Keefe............................................    81
    Post-hearing Questions and Responses from Senator Voinovich 
      for Mr. O'Keefe............................................    87
    Post-hearing Questions and Responses from Senator Akaka for 
      Mr. O'Keefe................................................    93
Walsh, Hon. James T.:
    Testimony....................................................     4

 
   NOMINATION OF SEAN O'KEEFE TO BE DEPUTY DIRECTOR OF THE OFFICE OF 
                         MANAGEMENT AND BUDGET

                              ----------                              

                       TUESDAY, FEBRUARY 27, 2001

                                       U.S. Senate,
                         Committee on Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:38 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Fred 
Thompson, Chairman of the Committee, presiding.
    Present: Senators Thompson, Stevens, Voinovich, Domenici, 
Bennett, Lieberman, and Levin.

             OPENING STATEMENT OF SENATOR THOMPSON

    Chairman Thompson. The Committee will be in order, please. 
This morning we are holding a hearing to consider the 
nomination of Sean O'Keefe to be Deputy Director of the Office 
of Management and Budget. OMB has responsibility for 
implementing a number of statutes, aimed at ensuring the 
efficiency and effectiveness of government operation. As deputy 
director of OMB, the person who assists the director daily in 
his many responsibilities, you can have a great impact in this 
area. As I mentioned to Mitch Daniels when he was before the 
Committee, I believe that OMB's responsibilities for the 
management of the Federal Government have been neglected.
    I was gratified by his February 14 memo to agency heads, 
asking that they set goals for achieving major government-wide 
management reforms in their fiscal year 2002 performance plans. 
That same memo made the point that agencies should have goals 
for achieving any reforms that will significantly enhance the 
administration and operation of the agency. That is a very good 
start. As you know, this Committee is the recipient of endless 
agency, inspector general, and General Accounting Office 
reports that detail the poor state of management in today's 
Executive Branch. This mismanagement is not outrageous just 
because it wastes scarce resources. Mismanagement means that 
those resources are diverted from the purposes for which they 
were appropriated.
    When a benefit program makes improper payments the intended 
beneficiaries suffer. When major information technology 
products are mismanaged, not only are tax dollars wasted, but 
we miss opportunities to benefit from greater efficiency and 
increased productivity. The financial management woes that 
befall most Federal agencies mean that we cannot even say with 
certainty that the American people have gotten what they paid 
for.
    The information technology area is a particular problem 
with the Federal Government. The Federal Government finds it 
extremely difficult to use information technology to enhance 
its efficiency and effectiveness. The Federal Aviation 
Administration spent $4 billion on an air traffic modernization 
program that did not work and was shut down before completion. 
The Internal Revenue Service spent $7 billion on its tax 
systems modernization project before they had to scrap it.
    I recently met with Commissioner Rossotti to discuss reform 
efforts at the IRS and he reported that after 3 years they have 
just completed the consolidation of its major systems, which is 
just the beginning of the IRS' modernization program. This 
Committee's investigation also uncovered weaknesses in 
government information systems that make them vulnerable to 
computer attacks from international and domestic terrorists, 
crime rings and everyday hackers.
    As a result, Senator Lieberman and I worked to enact the 
Government Information Securities Act, a bill to provide a new 
framework for protecting the security of the government's 
computers from outside attacks by hackers. These weaknesses 
jeopardize government operations and threaten the privacy of 
our citizens and I hope that OMB will help to ensure that the 
bill is implemented properly.
    Human capital is also an area where the government has 
fallen short. In recent years, the Federal Government reduced 
staffing without cutting back on anything it does. Workforce 
downsizing became just a numbers game carried out randomly, 
rather than strategically. Consequently many agencies now face 
severe shortages of employees with the necessary skills and 
expertise to carry out agency missions. It is quite clear, 
based on the work of this Committee, especially Senator 
Voinovich, that there is mounting evidence that workforce 
deficiencies are an impending crisis for the Federal 
Government.
    I believe, Senator Voinovich, you have told us that within 
the next 5 or 6 years, half of the workforce today is eligible 
for retirement. We need your expertise, Mr. O'Keefe, and input 
in crafting solutions to these problems. Over the last decade 
Congress enacted a number of laws designed to change how 
Washington works. The Government Performance and Results Act, 
which seeks to change the mind set of Washington from what 
government does, such as spending money, and issuing 
regulations to what actual results and activities those actions 
produce.
    Now, more than 7 years later, we still find that most 
agencies have difficulty explaining what results they are 
trying to achieve in measuring how well they are performing. 
Integrating budget and performance information would be a step 
in the right direction of finding out just how well the 
government is doing. That is something obviously we could spend 
a lot of time just listening to you and Senator Stevens 
discuss.
    I think it is becoming more and more apparent that until we 
integrate some of these performance measures into the budget 
submissions and then we, in our appropriations process, take 
that into account, nobody is going to take the Results Act 
seriously. I think we are on trial. I think OMB is on trial and 
Congress is on trial as to whether or not this is our last best 
chance to get a results-focused government.
    I am heartened by the management experience, Mr. O'Keefe, 
that you bring to this position, especially the exposure that 
you have had to some of the government's management statutes, 
and I am particularly interested to learn how you will leverage 
the power of the purse to obtain some of the management 
improvements that we are seeking. The only answer to these 
problems is strong leadership, and I hope you will bring that 
to your stewardship of the budget process and that we will see 
a marked improvement in the efficiency of government operations 
under your watch.
    Mr. O'Keefe has filed responses to biographical and 
financial questionnaires, answered pre-hearing questions 
submitted by the Committee, and had his financial statements 
reviewed by the Office of Government Ethics. Without objection, 
this information will be made a part of the hearing record with 
the exception of the financial data, which is on file and 
available for public inspection in the Committee files.\1\
---------------------------------------------------------------------------
    \1\ The biographical and financial information appear in the 
Appendix on page 29.
     Pre-hearing questions and responses appear in the Appendix on page 
40.
     Post-hearing questions and responses appear in the Appendix on 
page 70.
---------------------------------------------------------------------------
    Gentlemen, I am amenable to proceeding however you wish. I 
do not know what the schedules of Senator Stevens and 
Congressman Walsh are. Senator Lieberman, I do not know what 
your schedule is. Would you care to make your statement now?
    Senator Lieberman. Well, Mr. Chairman, operating on the 
rule that I learned early in my time in the Senate, that it 
never hurts to do a favor for the Chairman of the 
Appropriations Committee, I would ask Senator Stevens if he is 
in a hurry. I am going to be here awhile. You are welcome to go 
forward.
    Chairman Thompson. Senator Stevens.

              OPENING STATEMENT OF SENATOR STEVENS

    Senator Stevens. Well, thank you very much. As a matter of 
fact, I do have some problems. I have already told my friend 
Sean O'Keefe that I will have to leave soon, but gentlemen, I 
think one of the most gratifying parts of serving in this 
institution that I have had for more than 30 years now is to 
observe and share in the advancement of someone that you really 
care about; 12 years ago, I introduced Sean O'Keefe to the 
Senate Armed Services Committee when he was nominated to become 
the comptroller of the Department of Defense.
    I said then that Sean has the integrity and dedication to 
public service that it takes to move into a position like this. 
I also observe that if there is anyone who knows how to crunch 
numbers and make them meaningful to the people who try to 
understand them, Sean can do that. It is a privilege to be here 
with Sean, who is now the nominee to become Deputy Director of 
the Office of Management and Budget. There is a lot I could say 
about him this morning.
    I think you know he was staff director of the Defense 
Subcommittee when I was chairman of that Subcommittee, and he 
served as comptroller at DOD and also as Secretary of the Navy, 
and as Senator Thompson has indicated, you have a lot of 
materials now. He has provided the answers to questions that we 
all have available to us as members of this Committee, but I am 
here for one purpose, and that is to tell you that I not only 
have worked with Sean and I recommend him as a person I know 
and personally trust, but I can also tell you that while I 
worked with him on the Committee, I have also fished with him 
at 5 a.m. on the Nacdec River in Alaska. You get to know a man 
when you are out on trips like that, and I can tell you Sean's 
word is more than his bond; it is a real commitment, and I 
think it is a great thing to see a person who has come through 
both positions in the Executive Branch--and worked here as long 
as he did, here in the Senate--take this position.
    Let me make sure that we understand each other. I do not 
think each one of us here will agree with Sean every time. I 
know I will not. But he has got a job to do and he will do it. 
The difference between Sean and others I have known is that 
when you disagree with him, he will look you in the eye and 
tell you why he did what he did, and you can trust his answer 
will be truthful. He will not evade and he will not try to duck 
the problems of confrontation, as you will probably see this 
morning.
    But I do think that he has the background and the ability 
to do just what the Chairman said, make some difference at the 
Office of Management and Budget. I hope as a Member of the 
Committee that the Committee will see fit to consider this 
appointment and report it out as quickly as possible so that 
someone will be down there who does understand this. I am a 
little bit worried about some of the things I am hearing 
already. Maybe the Chairman of the Budget Committee can take 
that on, but I do believe that there ought to be more 
understanding of the process of the Congress in terms of 
reviewing some of these changes in the budget, and Sean has 
that ability.
    What the total impact of that will be remains to be seen, 
but he is a good man for the job and I am pleased to recommend 
him to the Committee, and I thank you very much. I thank you, 
Congressman, for allowing me to go first, and I will go back to 
my Committee, if I might, unless you have some questions, 
George.
    Chairman Thompson. He will submit them in writing. Thank 
you very much.
    Senator Voinovich. I am afraid of the answers.
    Chairman Thompson. Congressman Walsh, thank you for being 
with us.

