[COMMITTEE PRINT]

ADDRESSING GOVERNMENT

WASTE, FRAUD, AND ABUSE

SUBMISSION BY HOUSE COMMITTEES

AND THE

U.S. GENERAL ACCOUNTING OFFICE

PURSUANT TO SECTION 301 OF H. CON. RES. 95

COMMITTEE ON THE BUDGET 

U.S. HOUSE OF REPRESENTATIVES

SEPTEMBER 2003

Serial No. CP–2

THIS REPORT HAS NOT BEEN OFFICIALLY APPROVED BY THE 

COMMITTEE ON THE BUDGET

Printed for the use of the Committee on the Budget 


E:\Seals\Congress.#13
ADDRESSING GOVERNMENT WASTE, FRAUD, AND ABUSE 

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

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1

89–421 2003

[COMMITTEE PRINT]

ADDRESSING GOVERNMENT

WASTE, FRAUD, AND ABUSE

SUBMISSION BY HOUSE COMMITTEES

AND THE

U.S. GENERAL ACCOUNTING OFFICE

PURSUANT TO SECTION 301 OF H. CON. RES. 95

COMMITTEE ON THE BUDGET 

U.S. HOUSE OF REPRESENTATIVES

SEPTEMBER 2003

Serial No. CP–2

THIS REPORT HAS NOT BEEN OFFICIALLY APPROVED BY THE 

COMMITTEE ON THE BUDGET

Printed for the use of the Committee on the Budget 


E:\Seals\Congress.#13
(II)

COMMITTEE ON THE BUDGET 

JIM NUSSLE, Iowa Chairman 

CHRISTOPHER SHAYS, Connecticut 

Vice Chairman 

GIL GUTKNECHT, Minnesota 

MAC THORNBERRY, Texas 

JIM RYUN, Kansas 

PAT TOOMEY, Pennsylvania 

DOC HASTINGS, Washington 

ROB PORTMAN, Ohio 

EDWARD SCHROCK, Virginia 

HENRY E. BROWN, JR., South Carolina 

ANDER CRENSHAW, Florida 

ADAM PUTNAM, Florida 

ROGER WICKER, Mississippi 

KENNY HULSHOF, Mississippi 

THOMAS G. TANCREDO, Colorado 

DAVID VITTER, Louisiana 

JO BONNER, Alabama 

TRENT FRANKS, Arizona 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

THADDEUS McCOTTER, Michigan 

MARIO DIAZ-BALART, Florida 

JEB HENSARLING, Texas 

GINNY BROWN-WAITE, Florida 

JOHN M. SPRATT, JR., South Carolina, 

Ranking Minority Member 

JAMES P. MORAN, Virginia 

DARLENE HOOLEY, Oregon 

TAMMY BALDWIN, Wisconsin 

DENNIS MOORE, Kansas 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

ROSA DeLAURO, Connecticut 

CHET EDWARDS, Texas 

ROBERT C. SCOTT, Virginia 

HAROLD FORD, Tennessee 

LOIS CAPPS, California 

MIKE THOMPSON, California 

BRIAN BAIRD, Washington 

JIM COOPER, Tennessee 

RAHM EMANUEL, Illinois 

ARTUR DAVIS, Alabama 

DENIS MAJETTE, Georgia 

RON KIND, Wisconsin 

PROFESSIONAL STAFF

RICH MEADE, Chief of Staff 

THOMAS S. KAHN, Minority Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Chairman’s Introduction ......................................................................................... 1

Submission by the U.S. General Accounting Office .............................................. 3

Submissions by House Committees: 

Agriculture ........................................................................................................ 305

Education and the Workforce .......................................................................... 309

Energy and Commerce ..................................................................................... 319

Financial Services ............................................................................................. 323

Government Reform ......................................................................................... 331

House Administration ...................................................................................... 339

International Relations .................................................................................... 343

Judiciary ............................................................................................................ 387

Small Business ................................................................................................. 393

Transportation and Infrastructure .................................................................. 397

Veterans’ Affairs ............................................................................................... 403

Ways and Means ............................................................................................... 419

(1)

CHAIRMAN’S INTRODUCTION 

The problems of waste, fraud, and abuse in government programs have never been easy to resolve. Government lacks the builtin incentives that drive commercial enterprises, constantly, to reduce waste and improve efficiency. Over the years, therefore, Congress has created watchdogs, such as the General Accounting Office 

[GAO] and the Inspectors General, to track down systemic failures 

in government management. It has written laws, such as the Chief 

Financial Officers Act of 1990, and the Government Performance 

and Results Act of 1993, calling for regular measurements of government activities and expenditures. From time to time, various 

appropriating and authorizing committees have performed oversight of programs in their jurisdictions. Three years ago, the Budget Committee itself conducted its own examination of the continuing problems of waste, fraud, and abuse. 

But the need is especially acute today, with America facing the 

uncompromising requirements of winning the war against international terrorism, protecting Americans at home, and promoting 

sustained economic growth and job creation. Given these obligations, along with the myriad other demands on government resources, Congress and the President must do everything possible to 

assure that government funds are managed responsibly. 

This year the House of Representatives has advanced this ongoing effort to another stage. The conference report on the budget 

resolution for fiscal year 2004 (H. Con. Res. 95) formally required 

House authorizing committees to investigate programs in their respective jurisdictions, identify instances of waste, fraud, and abuse, 

and recommend ways of reducing or eliminating it. The resolution 

also called for a report on the subject from GAO. 