STATEMENT OF HON. JAMES T. WALSH, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF NEW YORK

    Mr. Walsh. Thank you, Mr. Chairman, Members of the 
Committee. I am here this morning with Senator Stevens to lend 
my support to Sean O'Keefe and his candidacy for the position 
of Deputy Director of the White House Office of Management and 
Budget. I think it is interesting that two appropriators are 
here to introduce him before your Committee. Obviously, we have 
an interest in our relationships with OMB, and we are delighted 
that he will, with your assistance and your affirmation, be 
joining OMB. Sean is currently the Louis A. Bantle professor of 
Business and Governmental Policy at Syracuse University's 
Maxwell School of Government and Citizenship--Public Affairs. 
Prior to his arrival in Syracuse, my hometown, he was professor 
of business administration and assistant to the dean of the 
graduate school of Penn State University.
    As you know, he served as Secretary of the Navy and 
comptroller and chief financial officer for the Department of 
Defense during the first Bush Administration. He also has 
significant experience on Capitol Hill. As Senator Stevens 
mentioned, he served as staff director of the Defense 
Appropriations Subcommittee. It is hard to believe that Sean 
and his family are interested in relocating to Washington at 
this time of year, especially considering Syracuse's balmy 
temperatures and snow-free skies, but in spite of that 
questionable judgment, I felt it my responsibility to be here 
to offer my enthusiastic support for his nomination.
    Throughout his previous public service to our Nation, Sean 
has conducted himself with the utmost integrity and respect for 
the institutions that define our government. He unquestionably 
possesses the experience and background necessary to be 
successful in this position. His even temperament will hold him 
in good stead as he works closely with members of the Senate 
and House to develop our budget allocation and appropriate 
those funds.
    It has been reported that Professor O'Keefe's imparts a 
vigorous work ethic to all of his students, an attribute that 
he has maintained throughout his professional life, and I 
believe that, too, will serve him well here. I know I speak for 
my colleagues on the House Appropriations Committee when I say 
that I am looking forward to working with Sean O'Keefe in his 
new capacity at OMB for years to come, and I encourage your 
affirmative and timely consideration of his nomination and I 
thank you very much for your time and attention.
    Chairman Thompson. Thank you very much, Congressman Walsh.
    Senator Lieberman.

             OPENING STATEMENT OF SENATOR LIEBERMAN

    Senator Lieberman. Thanks, Mr. Chairman. Thanks, 
Congressman. Welcome, Mr. O'Keefe, good to see you. Welcome 
back, I suppose I should say, after the years you have been on 
the Hill--probably should keep this a secret, because it might 
affect your confirmability, but I had the pleasure, Mr. 
Chairman, of working with Mr. O'Keefe on a task force on 
defense national security awhile ago and I was really most 
impressed with your service. Overall, you have a very 
impressive resume. Your background in navigating the ins and 
outs of the Federal bureaucracy and your experience in teaching 
executive leadership seems to me to be extremely well-suited to 
the position for which you have been nominated, a position that 
demands at the very least knowledge of fiscal and budgetary 
affairs, but also preferably an understanding of the broad 
implication of Federal policies on the lives of average 
Americans.
    As you well know, OMB has authority over a vast domain; 
that is, how every Federal dollar is spent and how every 
Federal program is managed, no doubt few people outside of the 
beltway are aware of the power vested in the agency, not just 
to manage the money, but really to help shape the core policies 
of the administration. I have some concerns about the budgetary 
core policies of the administration.
    This is not really the place to go into them in detail, but 
I want to come to one part of it, and my concerns are, as you 
have probably heard from others, if not from me, the tax cut is 
too large. I fear it will crowd out our ability to spend on 
other priority programs and perhaps take us back into debt. But 
based on your background in national security, I do want to 
make this appeal to you.
    I think you have, from that background, the credibility to 
be an advocate within the inner circles of this administration 
for adequate funding for our national security. Some of the 
steps that Secretary Rumsfeld has taken in recent weeks to 
initiate strategic review are quite heartening to me. Obviously 
this is only the beginning. We do not know what it is going to 
produce, but I think he is turning to people such as Andy 
Marshall and others, who are independent and fresh thinkers. So 
I am hopeful that we are going to have some innovative and bold 
recommendations here.
    We know that change is going to be difficult, both because 
of resistance to it from within the Pentagon and from within 
Congress, but I hope we can make that happen. What I want to 
stress here is, I think, that not only do we need more funding 
to take care of our military in terms of quality of life of the 
people in uniform, in terms of maintenance and operation and 
repair parts, and the systems and equipment we are depending on 
now, but if we embark on a bold course of transformation of our 
national security structure, as is at least suggested by some 
of the steps that Don Rumsfeld has taken, personally I think 
that is going to cost money, too.
    In other words, I think, its money well-spent, depending on 
how we spend it, but that, too, will cost. So my appeal today, 
based on your experience in defense appropriations here and 
your service as Secretary of the Navy and your previous 
experience as comptroller and chief financial officer at the 
Pentagon, is that you be a vigorous advocate within the 
counsels of the administration for exactly that kind of 
support.
    I want to mention briefly one other matter, and that is 
OMB's oversight of the Executive Branch regulatory process. The 
new administration's intentions as expressed in the so-called 
Card memo, which is Andy Card's memo to delay already finalized 
Federal regulations, I fear, could jeopardize a number of 
health, safety, worker, consumer and environmental protections. 
This Committee was actively involved in sorting out problems in 
the early years of regulatory review, problems that genuinely 
did undermine public trust in the fairness of the process.
    So I wanted to ask you as you go forward to be vigilant and 
oppose those who would use the process as a conduit to 
influence rule-making off the record and without disclosure, 
which is something we on this Committee are very concerned 
about. As you may know, along with several colleagues, I have 
written to OMB Director Mitch Daniels seeking information on 
the administration's plans in this regard, because I think it 
is very important that regulatory agencies be able to do what 
Congress asked them to do in order to protect the public 
interest, and I hope in your role you will encourage 
cooperation at OMB to help us conduct our oversight duties of 
this serious matter.
    Bottom line, you are extraordinarily well-prepared for this 
position. I thank you for being willing to take it. You have 
your adorable lovely family with you. I thank them for being 
willing to support your interest and service here. I just want 
to ask you one question. You can answer it now or on the record 
later. Did Stevens or you catch the bigger fish?
    Mr. O'Keefe. He always catches the bigger fish.
    Senator Lieberman. That is the right answer. Thank you.
    Mr. Walsh. Mr. Chairman, if there are no questions, I will 
excuse myself and return to my office.
    Chairman Thompson. Thank you very much. Senator Domenici, I 
know you have a Committee to chair, so with Senator Voinovich's 
indulgence, I will call on you.

             OPENING STATEMENT OF SENATOR DOMENICI

    Senator Domenici. Thank you, Mr. Chairman. I will not take 
long. Sean O'Keefe, it is great to see you here in this 
position. I wish you the best of luck. I might observe for you 
and perhaps for this Committee that your biggest job is based 
on the following that has already occurred. For the last 2 
years in a row, the appropriated accounts of our government 
have grown 8 percent and 9 percent respectively. Prior to that 
we had 3 years when we grew at less than 4 percent. The only 
thing I can find that distinguishes the 3 years or 4 years is 
that we spent 8 percent because we had a surplus, and we spent 
9 percent because we had a surplus.
    It seems to me that you will not be able to spend 9 
percent. Obviously, if you spent 9 percent, and I am talking 
about growth year over year, if you spent 9 percent each year, 
there would be no surplus for anything at the end of the 
decade. You would have eaten almost all of it up. So obviously 
that is not the right thing to do, and it is not right to grow 
at 9 percent a year just because there is a surplus. That is 
the challenge. We must decide around here that there are some 
other things to do with the surplus, besides end-of-the-year 
ballooning budgets.
    I think you are up to that challenge. It is obvious that 
right off the bat, while you did not prepare this budget 
because you are not over there doing it, what I am describing 
is going to present the most difficult case for explanation by 
the OMB Director and the President, because you could not even 
grow the accounts at 4 percent if in fact you let the whole 
budget increase at 4 percent and have a number of increases, 
which the President has asked that we do. Some will go down 
below that level and some will be partially eliminated, and 
that will be the tough part to explain to those who would like 
the President's plans not to work.
    For some, perhaps even including this Senator, there will 
probably be decisions made that in some areas you are not 
spending enough and that we cannot quite live with it. But I 
think you are experienced enough to work with us in that regard 
and understand the situation. You are aware of the facts that I 
just told you; are you not?
    Mr. O'Keefe. Yes, sir.
    Senator Domenici. And you know that is a very difficult 
problem to bring something down from growing at 9 percent to 
less than that, but you understand you are going to have to do 
that; right?
    Mr. O'Keefe. Indeed.
    Senator Domenici. Let the record reflect that he is 
nodding.
    Mr. O'Keefe. I am sorry. Yes, sir.
    Chairman Thompson. He is not under oath yet, but I think we 
will get him on that later.
    Senator Domenici. Thank you very much. I look forward to 
working with you first on the budget resolution and you will be 
very important to us as we try to put it together--finish it. 
Thank you, Mr. Chairman.
    Chairman Thompson. Thank you very much. Senator Voinovich.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. Good morning and welcome. We are pleased 
that you have brought your family with you today and I want to 
thank them for the sacrifice that they are going to make, of 
their time with you, so that you can serve your country. I told 
Mitch Daniels when he appeared before this Committee last month 
that he was going to have his work cut out for him, because the 
Director of the Office of Management and Budget is one of the 
most important positions in Washington.
    With the state of the economy, I think that was an 
understatement. Since you will be Director Daniels' right-hand 
man, that means you will have one of the most important jobs in 
Washington, and I hope that the deputy director for management, 
when he or she is found, can match the exceptional quality and 
experience that you possess, because as I mentioned to you when 
you were in my office, the observation I have made is that 
there is no M in the Office of Management and Budget, and that 
individual is going to have to get up early in the morning and 
go to bed late at night to make sure that we deal with the 
human capital crisis that we have. The comptroller general was 
here to talk about it and it is now on the GAO high-risk list, 
and I think you are aware that human capital has to have 
renewed emphasis in the Office of Management and Budget.
    Mr. O'Keefe, as you probably know, for the past 2 years in 
the Senate I have been a debt hawk. One of the reasons I ran 
for the Senate was to bring fiscal discipline to Washington, 
just as I tried to do as Mayor of Cleveland and Governor of 
Ohio. The 106th Congress, my first as a Senator, was a mixed 
bag in terms of fiscal discipline. Senator Domenici made 
reference to that. We did not use the Social Security surplus 
in 1999, 2000, and 2001 budgets, and in 2000 and 2001 we did 
not use the Medicare surplus.
    We have in effect lock-boxed Social Security and Medicare. 
We took the money off the table and used it to pay down the 
debt. However, the downside of the 106th Congress is that we 
spent too much money. I am sure you know the numbers, but non-
defense domestic budget authority for the year 2001 rose 14.3 
percent over fiscal year 2000--14.3 percent--this despite an 
inflation rate of less than 3 percent. Alan Greenspan, in his 
testimony before the Budget Committee, politely stated that he 
hoped it was an aberration. I refer to it as Congress spending 
money like drunken sailors.
    According to the latest report by the Congressional Budget 
Office, legislative changes made in the waning months of the 
106th Congress reduced the 10-year surplus budget projections 
by $598 billion. That is over one-half trillion dollars over 10 
years. This is the hangover I said the incoming President would 
inherit as a result of Congress' spending. Unfortunately, most 
people are unaware of what happened because the media did not 
highlight this fact, but when I tell people these figures they 
go absolutely nuts.
    I can tell you that as a governor or a mayor or a county 
commissioner, if I had spent money like this, they would have 
run me out of office. Even with all the spending that Congress 
did, thank God we were able to put $87 billion in fiscal year 
2000 on-budget surplus, straight to debt reduction. We cannot 
take credit for most of our good fortune on the fiscal front. 
We owe it to terrific economic growth because of significant 
increases in worker productivity which resulted in tax revenues 
far beyond what was expected.
    While our economy has been strong, there have been numerous 
signs lately that it is weakening. The Dow and the NASDAQ have 
slid. Consumer confidence is down and unemployment is up, and 
people, I can tell you, are skittish. In addition, high energy 
costs have dampened consumer spending and negatively impact on 
America's competitiveness and are threatening the least able in 
our society.
    I had a meeting in Cleveland to hear from Catholic 
charities, Lutheran housing, and other groups, and the impact 
that these high energy costs are having on ordinary citizen. 
Business people are up in arms about those costs and are losing 
money and are less productive. It is impacting agriculture. 
Federal Reserve Chairman Alan Greenspan said in recent 
testimony that the economy has stalled and we are at zero 
growth. Many of us agree that to stave off a recession and 
maintain fiscal discipline, we need a three-legged stool 
approach to the budget, along the lines of what Chairman 
Greenspan proposed; that is, reduce the debt; implement real, 
effective limits on Federal spending and provide a reduction in 
taxes.
    Like a three-legged stool, all three aspects of a plan must 
be of equal importance. Too much or not enough on one leg or 
even two legs and the stool just does not stand. It is 
important that we have all three of those things. While a tax 
cut is now needed to stimulate our economy and prevent a 
recession or reduce its length, in my view it must fit into a 
larger budget plan that controls spending and ensures debt 
reduction. Congress and the White House must hold the line on 
new spending. I think Senator Domenici underscored that.
    I want to cap spending in a real way to get Federal 
programs and agencies under control. That way we will have the 
money around to provide a tax cut that we can keep in place 
over time and continue to pay down our national debt. I am 
hopeful that given our present economic situation, the new 
administration and this Congress will hold down spending, make 
a substantial reduction in the debt and, yes, reduce the tax 
burden on hard-working Americans.
    If we can get on a glide path to doing all three in a real 
and substantive manner, the future should be bright. In 
addition, this approach will help us address the current 
economic situation. Many of us on Capitol Hill are very 
concerned about the growing signs of recession in our Nation. 
Over the past 10 days I have visited with business leaders from 
across the country, and they tell me we are in a recession. I 
know it is not good to use the R-word, but they have said we 
are in a recession.
    Mr. O'Keefe, I have been through two major recessions in 
the past 20 years, and I do not want to go through another one, 
a deep one. A lot of people are not aware of the fact that I 
was mayor of Cleveland during the recession of 1981 and 1982. 
It was devastating. Just remembering those tough times makes me 
pleased that the administration is giving consideration to 
jump-starting the economy through a marginal rate income tax 
reduction this year.
    Over the past 2 years, I have advocated using every dime of 
our on-budget surplus for debt reduction, and I am one of the 
only Republicans that voted against the reduction on the 
marriage penalty and on estate taxes, because I thought, with 
the robust economy that we had, that we ought to use that money 
to pay down the debt. However, as Chairman Greenspan has 
pointed out, we are on the road to pay down the debt much 
sooner than any of us anticipated, and we might find ourselves 
unable to redeem additional debt without paying large premiums.
    Therefore, in order to fend off a deep recession like the 
one we had in 1981 and 1982, I think it would be prudent to use 
the non-Medicare portion of the projected 2001 $125 billion on-
budget surplus to reduce tax rates this year, and to have the 
rate reduction reflected in this year's withholding tables. It 
may be hard to do that, but I think people have to see it this 
year. Based on recent Treasury reports, I am confident that the 
2001 on-budget surplus will also exceed earlier projections.
    We need a psychological boost for the American people, 
something that will make them understand that there will be a 
tax reduction coming not next year, but this year, and they 
need it now. We must remember that consumer spending makes up 
68 percent of our gross domestic product and it is essential 
that we turn consumer confidence around in a positive 
direction. We really need something very significant.
    Mr. O'Keefe, tomorrow the White House will submit its 
budget blueprint to Capitol Hill. I hope that OMB presents a 
budget that will adopt the three-legged stool approach that I 
have outlined, and will work with Congress to develop a 
bipartisan budget resolution, one that is respected by the 
financial markets, the opinion makers and the American people. 
I am hopeful that some of the people on the other side of the 
aisle will be willing to work on this, and it will require some 
compromise, and I think it is essential that we do have a 
bipartisan approach to this, because if we do not, I think we 
will spoil it. We need to restore people's faith. If Congress 
can demonstrate that it has worked something out and people can 
say they are putting their country first, that they have worked 
out their differences, it will be a positive stop. We should 
not end up with people throwing bricks at one another. We have 
had too much of that around here.
    If you couple that with an immediate marginal rate cut, 
another cut in interest rates, and some real possibilities that 
energy costs can come down, it will give a gigantic boost to 
consumer confidence and hopefully a return to economic growth. 
I cannot stress enough we must do what we can to avoid the 
economic scenario that plagued us in 1981 and 1982.
    Mr. O'Keefe, you, Mr. Daniels, Mr. O'Neill, Larry Lindsey, 
the President, have to work together with Congress, and what we 
do together is going to have an enormous impact on the future 
of our country. I was impressed with you at our meeting in my 
office and appreciate the time you spent with me. You bring a 
wealth of government and non-government experience to this 
position. I hope that it is going to teach you how to deal with 
those appropriators.
     Chairman Thompson. All right, sir.
    Senator Voinovich. You appear to have the interpersonal 
skills that will make you a great member of the team. You have 
your work cut out for you, but I have faith that you will 
succeed, and I just want you to know I look forward to working 
with you in the future.
    Mr. O'Keefe. Thank you, Senator.
    Chairman Thompson. Senator Bennett.