This committee print contains the findings of the House committees and GAO as submitted to the Budget Committee. 

As implied above, this report is neither the beginning nor the 

end of anything. It is continuation of efforts that have been going 

on for years and that must continue for years in the future. Government waste cannot be eliminated by a single agency, or a single 

legislative vehicle, or a single report. It will be reduced only by the 

constant and ongoing work of those who maintain a simple, fundamental belief: that Congress has a moral obligation to manage the 

public’s money responsibly.

JIM NUSSLE, 

Chairman. 

(3)


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(305)

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON AGRICULTURE, 

Washington, DC, September 10, 2003. 

The Hon. JIM NUSSLE, 

Chairman, House Committee on the Budget, 

Cannon House Office Building, Washington, DC. 

DEAR MR. CHAIRMAN: Pursuant to section 301 of the Concurrent 

Resolution on the Budget—Fiscal Year 2004, we are including 

below the findings of the Committee on Agriculture with respect to 

programs within the Committee’s jurisdiction. 

We commend the Budget Committee’s efforts to identify waste, 

fraud, and abuse in government programs. Doing so is important 

to the nation’s hard-working taxpayers who deserve value and efficiency in the government programs they pay for. 

The Committee on Agriculture has long viewed eliminating 

waste, fraud, and abuse in government programs as a critical aspect of our oversight responsibilities. That is why when problems 

have been identified, we have moved quickly to address them 

through legislation, when needed, or by working with Administration officials to make changes in rules and regulations. Our long 

term commitment to correcting problems is confirmed by our 

record. Here are a few examples: 

We addressed fraud in the Federal crop insurance program by 

limiting double insurance on the same acres in the same season, 

requiring that social security or tax identification numbers be used 

to track producers who previously would switch agents or companies for fraudulent activities, and encouraging the use of data mining techniques to identify schemes and devices used by agents, adjusters, and producers. 

We addressed fraud in both the commodity programs and crop 

insurance by requiring that producer information be reconciled between the Farm Service Agency’s commodity programs and the 

Risk Management Agency’s crop insurance programs. 

We addressed fraud in the food stamp program by requiring the 

use of EBT (electronic benefit transfer) cards to reduce trafficking 

in food stamp benefits and by tightening food stamp administration 

to ensure that certain classes of ineligible persons (such as prisoners) do not receive food stamps. 

Following the instructions of your May 20 letter, we have made 

every effort to identify changes in legislation that would allow us 

to save $5.25 billion of projected mandatory program costs (1% of 

the total) over 10 years due to waste, fraud, and abuse. 

Unfortunately, this is a very difficult legislative task. The steps 

needed to eliminate much—if not most—of the fraud and abuse uncovered by the Inspector Generals (OIG), the General Accounting 

Office (GAO), and others require management—not legislative—

changes. They require increased vigilance and enhanced enforceVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00311 Fmt 6601 Sfmt 6601 E:\HR\OC\A421.XXX A421
306

ment efforts under existing legal authority—not new legal authority. 

Certainly it would be possible to write into law general instructions to USDA to do a better job in minimizing waste, fraud, and 

abuse. Unfortunately, the Congressional Budget Office will not 

score any budget savings for such general language. 

We must constantly work to find the proper balance for enforcement activities. Our programs—whether food stamps or farm income support—are critically important to the well-being of recipients. Our society does not gain if, by writing the rules so tightly 

that no one receives benefits who shouldn’t, we deny benefits to 

those who should receive (and need) benefits. 

We recognize that there is substantial policy disagreement for 

many areas-not just for agriculture-as to what constitutes ‘‘waste.’’ 

So with the above concerns as background, this is what we have 

done. 

We first reviewed reports from the U.S. General Accounting Office and the Office of the Inspector General of the U. S. Department of Agriculture. We also reviewed budget reduction options 

from the Congressional Budget Office (CBO) and ideas from think 

tanks. We had discussions with GAO and OIG staff. We held hearings on food stamps and crop insurance to better understand how 

program administrators are dealing with fraud problems. 

Based on this extensive review, we have identified a number of 

options for reducing the costs of federal programs. This list includes options to reduce possible waste, fraud, and abuse but also 

includes options to improve the economy, efficiency, and effectiveness of programs, as well as options affecting worthy programs that 

it may turn out we simply cannot afford to fund as generously as 

we would like. The options include: • Mandating increased use of advanced statistical techniques to 

guide fraud investigations in the crop insurance and commodity 

programs. • Tightening compliance measures for commodity programs. 

• Consolidating commodity program payment statements to producers. 

• Phasing-in a moratorium on land purchases by the Forest 

Service. 

• Improving the delivery of rural development programs. 

• Modifying nutrition programs. 

• Reorganizing USDA to eliminate duplicative organization 

structures. 

Based on CBO estimates (supplemented, when necessary, by 

Committee staff estimates), we believe that this list of possible options represents a ten-year savings pool of more than $10 billion—

well beyond the $5.25 billion specified in this year’s budget resolution. 

We need to be clear that it would be a major legislative undertaking to achieve $5.25 billion in ten-year savings in our programs. 

Rest assured that we will do what needs to be done to find the savings required by any new budget reconciliation. But doing so will 

require a great deal of effort if we are to preserve the essential elements of efficient programs that provide important benefits to 

many people. 

307

If next year we are given reconciliation instructions to find program savings, we will look at these options as well as others. We 

appreciate very much the Budget Committee’s leadership in keeping issues of waste, fraud, and abuse on the front burner. Finding 

solutions to these problems requires constant vigilance and we are 

glad to have your support as we continue our efforts. Mr. Chairman, we look forward to continuing the excellent relationship that 

we have with you and that exists between our committees. 

Sincerely, 

BOB GOODLATTE

Chairman. 

CHARLES W. STENHOLM, Ranking Minority Member. 

(309)

COMMITTEE ON EDUCATION, AND THE WORKFORCE, 

HOUSE OF REPRESENTATIVES, 

Washington, DC, September 2, 2003. 

Hon. JIM NUSSLE, 

Chairman, Committee on the Budget, 

Cannon House Office Building, Washington, DC. 

DEAR CHAIRMAN NUSSLE: In reponse to your July 1, 2003 letter, 

and as required in the FY 2004 Budget Resolution Conference Report (House Report 108–71), enclosed please find the submission for 

the Committee on Education and the Workforce. Also enclosed is 

a submission from Representative George Miller regarding the Minority Views. 

If you have any questions, please feel free to contact me at your 

convenience. 

Sincerely, 

JOHN A. BOEHNER, 

Chairman. 

COMMITTEE ON EDUCATION AND THE WORKFORCE FISCAL 

YEAR 2004 BUDGET RESOLUTION 

The Committee on Education and the Workforce applauds the efforts of the Committee on the Budget to focus Congressional attention on waste, fraud, and abuse in federal programs. 

In response to the FY 2004 Budget Resolution Conference Report 

(108–71), the Committee on Education and the Workforce finds 

that in the area of death and disability student loan claims, professional judgment, and fraudulent activities at the Department of 

Education, significant corrective action has already been taken. 

However, the Committee identifies the following potential means of 

reducing waste, fraud, and abuse in both discretionary and mandatory spending programs under its jurisdiction: 

• Request that the Committee on Ways and Means examine 

an IRS data match legislative proposal designed to reduce the 

Pell Grant shortfall; 

• Reform or repeal the Davis-Bacon Act to reduce artificially-inflated federal construction costs by as much as 38 percent; and 

• Reform or repeal the Service Contract Act to permit employers in affected industries to pay employees a market-based 

wage. 

SIGNIFICANT CORRECTIVE ACTION FINDINGS

Death and Disability Student Loan Claims 

According to Section 301(a)(1) of the FY 04 Budget Resolution 

Conference Report, ‘‘the Inspector General of the Department of 

Education has found that nearly 23 percent of recipients whose 

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loans where discharged due to disability claims were gainfully employed.’’ 

However, the Department of Education has already investigated 

this allegation and the Chief Operating Officer of the Department’s 

Performance Based Organization found that there were far fewer 

improper claims paid than first reported by the Inspector General’s 

(IG) Office. In its FY 2001 Performance Plan, the Department’s Office of Student Financial Assistance (SFA) stated ‘‘we continue to 

work to determine the true scope of fraud in death and disability 

claims’’ and ‘‘these efforts have helped us determine that false 

death and disability claims aren’t nearly as widespread as originally thought.’’ 

Further, in the summer of 2000, a negotiated rulemaking session 

took place with the higher education community to amend the regulations governing death and disability discharges. These new regulations are far more onerous on the borrower, provide for a ‘‘conditional’’ discharge of the loan debt for up to three years, necessitate 

more information and certification of the borrower’s condition, and 

require the loan to be assigned to the Secretary.

Due to the complexity of this change in policy, the new regulations did not take effect until July 1, 2002. At this time, it is too 

early to determine the effect they have had on reducing fraudulent 

death and disability claims. However, the concern expressed by the 

IG in its report has been addressed. 

Professional Judgment 

The Committee on the Budget has also indicated publicly that 

money can be saved in higher education programs by regulating 

what is known as ‘‘professional judgment.’’ Professional judgment 

is authority given to financial aid professionals which allows them 

to address special circumstances of students on a case-by-case 

basis. There are no regulations pertaining to this authority for obvious reasons, however, there are specific parameters within which 

the financial aid professional must work. For instance, in most 

cases there needs to be third party written documentation supporting the student’s special circumstance or a specific student 

statement with evidence of the circumstance, and a written statement by the financial aid professional as to his determination. 

Examples of special or unusual circumstances include recent unemployment of a parent, high medical expenses not covered by insurance, domestic violence whereby the student no longer resides 

at home, or cases where a parent cannot be located. Most financial 

aid professionals use this authority sparingly. In fact, during the 

107th Congress, a specific reference to professional judgment was 

included in the HEROES bill (P.L. 107–122) to encourage financial 

aid officers to utilize the authority in specific circumstances. The 

Committee on Education and the Workforce believes that regulating something that is designed to deal with extraordinary exceptions would be counterproductive. 