              OPENING STATEMENT OF SENATOR BENNETT

    Senator Bennett. Thank you, Mr. Chairman. Mr. O'Keefe, 
welcome to the Committee, welcome back to government service. 
You are a glutton for punishment to keep coming back to this, 
but the country is grateful to you, that you would be willing 
to do this. I remember when your agency was called BOB, or the 
Bureau of the Budget, and it was Richard Nixon who changed the 
name to Office of Management and Budget, and it took a long 
time for some of us to get the new nomenclature, and we kept 
calling it BOB.
    Some others have mentioned this, but I have not seen a lot 
of change since the name was changed; that there has been that 
much focus on management. The budget process dominates 
everything, takes all of your time. You just get it done when 
you have to do another one, to get ready for next year, and the 
kinds of skills that you bring to this position get subsumed in 
the activities with respect to the budget. Can you talk to us a 
little bit, or to me anyway, about anything you might be able 
to do to improve the management style in the government?
    We do not automatically think of the Federal Government as 
the place to go when we are looking for heroes of management 
skills.
    Mr. O'Keefe. Indeed. No, I look forward to having the 
opportunity to dialogue with you about how that could be 
approached. There are number of things, I think, could be 
initiated on that front. Appreciate it.
    Chairman Thompson. We have not sworn the witness in yet. Do 
you want to swear him in now and ask your questions?
    Senator Bennett. Oh, this is not a question time?
    Chairman Thompson. No, just if you have any preliminary 
statements.
    Senator Bennett. I do not have any preliminary statements. 
I am for the tax cut. Thank you.
    Mr. O'Keefe. Thank you, Senator.
    Chairman Thompson. Our Committee rules require that all 
witnesses at nomination hearings give their testimony under 
oath, so Mr. O'Keefe, would you please stand and raise your 
right hand? Do you solemnly swear to tell the truth, the whole 
truth, and nothing but the truth, so help you, God?
    Mr. O'Keefe. Yes, sir.
    Chairman Thompson. Thank you and please be seated. At this 
point I would like to give Mr. O'Keefe an opportunity to 
introduce any family members he may have in the audience here 
today.
    Mr. O'Keefe. Thank you, sir. A brief opening statement will 
accomplish that task, if you would permit me, sir.
    Chairman Thompson. All right. Proceed.