Fraudulent Activities at the Department of Education 

Over the past five years, the Committee on Education and the 

Workforce has held a series of eight hearings examining the finanVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00316 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
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cial management practices and fraudulent activities at the Department of Education: 

• The Financial Management Practices of the Department of 

Education (12/6/99); 

• Financial Management at the Department of Education (3/

1/00); 

• Financial Management Issues at the Department of Education (9/19/00); 

• Waste, Fraud & Program Implementation at the U.S. Department of Education (10/25/00); 

• Department of Education Financial Management (4/3/01); 

• Status of Financial Management at the U.S. Department 

of Education (7/24/01); 

• Status of Financial Management at the U.S. Department 

of Education (4/10/02); and 

• The Recent Improvements of Financial Management Practices at the U.S. Department of Education (3/10/03). 

As a result of this intense Congressional oversight and Secretary 

Paige’s Management Improvement Team, the Department of Education—for only the second time in its 23-year history—received a 

‘‘clean financial audit’’ from an independent accounting firm earlier 

this year. 

In addition, the Department of Education’s Office of Inspector 

General and the Department of Justice have made significant 

strides to recover some of the taxpayer funds that were lost due to 

prior waste, fraud, and abuse under the previous Administration. 

For example: 

• Four people have been arrested and indicted on federal charges 

for stealing $1.9 million in Impact Aid funds that should have gone 

to schools in South Dakota and instead were spent on real estate 

and luxury cars. 

• Nineteen people have either pled guilty to federal charges or 

were convicted after a federal trial for their involvement in a massive theft ring at the department. On February 6, 2003, Verizon 

Federal Systems (successor to Bell Atlantic) entered into a $2 million civil settlement with the Department of Education and the Department of Justice to settle federal claims of false overtime 

charges and improper electronic equipment purchases by their employees in conspiracy with Department of Education employees. 

• Two Department employees and three employees of vendors for 

the Department have pled guilty to charges stemming from the ongoing investigation of fraudulent purchase card use. These individuals admitted to conspiring to use government credit cards to purchase household furniture for the Department employees’ personal 

use. 

The Committee on Education and the Workforce commends the 

Bush Administration and Secretary Paige for changing the internal 

culture at the Department of Education and for bringing those individuals who abused taxpayer dollars to justice. 

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IDENTIFICATION OF WASTE, FRAUD, AND ABUSE

Examine an IRS Data Match Legislative Proposal Designed To Reduce the Pell Grant Shortfall 

The Committee on Education and the Workforce is committed to 

protecting student aid from abuse by improving management controls for programs under its jurisdiction. The federal Pell Grant 

Program, which provides undergraduate students from low-income 

families with up to $4,050 this year to help pay for college and 

other post-secondary education, is an example of one such program. 

Recently, the Department of Education’s Inspector General testified before the House Committee on the Budget that $300 to $400 

million in Pell Grant aid was erroneously awarded because some 

applicants misreported their income levels on their federal student 

aid applications. The Wall Street Journal pointed out in their July 

22nd ‘‘Waste Not, Deficit Not’’ editorial that according to Inspector 

General John Higgins this estimate was ‘‘conservative.’’ 

The Bush Administration has proposed an Internal Revenue 

Service data match of information submitted by Pell applicants and 

believes that this will reduce over awards and under awards of Pell 

Grant funds. If enacted, the proposed match between the Department of Education and the IRS has the potential to free up as 

much as $340 million to reduce the current Pell Grant shortfall 

and strengthen the Pell Grant program for needy students striving 

for a college education. 

While the Higher Education Act currently provides authorization 

for such a data match to take place, additional legislative action on 

the part of the Committee on Ways and Means is necessary to implement a less burdensome and more streamlined process. The 

Committee on Education on the Workforce has asked the Committee on Ways and Means to examine this proposal to determine 

its potential effectiveness—recognizing that any savings realized 

from the data match will be used to reduce the current Pell Grant 

shortfall. 

Repeal or Reform the Davis-Bacon Act 

As a means of reducing waste, fraud, and abuse in federal programs, the Committee on Education and the Workforce suggests 

consideration of the repeal or reform of the costly and outdated 

Davis-Bacon Act. Repeal or reform of Davis-Bacon would improve 

the efficiency and cost-effectiveness of federal contracting, and address systemic flaws contained in the statute that have led to documented fraud and abuse. 

In general, the Davis-Bacon Act requires that employers on federally funded construction projects valued in excess of $2,000 pay 

their workers no less than the ‘‘prevailing wage rate’’ as determined by the Department of Labor (DOL). Enacted in 1931, the 

law was drafted to apply to contracts for construction to which the 

federal government was a contracting party. In the 70+ years since 

its enactment, however, the application of Davis-Bacon has been interpreted and legislatively expanded to encompass a far wider 

range of federal programs than the original ‘‘federal construction’’ 

model for which it was intended. For example, in recent years, it 

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has been legislatively applied to programs using increasingly indirect and/or attenuated federal financing. 

The application of Davis-Bacon has been demonstrated to inflate 

construction costs on average from five to fifteen percent, and in 

some instances up to almost 40 percent (38 percent in rural areas, 

according to some studies). Moreover, the determination of ‘‘prevailing wages’’ by the Department of Labor has been documented 

to be rife with abuse. A January 1999 General Accounting Office 

report found errors in 70 percent of the wage forms used by DOL 

to calculate prevailing wages, and DOL’s own Inspector General 

concluded in 1997 that two-thirds of the wage surveys provided to 

the Department for use in calculating prevailing wage rates were 

inaccurate. 

Worse, some believe the Davis-Bacon Act encourages discrimination against some of America’s most vulnerable workers. ‘‘The effect 

of the Davis-Bacon Act is that of discriminating against contractor 

employment of non-union and lower skilled workers,’’ wrote Dr. 

Walter E. Williams, a noted columnist and professor at George 

Mason University, earlier this year. ‘‘Thus, it has a racially discriminatory effect, since most blacks are in the non-union sector of 

the construction industry. Even black contractors wanting to hire 

a lower skilled black worker can’t do so.’’ (Walter E. Williams, 

‘‘Congress’’ Insidious Discrimination,’’ Augusta Chronicle, March 

14, 2003) 

An increase in the $2,000 threshold for Davis-Bacon projects (last 

revised in 1935) would also result in significant cost savings to the 

federal government. In the Congressional Budget Office’s Budget 

Options 2003, it is noted that simply raising the threshold for 

Davis-Bacon covered contracts from $2,000 to $1 million could save 

the government $50 million in FY 2004. Over a four year period 

(2004–2008) CBO estimates a savings of $750 million. 

At a minimum, the Committee on Education and the Workforce 

endorses limiting the Davis-Bacon Act to the historic and traditional model for which it was enacted and intended, and opposes 

any expansion of these outdated requirements for new federal programs or non-traditional means of federal financing. 

Repeal or Limit the Service Contract Act to Ensure Payment of Market-Based Wages 

As a further means of reducing waste, fraud, and abuse in federal programs, the Committee on Education and the Workforce also 

endorses the repeal or limitation of the costly and outdated Service 

Contract Act, originally enacted in 1965 to compliment DavisBacon. Repeal or limitation of the Service Contract Act would improve the efficiency and cost-effectiveness of federal contracting 

and permit employers to pay employees a market-based wage, rather than a wage determined artificially by the federal government 

using data that is frequently outdated and/or of questionable value. 

The Service Contract Act has been problematic and unnecessarily 

costly for virtually everyone involved with it—private sector workers, private sector employers, American consumers, and the federal 

government itself. Take environmental enthusiasts, for example. 

The National Forest Recreation Association (NFRA) in 1999 tried 

to persuade Congress to change the Service Contract Act because 

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it was applied—to the surprise of many—to wages paid to employees working on privately operated campgrounds in the nation’s national forests, resulting in fees nearly doubling for Americans visiting those popular environmental attractions. According to the Modesto Bee, NFRA argued the Service Contract Act was meant to 

apply to ‘‘carpenters and electricians providing services to the government, not campground hosts serving the public,’’ (Ron DeLacy, 

‘‘Wage Ruling Assailed; Angry Campers Protest Changes,’’ Modesto 

Bee, February 8, 1999). According to an Associated Press account, 

‘‘Forest Service officials had assumed the campground workers 

were exempt from the McNamara-O’Hara Act. They viewed their 

contracts with concessionaires as leases, which don’t come under 

the act’s jurisdiction. When told otherwise, Forest Service officials 

tried to get an exemption last year. The Labor Department already 

exempts concession contracts for lodging at national parks, they 

said, arguing that campgrounds should be considered lodging, too.’’ 

(John Hughes, ‘‘Wage Increase for Campground Workers Could 

Boost Fees in Federal Forests,’’ Associated Press, January 18, 

1999) 

At a March 10,1999 hearing of the House Armed Services Committee, the U.S. Navy cited the Service Contract Act not only as 

an unnecessary cost-driver, but also as an obstacle to its efforts to 

provide quality childcare for military families. Rear Admiral James 

B. Hinkle, U.S. Navy Assistant Commander, Navy Personnel Command, Personal Readiness & Community Support, testified on the 

topic before the House Armed Service Committee’s Special Oversight Panel on Morale, Welfare, and Recreation. He discussed the 

Navy’s experience with a demonstration project designed to explore 

the possibilities of contracting with commercial child care centers 

to provide care for the children of military personnel, rather than 

relying exclusively on military-operated centers, which is the most 

expensive option. The project was successful in some places but not 

in others, Admiral Hinkle noted, in part because of unnecessary 

cost increases resulting from the Service Contract Act. ‘‘The Service 

Contract Act increases the cost to the government, which often 

makes the cost of the program uneconomical as compared to other 

alternatives.’’ (Federal News Service Transcripts, March 10, 1999) 

Like Davis-Bacon, the Service Contract Act has been identified 

by previous Congresses as a source of waste that is ripe for reform 

or repeal. For example, the chairman’s mark for the FY 2000 Budget Resolution proposed in March 1999 by Senate Budget Committee 

Chairman Pete Domenici (R–NM) proposed repealing both DavisBacon and the Service Contract Act for a net $1 billion in savings. 

(National Journal’s CongressDaily, ‘‘Domenici Plan Includes Reserve Fund, 10-Yr. Tax Cut,’’ March 17, 1999) 

The Congressional Budget Office’s Budget Options 2001 estimated that $9.8 billion could be saved in Fiscal Years 2002–2011 

by repealing the Service Contract Act. The document concludes 

that, ‘‘Federal procurement costs would fall because repealing the 

Service Contract Act would promote greater competition among 

bidders, although the precise magnitude of the savings is difficult 

to estimate.’’ At a minimum, a review of the Davis-Bacon and Service Contract Act impact on federal procurement demonstrates the 

need for significant reform if not outright repeal.