 TESTIMONY OF SEAN O'KEEFE,\1\ NOMINATED TO BE DEPUTY DIRECTOR 
             OF THE OFFICE OF MANAGEMENT AND BUDGET

    Mr. O'Keefe. Thank you, sir. Good morning, Mr. Chairman and 
Members of the Committee. It is an honor and a pleasure to be 
here. This is a very special occasion for me and my family, 
made all the more memorable by your opening statements, and the 
most thoughtful introductions just offered by two distinguished 
members. We are fortunate constituents of Congressman Jim 
Walsh, a gentleman of the House who serves his district with 
great distinction and integrity, but I also count myself among 
his legion of admirers and friends who are the beneficiaries of 
his distinguished public service.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. O'Keefe appears in the Appendix 
on page 27.
     The biographical and financial information appear in the Appendix 
on page 29.
     Pre-hearing questions and responses appear in the Appendix on page 
40.
     Post-hearing questions and responses appear in the Appendix on 
page 70.
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    To Senator Ted Stevens, I am forever in his debt for the 
extraordinary friendship he has shown me and my wife Laura for 
more than 20 years. He has been my mentor, career counselor, 
and advocate throughout my professional life, and he has set me 
straight on more than one occasion and always with my best 
interest in mind. I am honored and particularly grateful to him 
for his presence and the time he spent to support me here 
today.
    Mr. Chairman, I also want to express my gratitude to the 
Committee for the expeditious consideration of my nomination. 
Having received the formal paperwork just before the scheduled 
Senate recess and now turning your attention to the matter 
immediately upon your return, this is an extraordinary courtesy 
and I am most grateful to you, Mr. Chairman, and to you, 
Senator Lieberman, for that consideration. During the break the 
Committee staff and the personal staff expended a lot of effort 
in preparing for this particular hearing.
    They very helpfully met with me just after the recess began 
to familiarize me with the process, policies and issues which 
are of importance to this Committee. Having served in the 
Senate staff in my previous public service experience, I know 
what a sacrifice it is to expend precious time during rare 
periods when the Senate is out of session, so I am particularly 
grateful to them for their helpful and dedicated effort. I 
thank you.
    It is indeed a privilege and an honor to be the President's 
nominee for this challenging post. Few are afforded the 
opportunity to participate and contribute in such appointed 
capacities, much less for a third time. I am filled with great 
anticipation and a very substantial dose of humility for what I 
know will be the important challenges ahead. Public service is 
never to be taken lightly and particularly so given the 
challenging portfolio, I think as Senator Bennett referred to, 
in the Office of Management and Budget itself.
    But having spent the last several years teaching graduate 
students who are aspiring public servants at the Maxwell School 
at Syracuse University, the Nation's top-ranked school of 
public affairs, this is a responsibility to step up and do what 
I have been preaching.
    Explaining the stakes involved to my children has been a 
difficult and different kind of challenge. I am so pleased that 
they are all here this morning. Our oldest, 14-year-old 
daughter Lindsey, who possesses the intellectual maturity of 
twice her age, appreciates the significance and understands 
that I am afforded an exceptional privilege. For our two sons, 
11-year-old Jonathan and Kevin, who will turn 10 tomorrow, 
explaining this has required a little more imagination. As 
active youth program athletes in our community, they took 
aboard the significance when I likened this particular 
experience to go to fantasy baseball camp with the New York 
Yankees.
    Indeed, the President has assembled the public service 
equivalent thereof, by his leadership selections. I am excited 
with the prospect of working with such a distinguished group, 
most particularly for a gentleman with the professionalism and 
intellectual capacity of Mitch Daniels. It promises to be a 
great challenge and an even greater opportunity for me to learn 
from him as we forge our partnership in advancement of the 
President's agenda.
    Explaining the significance of this opportunity to my wife, 
Laura, my partner and my best friend, was perhaps the easiest 
of all because she is so thoroughly supportive of the President 
and the policy he plans to champion. She understands the 
historic significance of this time and shares my commitment to 
the importance of public service. But she also fully 
appreciates the hardships and the sacrifice this profession 
entails. Her willingness to be a part of this public service 
odyssey yet again speaks volumes for her love and extraordinary 
tolerance, far greater than I deserve in both instances.
    This is an important time and important work lies ahead. My 
fitness for this office is of course for this Committee to 
judge, and for the U.S. Senate to decide. But if I am fortunate 
to be confirmed, I will do my best. I thank you, Mr. Chairman 
and Members of the Committee, for the opportunity to be here. I 
look forward to what I hope will be the first of many 
opportunities to dialogue with you. Thank you.
    Chairman Thompson. Thank you very much. As I indicated 
earlier, the Committee submitted some substantive pre-hearing 
questions to the nominee and the nominee has also met with 
Committee staff to discuss a variety of issues. I will start 
with the questions that we ask of all nominees, Mr. O'Keefe. Is 
there anything that you are aware of in your background which 
might present a conflict of interest with the duties of the 
office to which you have been nominated?
    Mr. O'Keefe. No, sir.
    Chairman Thompson. Do you know of anything personal or 
otherwise that would in any way prevent you from fully and 
honorably discharging the responsibilities of deputy director 
of OMB?
    Mr. O'Keefe. No, sir.
    Chairman Thompson. Do you agree without reservation to 
respond to any reasonable summons to appear and testify before 
any duly constituted Committee of Congress, if you are 
confirmed?
    Mr. O'Keefe. Yes, sir. I do.
    Chairman Thompson. All right. I appreciate your appearing 
here today. With those questions out of the way, I would like 
to start the questioning by weighing in on the subject that is 
on all of our minds today, and that is the President's budget 
message and the President's budget. There is just one thought 
that I would like to leave with you from one Senator's vantage 
point, and that has to do with the mandatory side of the 
ledger. We are still focusing on the tail of the dog instead of 
the dog. We constantly are crunching and arguing over the 
discretionary side of the budget, which is getting smaller and 
smaller. We have to do that. I think obviously the President's 
budget is going to have some increases in some areas on the 
discretionary side. It apparently is going to have some cuts in 
some areas on the discretionary side and probably more likely 
some reductions in the increase on the discretionary side.
    But now, with the mandatory side taking up almost 70 
percent of the budget, we have to ask ourselves if we are going 
to really make any difference and where are we going to make 
that difference up? The fact of the matter is that although the 
statements that were made here earlier today certainly are true 
in terms of the dollar amounts of the discretionary spending 
and that we do have to do a better job on that, the fact of the 
matter is that discretionary spending as a percentage of GDP is 
at a historical low.
    As a percentage of GDP, my figures indicate for the year 
2000, it was 6.3 percent, and this chart goes back to 1962. It 
is the lowest that I see on the entire chart as a percentage of 
GDP. So we cannot keep squeezing in that area alone, because 
the most conservative of us must acknowledge that we have got 
some chickens coming home to roost in terms of our 
infrastructure, such as our national laboratories, which in 
some cases are physically crumbling.
    If there is one document I would ask you to read, if you 
have not already, is the U.S. Commission on National Security, 
21st Century's latest report, known as the Hart-Rudman report. 
This is their latest iteration. I do not know if you have had a 
chance to look at that or not, but they make a very good case 
that we have to do some things better and differently from the 
standpoint of our national security, not a matter of what we 
wish, but things that we have to do.
    It talks about the science and education, for example, and 
how we are falling behind in basic research. They recommend 
that we double the NIH budget, but we have not yet addressed 
the thing that underlies, in their estimation our national 
security, and that is the basic science and education budget. 
They are recommending doubling R&D in those areas by the year 
2010. They talk about our national laboratories and what is 
happening to them and they go on in other areas.
    So as I say, the most rabid conservative, I think, has to 
acknowledge we have to build the bridges, our national parks, 
and things that the Federal Government properly ought to be 
doing. We all have to acknowledge that there is a role for the 
Federal Government and that these are certainly things that 
ought to be done. We are now coming to the conclusion that 
education has become a national security issue also. So does 
all of that mean we cannot afford a tax cut? Not in my 
estimation.
    I think unless we have long-term economic growth, we are 
not going to make our numbers in any of these areas. I think 
that is essential for long-term economic growth, but we are 
going to have to do something on the mandatory side. We are 
going to have to have Social Security reform. We are going to 
have to have Medicare reform or none of the rest of this stuff 
is going to matter. We cannot tax our way out of this problem.
    We cannot even grow our way out of this problem, especially 
when the baby boomers start retiring. We all know that. We all 
keep talking about it and we do nothing about it while we still 
focus more narrowly on the tip of the dog's tail, on the little 
details of the discretionary spending side. That is a long-
winded non-question. I would just ask you, although and a lot 
of this you do not really have jurisdiction over, you have a 
bully pulpit, and I would ask of you the same thing I asked of 
Mr. Daniels, to use that bully pulpit to speak the truth, and 
that is until we get a handle on the dog, as well as the tail, 
we are going to have big problems in this country and we are 
not going to be able to keep our commitments to the American 
people with regard to the entitlement programs themselves. 
Further, in the process we are not going to be able to keep our 
commitment to the vital national security requirements of this 
country.
    Mr. O'Keefe. I agree, Mr. Chairman. I agree with you 
wholeheartedly. As a matter of fact, just sorting through the 
issues that you have raised here as it pertains to mandatory 
versus discretionary spending in particular, I could not help 
but think that 20 years ago, about exactly this period of time, 
when Ronald Reagan was submitting his very first budget to the 
Congress in the late winter of 1981, the percentages of 
discretionary to mandatory were precisely reversed.
    It was about 70 percent, 65 to 70 percent discretionary 
spending at the time relative to about 30 to 35 percent 
mandatory, versus today's percentage, which is exactly 
opposite. In the span of 20 years, that has taken effect. So as 
a consequence the focus and attention that you have referred to 
on the discretionary side of the equation positively has been 
one of the more focused endeavors, certainly in the last 20 
years, with Gramm-Rudman-Hollings and every attempt at budget 
enforcement acts and so forth. Nonetheless, I am impressed by, 
I guess, the effect that occurs, to the extent that there is 
not a constraint on discretionary spending that I would 
otherwise consider one of the very best things that the 
Congress has done. I think, in the last few years, and I 
certainly have been part of that in the last Bush 
Administration, in dealing with the Budget Enforcement Act at 
that time and the omnibus budget reconciliations that went on 
at that point, was to establish some limitations, caps on 
spending, so as to avoid those kinds of issues. Because just a 
simple projection, the reference that Senator Domenici made and 
a point that Mitch Daniels has talked about repeatedly, is that 
in the last 3 years the average growth has been on the order of 
about 6 percent of discretionary spending.
    If that were to be left and just continued along for the 
next 10 years, that equates to $1.5 trillion right there. As a 
consequence, that growth in the overall discretionary spending, 
if not constrained or at least managed--moderated to some 
point, could have the effect each year of building on the base. 
It is a phenomenon I think the President has referred to on 
several occasions in which he has talked about the consequences 
and the approach that is typically taken in examining budget 
alternatives in Washington; that is unless there is an increase 
commensurate with expectations, it is considered a cut. So as a 
result that has the exact opposite view. So that kind of mind 
set is one that certainly we need to work with, we have to sort 
through. You are right. There is more attention to it in the 
last 20 years, but the focus on the mandatory side of the 
equation, I agree with you, requires every bit as much of the 
attention, and we hope to implement the kind of objectives to 
make that happen over the course of this next year.
    Chairman Thompson. Senator Voinovich.
    Senator Voinovich. I would like to focus on GAO's recently 
released high-risk list, which included human capital. We have 
22 high-risk areas in the Federal Government. Some of them, 
such as DOE and NASA contract management, DOD inventory 
management, student financial aid programs and the Medicare 
program, have been on the high-risk list since 1990. From my 
perspective very little was done to address these high-risk 
areas by the past administration.
    Are you familiar at all with that report?
    Mr. O'Keefe. I have a very specific recollection of having 
signed off on those, as comptroller and CFO at Defense, at the 
beginning of some of these reporting periods, under the Federal 
Financial Management Integrity Act compliance requirements for 
reporting material weaknesses. Having signed off on a number of 
them and reporting that there were material weaknesses in 
accounting systems, in the inventory process, in a range of 
different things, I share your concern that that does not 
appear to have altered dramatically since those reporting 
requirements were issued better than 10 years ago.
    So I guess it is the equivalent of being asked to watch a 
bad movie yet again, to look at precisely the same kinds of 
issues, but that appears to be the case and it is one that I 
have got to focus some attention on. I understand that.
    Senator Voinovich. How many of them can we count on being 
removed during the 4 years of the Bush Administration and what 
do you intend to do to make sure that some of them are not on 
this list 4 years from now?
    Mr. O'Keefe. My fondest hope is that the answer is all of 
them, in order to sort through that. I guess my concern in a 