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MINORITY VIEWS

Majority’s Recommendation to Slash Worker Benefits to Support 

Tax Cuts for the Wealthy 

We strongly disagree with the recommendation of our Republican 

colleagues that the Congress should repeal or otherwise weaken 

the Davis-Bacon Act and the Service Contract Act. The Republicans 

are proposing is to slash the wages and living conditions of working 

Americans in order to pay for their irresponsible tax cuts for the 

wealthy. 

The Republican proposal would undercut the financial security of 

millions of middle income families in order to address the largest 

in history, one they have created through irresponsible tax policy. 

In 2001, the Congressional Budget Office (CBO) estimated that the 

Federal Government would have a unified surplus of $359 billion 

in 2003. Instead, after two-and-a-half years of the Bush Administration, CBO forecasts that the Federal Government will have a 

deficit of $401 billion for 2003, and even higher for 2004. Under the 

policies of the Bush Administration, the federal budget has deteriorated by $760 billion dollars in 2003 alone. The long-term picture 

is even worse. The cumulative budget over 2002–2011, which was 

a surplus of $5.6 trillion when President Bush took office, has deteriorated to a $3.3 trillion deficit—a swing of $9 trillion to the 

worse. 

While President Bush’s budget policies have sent the deficit soaring out of control, they have yet to produce any benefit, trickle 

down or otherwise, for most Americans. Since President Bush took 

office, we have lost 3.2 million private sector jobs, by far the worst 

jobs record of any Administration since the Great Depression. 

Long-term unemployment has tripled. Real GDP growth has been 

the lowest for any Administration since World War II. Real business investment has fallen by 10.4 percent under the Bush Administration, and the trade deficit has increased by almost $100 billion. 

Further undermining the wages and living conditions of American 

citizens as the Republican majority recommends, by repealing prevailing wage protections, compounds these job and income problems. 

Prevailing wage laws such as the Davis-Bacon Act and the Service Contract Act ensure that the government procurement process 

does not undermine the wages and living conditions of taxpayers. 

Generally, the government purchases on a low-bid basis—if contractor A agrees to perform the work for less than anyone else, 

then contractor A is awarded to the contract to do the work. Particularly in the construction industry and many segments of the 

service sector, where labor costs are often the single largest cost 

that can be manipulated in the absence of a prevailing wage statute, the low bidder will ultimately be determined on the basis of 

who pays the lowest wage. For example, prior the enactment of the 

Service Contract Act in 1965, star carriers, private truckers and 

trucking companies who contract to carry mail for the U.S. Postal 

Service, were typically paying their truck drivers less than the 

minimum wage. Further, employees had no means of bettering 

their condition because any increase in wages typically resulted in 

the loss of the contract to a different contractor able and willing to 

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pay the former lower wage. In other words, without prevailing 

wage protection, the government procurement process acts to undermine wages and living conditions by encouraging contractors to 

compete for government contracts on the basis of who will pay their 

employees the least. 

By recommending the repeal of the Davis-Bacon Act and the 

Service Contract Act, Republicans are recommending that the government undermine the wages of its citizens. They claim that undermining wages will save the government money. It will not. By 

establishing a wage floor at locally prevailing wages rates, the 

Davis-Bacon Act and the Service Contract Act ensure that government contracts are competed for on the basis of who can most efficiently fulfill the contract rather than who can pay the least. Prevailing wage laws ensure that the government has access to reputable contractors who employ skilled and trained workers. They 

ensure that the government receives quality for its dollars. Repealing the Davis-Bacon Act and the Service Contract Act will cost the 

government money by undermining the quality of the work performed for the government. It will also cost the government money 

by undermining the wages and living conditions of its citizens, 

trapping workers in dead end jobs and increasing reliance upon 

public resources while simultaneously undermining the ability to 

pay for those resources. 

We note that the Republican leadership has refused to bring vital 

public works bills to floor because the bills have included prevailing 

wage requirements and the Republicans have lacked the votes to 

remove or eliminate those requirements. The Republican leadership has prohibited House consideration of the Water Quality Financing Act, the Railroad Track Modernization Act, and the Rail 

Infrastructure Development and Expansion Act for the 21st Century because Davis-Bacon Act requirements would apply to the 

projects. It is estimated that the highway and water project construction jobs that have been put on hold by the Republican leadership would create as many as three million jobs. Instead, we are 

failing to meet vital public needs and exacerbating unemployment 

in a faltering economy. 

Administration’s Failure to Address Growing Pension Crisis: PBGC 

Deficit of $3.7 Billion Puts Taxpayers at Risk 

Despite repeated requests by the Minority for the Bush Administration to address a $300 billion shortfall in private pension plans, 

and a $3.7 billion PBGC deficit, no action has been taken to address this urgent problem. In fact, the Administration is unable to 

demonstrate how its proposal to scrap the 30-year Treasury Bond 

Rate will improve pension plan security. The failure of the Administration and the Republican Congress to act poses a significant 

risk to taxpayers, who may be required to pay billions of dollars to 

bail out the PBGC which currently has its largest deficit in its 29-

year history. Over the past two years, the PBGC has paid out 18 

times the amounts in benefits that it paid in the period 1993 to 

2000. The GAO recently put the PBGC on its watch list because 

of its precarious financial position. The Administration must stop 

its dithering on pension security, and provide Congress with information necessary to make urgently needed pension reforms. 

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Death and Disability Student Loan Claims 

Any efforts to eliminate fraud and abuse in death and disability 

student loan claims must not impede students with legitimate 

claims from receiving fair and timely consideration. In addition, the 

definition of ‘disability’ used by the Department of Education 

should be updated to provide a uniform federal definition and 

threshold, to better coordinate and expedite legitimate discharge of 

student loans. 

Pell Grant Shortfall 

The Committee on Education must fully investigate the Department of Education’s inability to resolve the chronic Pell Grant 

shortfall. The Department has repeatedly failed to make accurate 

assumptions as to how many eligible students will apply for Pell 

Grants when writing its annual budget. The Department’s failure 

to make accurate assumptions has undermined efforts to fully fund 

the Pell Grant program and to ensure that all low and middle-income students have access to a college education. The Administration has also intentionally failed to budget sufficient funds to address the shortfall, thus undermining appropriations necessary for 

even modest Pell increases. The Department must revise its outdated methods to ensure accurate assumptions regarding participation levels in the Pell Grant program. 

Student Loan Subsidies 

As instructed by the Committee on Budget, in its FY 2004 Budget Resolution Conference Report, the Committee on Education and 

the Workforce finds that two of the most promising areas to reduce 

wasteful spending are to eliminate lender windfall profits and to 

promote competition within the student loan programs. 

Under current law, student lenders are not required to rebate excess federal subsidies to the government when they earn more than 

a fair market return on student loans. According to the Congressional Budget Office (CBO) eliminating these lender windfall profits would save an estimated $4.5 billion between 2004–2008. 

In addition, the Department of Education must pursue opportunities to increase competition among the loan programs, such as 

eliminating the Single Lender Rule, as a means to eliminate wasteful spending. One such area of competition where the Department 

has failed to make progress is on the issue of how to appropriately 

set lender yields, or competitive mechanisms, on federal student 

loans. The Department must move forward on competitive market 

mechanisms in order to ensure both private sector participation 

and government savings.

GEORGE MILLER, Senior Democratic Member. 

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1 HHS, Office of Inspector General, A–03–00216, September, 2001 (Upper Payment Limits); 

HHS Office of Inspector General, A–06–01–00069, December 2001 (Disproportionate Share Hospital payments); U.S. General Accounting Office, Medicaid: State Financing Schemes Again 

Drive Up Federal Payments. GAO/T–HEHS–00–193. September 6, 2000. 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON ENERGY AND COMMERCE, 

Washington, DC, September 2, 2003. 

Hon. JIM NUSSLE, 

Chairman, Committee on the Budget, House of Representatives, 

Cannon House Office Building, Washington, DC. 

DEAR CHAIRMAN NUSSLE: Pursuant to section 301(b) of the FY 

2004 Budget Resolution, this letter details findings that identify 

changes in law within the Committee on Energy and Commerce’s 

jurisdiction that would achieve the level of savings through the 

elimination of waste, fraud, and abuse that you specified in the 

Congressional Record on May 21, 2003. As is the custom in our 

Committee, our minority may choose to submit their own findings 

under separate cover. 

Congress should strongly consider acting on some of these ideas 

within the next year. With entitlement spending growing at a rapid 

rate, it is critical to identify new ways to limit spending. At the 

same time, we must continue to strengthen and preserve the core 

mission of our safety net programs. These recommendations reflect 

this delicate balance and will contribute to our joint efforts to balance the Federal budget in future years. 

MEDICAID FINANCING

Medicaid pays for the costs of providing health care coverage to 

44 million low-income Americans. States and the Federal government fund the program jointly, with the Federal share determined 

by the use of the FMAP (Federal Medical Assistance Percentage) 

formula, which is based upon state per capita income. The Federal 

liability for Medicaid program expenditures is presently openended, because the Federal government is obligated to pay a set 

percentage of all state Medicaid expenditures covered under each 

state’s Medicaid plan. As states’ costs rise, the Federal government’s costs increased as well. 

Unfortunately, the current mechanism for funding Medicaid encourages states to aggressively define their Medicaid spending as 

creatively as possible in order to qualify for Federal matching 

funds. In addition, the current system has inappropriately led 

many states to adopt various schemes to obtain additional federal 

funds. These strategies—known generally as ‘‘Medicaid maximization’’—have led to the well-documented abuses associated with 

Upper Payment Limits, Inter-Governmental Transfers, and Disproportionate Share Hospital payments.1

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2For example, the CBO has estimated that requiring all states to be in full compliance with 

the January 2001 UPL regulations by 2004 (rather than the extended deadlines provided under 

the Benefits Improvement and Protection Act of 2000) would reduce federal outlays by almost 

$2.8 billion in 2004 and $7.3 billion over five years. 3 HHS Office of Inspector General, Medicaid Pharmacy: Actual Acquisition Cost of Brand 

Name Prescription Drug Products, A–06–00–00023, August 2001. 