lot of the areas of dealing with FMFIA--the Federal Managers' 
Financial Integrity Act--is that there is a tremendous amount 
of effort that is poured in on the administrative side with 
compliance, with trying to attempt to determine where the 
material weaknesses exist, how to describe them best, 
understand exactly what the limitations are, and not nearly as 
much attention placed to trying to correct or implement means 
to correct those kinds of problems.
    So as a result it is a repetitive cycle in which we are 
awfully good at reporting compliance failures, but not 
particularly great at figuring out what the solutions are. If 
we put as much attention to the implementation side of the 
equation on the management side of the arguments that are 
necessary, as the Federal Government typically is, on the 
reporting requirement side, I think we would be able to lick 
this in fairly short order.
    Senator Voinovich. How high a priority is it going to have 
in your operation?
    Mr. O'Keefe. I think it has to have a very high one. In my 
view, until you get, first and foremost, the financial systems 
to the point where they are in compliance with the CFO Act and 
that we can get clean, auditable statements each year, until we 
can say that with success across the board for every department 
across the Federal Government, we are going to continually be 
into the situation of trying to put band-aids on problems. So I 
see that as a very high priority and one that requires the 
earliest and most concentrated attention; trying to deal just 
with that one focus alone. There are so many others that are 
included within the material weaknesses report that you have 
referred to, that to include all of them simultaneously is 
something I am not sure how that would shake out, but certainly 
on a financial systems side of it, that is the first order of 
magnitude issue that I think would get focused on.
    Senator Voinovich. How about the human capital side?
    Mr. O'Keefe. I share your deep concern there, in part as a 
consequence of some very recent experiences that I have had in 
the last couple of years, chairing a commission that dealt with 
looking at the human resource, human capital kinds of 
difficulties and challenges that the Defense Department is 
about to encounter in that area. I came to find, as a result of 
that endeavor and by working very closely with the National 
Academy of Public Administration, who are doing some very 
similar things across the Federal Government, that I know you 
are aware of from our conversations, looking at the civilian 
piece of this equation, the problems are identical. As a 
result, the statistics that you have talked about and the 
effort that you put into raising the standing of this 
particular question and issue, is one that I think is a matter 
that has to be at the very top of the management agenda we have 
to take on. Because if we do not, the consequences are, as you 
have suggested. The retirement rates are going to dissipate the 
preponderance of the competence of the force very quickly and 
in a very short period of time the middle management layers 
that are there, primarily vacancies, not folks who have spent a 
lot of time in grade, and as a result of that the experiences 
that the Federal Government is having across the board, 
particularly in technical skill areas, is failure to compete 
successfully with industry and other kinds of comparable 
circumstances where they would otherwise be recruitable.
    So the findings we came up with and the reports that we 
were able to put together to try to deal with that cover a 
range of management agenda issues that I think can be taken on 
administratively; some of which will require very close 
cooperation with Congress. But by and large the authorities 
exist to deal with a number of those issues right now. I will 
seek to pursue those in a larger context in resurfacing some of 
these issues from the national academy.
    Senator Voinovich. One of the things that I am going to be 
looking at in this budget is the commitment of the 
administration to funding those things. For example, as I 
mentioned to you, there is no government-wide number on 
training. There are many incentives that are available to 
maintain and recruit people in the Federal Government, but the 
budget has not been available to the departments to do it, 
either because the administration had not suggested it or the 
departments did not ask for it.
    In addition to that, we worked very hard last year to pass 
a Department of Defense civilian workforce reshaping bill, for 
fiscal 2001, and we had it funded, but we will be looking at 
whether or not the administration funds the authorities for 
2002 and 2003. We have some crucial challenges in Defense 
civilian workforce, and without the money, they are not going 
to be able to continue with the workforce reshaping effort.
    Mr. O'Keefe. Senator, my guess, though, is that the fiscal 
year 2002 budget that is going to be presented before Congress, 
if there are very close relationships between the budget 
requirements and the numbers that are presented and the kind of 
performance characteristics that you have just talked about in 
terms of linkages between training, education and so forth for 
the career force, it will be purely coincidental, because the 
mechanics of how this process has been put together this year, 
as best I have observed, is one in which the imperatives are 
very focused.
    For fiscal year 2003, with a period of time where we have 
the opportunity to develop it over a period of time, I think 
the chances--well, at least it will be a more deliberate 
expression of exactly the points you are raising. Throughout 
the course of the development of that budget which will begin 
in earnest late this spring and summer, throughout the fall, to 
be presented this time next year--that is when the opportunity, 
I think, of this administration to put a very strong imprimatur 
on it. If I am fortunate enough to be confirmed, that is one of 
the areas that I think will be a very high focus, of trying to 
establish those linkages on exactly the points you are raising. 
This time around, it will be coincidental, is my guess.
    Chairman Thompson. Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman, and again I 
apologize for getting out of sync.
    Chairman Thompson. We were proceeding a little out of sync 
this morning anyway.
    Senator Bennett. Let me go back to the line of questioning 
I started about management, and the question arises of whether 
or not there is any real management discipline imposed from the 
White House. You are an agency of the White House--on the 
various departments. Let me give you an example of what I 
consider to be the most egregious mismanagement that we have 
seen just recently--HCFA, Health Care Financing Administration.
    We have had the experience up here, as appropriators, of 
dealing with what HCFA insisted was Congress' fault with 
respect to home health care, HMOs and teaching hospitals. 
Everywhere I went, I ran into people that were in serious 
trouble in those areas and they all blamed it on the Balanced 
Budget Act, and it was Congress that has taken this money out 
of us and is threatening to shut these things down.
    I could give you solid examples out of my own State of real 
hardship. Now, the amount of money, if we are talking on the 
budget side, that was projected to be saved by the Balanced 
Budget Act in this area, turned out to be roughly one-fifth of 
the amount that HCFA in fact took out of the area by virtue of 
their administrative actions. Former Secretary Shalala has 
defended HCFA on this, and said we acted properly and there was 
that much waste, fraud and abuse.
    I would like to take her to some folks in my State that 
lost their health care because of HCFA's actions. We lament 
here in the Congress that we do not exercise our oversight 
ability. It is a little difficult when the Congress is in one 
party and the Executive Branch is in another and so you are 
fighting each other, but this became a real political issue, 
with members of the former President's party saying, if you do 
not have decent health care and home health care, and if you 
are seeing the research on the medical hospitals cut back, go 
blame the Congress because they are the ones who did it by 
passing that terrible Balanced Budget Act, which, by the way, 
the President signed.
    As nearly as I can tell, this was entirely administrative 
overreach on the part of HCFA, and they were acting on bad 
data. They were going off of information that was 2 and 3 years 
old and cutting back on the basis of that information, and 
ignoring the devastation that they were creating out there in 
the real world. We finally had to fix it in the last Congress 
with an appropriation that added significantly to the increased 
percentage in discretionary spending that Senator Domenici 
talked about, to virtually order the administration to do what 
we thought we had told them to do when we passed that act.
    Now, I give you that example, is there a watchdog function 
that OMB can play where you could call HCFA and say wait a 
minute, you are going way beyond what you should be doing, or 
do you just say, well, that is the jurisdiction of the agency 
and we are busy getting up next year's budget, so we do not 
really have any management role? I give you that real-life 
example to have you tell me what you see, and hopefully your 
director sees, as the management function of OMB.
    Mr. O'Keefe. Sure. Well, there is no question that the 
Congress in my judgment, in the last 10 years, has 
significantly strengthened the hand of the Office of Management 
and Budget on the management side of the equation. With the 
enactment of the CFO Act, the Government Performance Results 
Act, the string of efforts that have been put into this in the 
last 10 years are very clearly focused on that objective.
    First and foremost, I think the requirement then on the 
part of the Office of Management and Budget, in sorting with 
these particular management kind of initiatives, is to look at 
the applicability of best standards, practices, etc., across 
the Federal Government in a uniform manner, in the way that 
tries to implement those in a way that can transport what the 
best experiences have been, as well as deal with, and I think 
to your example, to your very human analogy that you have 
raised with HCFA, to look at those cases where it clearly is 
failing as a consequence of either systemic or failure of 
compliance to respond to the law in a way that is appropriate.
    So that becomes an important function of OMB, again, not to 
be a micromanager, and I learned a long time ago that the best 
definition of a micromanager is whatever the person or 
organization right above you does, and that is the usual 
descriptor. As a consequence, we really need to steer clear of 
that kind of concept, in trying to intrude on those who are 
charged by the President to be the appropriate administrators 
for those kinds of programs and certainly in this kind of case, 
Governor Thompson, now Secretary Thompson, will have a very 
strong interest and influence, and I cannot imagine him being a 
wallflower about issues like this one in the future.
    So as a result that is going to be the best relief or best 
opportunity to implement and see that kind of management 
attention faced. Having said that, there is nonetheless, I 
think, ample tools that the Congress has seen fit to bestow 
upon OMB, to strengthen the kind of oversight and enforcement 
role that we can play or could play within the management 
arena, to look at standard function best practices across the 
board and to find those cases in which it is failing, to 
identify what the solutions may be.
    Senator Bennett. One quick observation. A slightly 
different area, but it may be related. It is my understanding 
that a number of agencies have been unable to pass an audit for 
years, and the cry is raised, why give them more money if they 
cannot tell us what they did with the past money, if it just 
gets lost and you cannot come in and audit them? Does OMB 
perform the function of an outside audit? Is that GAO's 
function? GAO is a creature of the Congress and so they go 
wherever we tell them, and this Committee is the primary 
Committee to tell them, but do you have any sense of what do 
you do with a department, a cabinet level department, that at 
the end of the year says we cannot really tell you what 
happened to all the money because we could not pass the kind of 
audit that, say, General Motors would have to pass, or go to 
jail?
    Mr. O'Keefe. Well, the CFO Act very specifically, as I 
remember the mechanics of this, in part, I guess, it impressed 
me most because I had the great fortune, circumstance or just 
being in the right place at the right time or whatever, to be 
the very first CFO to be appointed under the act in January 
1991. Having been in a position of being the comptroller as a 
result of the act having been passed, it was therefore 
conferred, that responsibility. The act is very specific. The 
General Accounting Office is--and the comptroller general is 
the auditor of record for the independent audit finding and for 
examining the financial statements and the annual reports 
thereof.
    The problem I always found with this, and again I am really 
looking forward to getting a little more updated on where this 
has moved in the last several years. But the problem I remember 
very specifically of dealing with this question, and have since 
had a stronger view of why, as a consequence of some corporate 
experiences, is that, in and of itself, a corporate, private 
sector financial statement imposed on a public agency as a 
reporting requirement, while it should be done and is an 
appropriate kind of way to translate or transfer the 
information, is used for entirely different purposes.
    There are the quarterly statements and the annual 
statements of any corporation, having served on boards of 
directors, on audit committees of those companies in several 
instances here over the last few years, that becomes the 
governing management information tool that outside independent 
directors can use for the purpose of judging performance and 
capability of the company, independent of what the internal 
management may be offering or providing.
    It does not serve the same purpose on the public sector 
side. It is prepared by the same people. As a consequence it is 
all being dealt with as a different kind of arrangement, and so 
it has a different standing in that respect. The second one is 
it is more again developed--and again I am prepared to be 
corrected on this one once I get a chance to dig into it a 
little more--but my recollection of it is this was viewed as a 
compliance or reporting requirement as opposed to a management 
tool, for the purpose of giving the senior management, as well 
as the equivalent of the board of directors in Congress, an 
understanding on a routine, regular basis of exactly what the 
financial performance has been of the agency or department 
involved.
    That is exactly the purpose that it serves within any 
corporation, and it does not have that requirement at all. It 
is more of a reporting challenge to go deal with and try to 
figure out how to reconcile. So until that mind set changes and 
until we can find, in each of those agencies and departments, a 
means to make it an important management information tool, for 
exactly the same or at least similar purposes that you would 
see in any corporation, its utility and its completeness are 
always going to be questionable in my view. But again, digging 
into how this has changed in the last few years, I am really 
looking forward to seeing, by department, what the alterations 
are, because in many respects the ones that still seem to fail 
the clean statement requirement from GAO are the same ones that 
had trouble organizing and getting ready for this kind of stuff 
10 years ago.
    Senator Bennett. That is the point.
    Mr. O'Keefe. There is a correlation there.
    Senator Bennett. I agree completely that it is a different 
circumstance, because I am not planning to invest in HUD, so I 
do not really care about their audited statements, but on the 
other hand, if an agency cannot get its act together 
sufficiently well to tell GAO where we are, I really think that 
is something you ought to be looking at. I have run a business 
and I have watched the difference between a comptroller who 
simply says to the outside auditor, ``Well, here are our books, 
audit them,'' and the comptroller who says, ``The auditors are 
coming and I had better have everything lined up.'' You have 
the second kind of comptroller, you have a much tighter ship 
and a much firmer grip on management, and quite frankly you 
have a lower audit bill when you pay the outside auditors.
    Mr. O'Keefe. Indeed.
    Senator Bennett. So I think if you are the head of--you and 
your director are the head of management throughout the 
Executive Branch, you ought to pay attention to that and I am 
delighted with your answers. Thank you.
    Mr. O'Keefe. I appreciate it. Thank you, Senator.
    Chairman Thompson. Thank you very much. Just to continue 
with that a little bit, I will be interested in seeing your 
assessment a little bit later on about how all these various 
laws we passed in the last few years, Clinger-Cohen, Paperwork 
Reduction, and all those have worked. Apparently they have not 
worked very well, and we need to see whether or not we need to 
change them or whether or not it is strictly a management 
issue.
    The reason you are getting so much from the management side 
when we are right on the eve of the budget is because we have 
been seeing, day after day after day in this Committee, the 
evidence of mismanagement. We get GAO reports as high as an 
elephant's eye on our deficiencies on one thing or another. It 
is amazing to me, coming into government like this for the 
first time, how many warnings and reports and terrible reports 
and analyses of problems it takes before it gets anybody's 
attention.
    We have seen, on the financial management side, great 
deficiencies. Not being able to pass an audit is certainly a 
part of it, but you get into the waste, fraud and abuse, and 
our Committee came up with $220 billion worth the other day, 
$30 billion in 1 year alone, sending out payments to dead 
people and things of that nature. But the real story is we have 
no clue because these were just voluntary reports that certain 
agencies made. Most of them are not even required to make 
reports along those lines in terms of how much has been lost 
because of waste, fraud and abuse.
    Regarding information technology, we are way, way behind 
and vulnerable in so many ways. GAO has told us that in 
definitive terms over and over again. There are computer 
systems that do not talk to each other; billions of dollars 
spent and they still do not work; an infrastructure like the 
one in IRS, are in trouble. They are doing the best they can 
over there. I think they have good management now. We have 
given them some flexibility in terms of hiring some people over 
there and I think they are putting it to good use. But they are 
having to start from scratch; terrible infrastructure problems 
over there.
    Regarding human capital, as we were talking about earlier 
today, we are needing, as industry is, more and more people in 
the high-tech areas, specialized areas. Though we downsize, we 
pay no attention to retaining those type of needs, and 
therefore we are not meeting them, plus government service 
altogether is going downhill. There is this report that I 
referred to awhile ago. I saw a survey recently which stated 
that over 70 percent of young people that were interviewed said 
they would never consider government service. So that is the 
reason you are getting this, and I know you are going to OMB 
and spend just about all your time on the budget, just like 
everybody else does. And I know that your life is probably, in 
most regards, going to be determined by the priorities of the 
director. That is the setup and that is understandable.
    But between the two of you, please keep these things in 
mind. We cannot continue to go down this path where we are 
behind the curve so badly in terms of not only private 
industry, but what a lot of other countries are doing. We have 
got people coming in here from New Zealand, trying to tell us 
how to do better. So I would just urge you to keep that in mind 
and think of ways where the OMB staff could be more dedicated 
to the management functions of the job.
    I have one more area that I would like to touch on, and 
that is getting back to the question of ensuring that agencies 
and OMB factor in performance data and results in their budget 
submissions. We have the Results Act on the books now. That is 
another law that was passed, about 6 or 7 years ago, and the 
jury is still out in terms of whether or not it is going to 
mean anything. It is not going to mean anything until those 
people out there in the agencies feel like somebody is watching 
them or feel like there is going to be some reward or some 
detriment based upon performances.
    If we continue to fund the same programs that are not 
working at the same levels in the same ways that we are funding 
programs that are working, then the act is going to be 
meaningless. For it to mean something, it seems to me like you 
need to incorporate the results of what these agencies are 
doing or are not doing into the budget submissions and let them 
know that is going to happen, and then we in Congress have a 
responsibility to take that and incorporate that into the 
appropriations process. Do you acknowledge that?
    Mr. O'Keefe. Yes, sir; absolutely. As a matter of fact, the 
distinction here, and it is along the same lines as Senator 
Voinovich raised, too, on the issue of material weaknesses and 
reporting requirements and so forth, is that the attention and 
the focus, if it is on the issue of either comply or there will 
be a penalty, always has mixed results. If you are really 
brutal about the penalties or if you are really brutal about 
enforcing the compliance, it is astounding how much more focus 
and attention can be there. But that means you are also then 
ignoring a range of other things as you look at that particular 
set of issues.
    If instead you design the requirements, and this is what I 
find so interesting about the Results Act itself, in terms of 
how to organize this as a way to, now that it has been in 
currency for 7 years since its enactment and has gained some 
standing and understanding, is to try to demonstrate to 
agencies and departments how it can be revealing management 
information system and an information tool for the purpose of 
managing differently and looking at performance as a primary 
criteria therein.
    One of the projects that was conducted at the Maxwell 
School at Syracuse in the last 4 years is a Government 
Performance Results Act-oriented kind of effort in looking at 
State and localities, and their performance on a variety of 
different fundamental, basic public services. The provisioning 
of passing or very exceptional grades got great headlines, and 
for places like my home city of New Orleans, Louisiana, which 
failed on every count, made front headlines in the newspaper 
and raised the interest of the business community in forcing 
the city management and the mayor to consider what the 
deficiencies were in those public services and identify how 
those corrections were going to be obtained.
    So as a consequence the efforts to organize and to focus 
the way GPRA has in so many different areas, to include, I am 
delighted to tell you, on the State and local front, as a 
result of this particular project that the Maxwell School did, 
it has a very sallying effect in many respects on public 
service agencies and departments that are having difficulties, 
but I think the most effective way is to make it an 
incorporated management information or management tool for the 
purpose of improving performance, and that is when you really 
have achieved success.
    Chairman Thompson. Let me tell you, if you do not know what 
you are walking into now--you know the Results Act has been on 
the books several years now, and we have gone back and forth 
with the plan. As you know the basis of all of it is setting 
goals, and we, in our review of agency performance plans, found 
that some agencies had set no goals, not just bad goals or 
improper goals, no goals for any of the management problems 
that we identified; GSA, AID, SBA, NRC, no goals. What do you 
do about it? That is just somebody does not feel accountable. 
Somebody does not feel that they are going to be held 
accountable when they send something like that up to us.
    We do not have enough hearing days to get every one of them 
up here and spend a day chastising them over what they are 
supposed to do. Maybe you feel the same, but somebody over 
there needs to ride herd on it.
    Mr. O'Keefe. Yes, sir, Mr. Chairman.
    Chairman Thompson. Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Mr. Chairman, thank you and let me add my 
welcome to Mr. O'Keefe and my congratulations to him and his 
family on this nomination. First, you and I have had a chance 
to talk about the role of the OMB in reviewing rules, and I 
want you to comment on that issue for us, and let me ask you 
this question. Since one of the important offices in the OMB is 
the Office of Information and Regulatory Affairs, or OIRA, and 
under every President since President Reagan, the office has 
had the responsibility to review proposed and final rules of 
significance, and given the fact that after some very difficult 
negotiations, we have achieved an agreement for the last three 
administrations, I believe, on a number of disclosure 
procedures which have gone a long way to keep the public 
informed as to the OMB's involvement and who is lobbying OMB, 
would you recommend that those disclosure rules be kept in 
place?
    Mr. O'Keefe. Well, I thank you for your comment, Senator, 
and since the opportunity to visit with you, I have looked into 
that a little bit, and again my personal disposition and 
leaning in these kinds of circumstances is toward full 
disclosure. There is just no question that that is a far more 
prudent approach in any context, in any approach involved here, 
and at this juncture I see no reason to alter the procedures 
you have described. I again asked for, and you were kind enough 
to grant to me, the opportunity to dig into it a little further 
to figure out where we are on this, and I have just had a 
passing opportunity here to do that lately.
    I do not see anything that would change that procedure at 
this time, and I will certainly be in touch to the extent that 
we discover or come across anything that would otherwise 
suggest to the contrary.
    Senator Levin. If there is a proposal to amend those 
executive orders that have been in place now for some years, to 
change that procedure, would you alert this--or would you at 
least recommend to the OMB Director, that he alert this 
Committee prior to any change in the executive order, so that 
the Committee could take whatever action it saw fit, relative 
to weighing in on that subject?
    Mr. O'Keefe. I see absolutely no reason whatsoever why we 
should not, on all matters, this one in particular, consult 
with the Committee and determine where those interests lie. To 
do something that will fundamentally put us at odds with the 
Committee over a procedural set of questions, I do not think is 
in anybody's best interest.
    Senator Levin. As you know, I support the OMB review of 
rules. I think it is important for accountability that we have 
basically the elected officials of this country, be it in the 
White House or here in Congress, be accountable for 
regulations. I came to this town believing passionately in that 
requirement and I have hung on to that for dear life ever 
since. So I just welcome your comments on that and your 
assurances on that.
    Mr. O'Keefe. Thank you, sir.
    Senator Levin. A number of Committees are involved in the 
issue of contracting, and one of those issues is the 
contracting-out process. Do you believe that Federal employees 
should be given the opportunity to fairly and fully compete 
with the private sector when there is the possibility of 
contracting out government work?
    Mr. O'Keefe. I do indeed.
    Senator Levin. Just one question on the budget. We have a 
Budget Act, which requires--that is the Budget Enforcement Act 
of 1990--which says that the Social Security trust fund shall 
not be counted relative to budget authority, outlays, receipts, 
deficit or a surplus, for purpose of the budget of the U.S. 
Government as submitted by the President. Are you familiar with 
that requirement?
    Mr. O'Keefe. No, sir, I am not. I have to become more so.
    Senator Levin. It is very important that you do so, because 
there are a lot of words out there and rhetoric that we all use 
about protecting Social Security, and I want to be sure that we 
do not count the Social Security surplus for any purpose. It is 
by law dedicated to Social Security, for that fund, and this 
law is very explicit that it must not be used as part of new 
budget authority, outlays, receipts or deficit, or a surplus 
for purposes of the budget of the U.S. Government as submitted 
by the President.
    Would you agree that we should not count that surplus?
    Mr. O'Keefe. The unified budget concept that I have always 
grown up with in this process makes no distinction with the 
notable exception of a very small number of funds, and as a 
consequence, revenues received, general revenue by the Federal 
Government and disbursed as amended herein, which is the reason 
I need to very specifically go do my homework on the matter you 
have just raised in terms of the specific provisions of the law 
which now are contrary to what my understanding has been, 
typically has been controlled by a unified budget process, and 
so absent any argument to the contrary, the principles that 
govern a unified budget are the ones that I think are most 
useful.
    Senator Levin. Well, I want to make sure you look at this 
section. This is a pretty important piece of law, Section 
13.301 of the Budget Enforcement Act of 1990, and I am going to 
read it to you. It says: ``Off-budget Status of OASDI Trust 
Fund, Off-budget Status, A, Exclusion of Social Security from 
all budgets,'' that is the heading. ``Notwithstanding any other 
provision of law, the receipts and disbursements of the Federal 
Old Age and Survivors Insurance Trust Fund and the Federal 
Disability Insurance Trust Fund shall not be counted as new 
budget authority, outlays, receipts or deficit or surplus, for 
the purposes of, one, the budget of the U.S. Government as 
submitted by the President; two, the congressional budget; or 
three, the Balanced Budget or Emergency Deficit Control Act of 
1985.''
    If you would submit for the record your answer to my 
question about whether or not Social Security surplus should be 
counted in calculations, and if so, how, or if so, why, given 
this law, I would find that answer for the record very 
essential and useful and hopefully helpful.
    Mr. O'Keefe. Yes, sir. I would be pleased to do that.
    [The information follows:]

                 INFORMATION RECEIVED FROM MR. O'KEEFE
    Question from Senator Levin: ``If you would submit for the record 
your answer to my question about whether or not Social Security surplus 
should be counted in calculations, and if so, how, or if so, why, given 
this law, I would find that answer for the record very essential and 
useful and hopefully helpful.''

        The President's budget blueprint presents the Social Security 
        trust funds in the same basic manner as in prior years--that 
        is, the trust funds are off-budget and are not included in the 
        on-budget totals, consistent with the budget process laws 
        cited.

        The administration does not believe Social Security's status as 
        off-budget should be changed at all. In fact, the budget 
        ensures that all $2.6 trillion of the surpluses in these trust 
        funds are reserved just for Social Security and debt retirement 
        and cannot be used to offset other spending or tax relief.

    Senator Levin. Mr. Chairman, I want to thank you. I am done 
with my questions.
    Chairman Thompson. Thank you very much. Mr. O'Keefe, thank 
you very much for coming today and your forthright responses. 
You have already a long history of public service. I know you 
will continue in that same fine way. I look forward to bringing 
this nomination to the Committee's attention in the near 
future. Thank you very much.
    Mr. O'Keefe. Thank you, Mr. Chairman. I appreciate your 
courtesy.
    Chairman Thompson. We are adjourned.
    [Whereupon, at 12:03 p.m., the Committee was adjourned.]
                            A P P E N D I X

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