Each of the financing schemes involves states responding to the 

perverse incentives currently reflected in how the Federal government finances Medicaid. So long as the Federal government continues to provide an open-ended commitment to match all state expenditures, states will have strong financial incentives to maximize 

the amount of Federal dollars that can be drawn-down as matching 

payments. In addition, states engaging in these practices will always be able to provide persuasive arguments for why the additional Federal dollars are necessary to support a wide variety of 

popular expenditures to provide health care for particularly vulnerable Medicaid beneficiaries. These justifications have historically 

made it very difficult for Congress to reduce or eliminate abusive 

financing schemes, despite the large potential savings that could 

result from such changes.2 Ironically, many of these financing 

schemes have not even resulted in our precious Federal health care 

dollars being utilized for patient care. 

Recommendation No. 1: The current Medicaid reimbursement 

methodology should be altered to eliminate the current perverse incentives that encourage states to engage in Medicaid maximization 

schemes. Adopting capped, state-specific allotments for optional 

populations and services, as recently discussed by a National Governor’s Association task force, would significantly reduce the incentives for states to maintain or prospectively implement such financing schemes. Such an approach would also give states incentives to 

manage their Medicaid programs more cost-effectively. 

MEDICAID ADMINISTRATIVE COSTS

Before 1996, common costs for administering food stamps, Medicaid, and welfare were often charged to the AFDC program—the 

predecessor of the Temporary Assistance for Needy Families 

(‘‘TANF’’) grants. These common costs were subsequently included 

in the calculation of each state’s TANF grant when Congress 

passed welfare reform in 1996. Unfortunately, states that had previously charged their Medicaid program’s share of common administrative costs to AFDC now receive Federal Medicaid reimbursements for these same expenses. This double payment should be 

eliminated. 

Recommendation No. 2: Reduce federal reimbursement for Medicaid administrative costs to reflect the portion of these costs that 

are already included in the TANF block grant that a state receives.

MEDICAID DRUG REIMBURSEMENTS

Many states currently reimburse Medicaid providers for the costs 

of covered outpatient drugs based upon manufacturer reported 

prices. These prices, known as either Average Wholesale Price 

(‘‘AWP’’) or Wholesale Acquisition Cost (‘‘WAC’’) have been reported 

to far exceed the acquisition prices paid by many providers.3

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4 Id. 

The Energy and Commerce Committee has already conducted an 

extensive investigation into how the manipulation of AWPs currently costs the Medicare program hundreds of millions of dollars 

annually due to inflated reimbursements. This investigation also 

revealed that certain drug manufacturers have deliberately inflated 

their AWPs above their sale prices, in order to create an inducement for providers to use their products. Similar incentives exist 

in the Medicaid program for certain types of drugs, and the Committee is currently conducting an extensive investigation to assess 

the extent to which the inflation of AWPs unnecessarily increases 

Medicaid drug reimbursements. Reports prepared by the Department of Health and Human Services’ Office of Inspector General 

(OIG) have estimated that the inflation of AWPs for brand-name 

drugs resulted in Medicaid overpayments in excess of $1 billion per 

year and $470 million per year for generic drugs.4

Recommendation No. 3: Require that states reimburse providers 

for Medicaid-covered outpatient drugs at prices that better reflect 

their acquisition costs. 

State Medicaid programs are currently required to collect and 

submit information regarding the utilization of covered outpatient 

drugs. This data is then used to calculate the amounts that drug 

manufacturers must pay in the form of Medicaid rebates. A recent 

letter from the Centers for Medicare and Medicaid Services’ 

(‘‘CMS’’) Director of the Center for Medicaid and State Operations 

highlighted that many states do not currently collect the data necessary to obtain rebates on drugs administered in physician office 

settings. The letter encouraged states to collect and submit this 

data, and pointed out that their failure to do so has in the past led 

to millions of dollars in potential rebates going uncollected. Congress should step in to fix this problem. 

Recommendation No. 4: Require that states collect and submit 

the necessary information that will enable the Medicaid program 

to collect the correct rebates for these drugs. 

MEDICARE OVERPAYMENTS

The Energy and Commerce Committee included several provisions that will reduce excessive payments to Medicare providers in 

H.R. 1, the Medicare Prescription Drug and Modernization Act of 

2003. As the House-Senate conference on H.R. 1 proceeds, it is critical that we continue to modernize the Medicare Program and 

make it more efficient. Currently, Medicare comprises approximately 12% of all Federal spending—a number expected to more 

than double in the next twenty-five years. Absent changes to Medicare, the financial burdens on future taxpayers and beneficiaries 

will be overwhelming. That is why sections 302 and 303 of H.R. 1 

are essential in clamping down on some of the unwarranted spending in two areas of the traditional fee-for-service program: (1) payments for drugs administered within physician office settings and 

(2) reimbursements for certain types of durable medical equipment. 

Working in collaboration with the Ways and Means Committee, 

our Committee developed policies earlier this year designed to reduce the level of inappropriate payments in the aforementioned 

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areas and to create a more competitive market-oriented structure 

that efficiently expends health care resources. Enactment of sections 301 and 302 alone will, according to the Congressional Budget Office, save the Medicare Program over $22 billion over the next 

ten years. Additionally, the reduction in these payments will significantly reduce beneficiaries’ overpayments for coinsurance. For 

drugs administered in the physician office setting, the Inspector 

General has estimated that Medicare beneficiaries are overpaying 

over $175 million in coinsurance annually. The AWP policy in H.R. 

1 will reduce those overpayments and create a more rational payment policy for beneficiaries, providers, and taxpayers. 

With respect to durable medical equipment, beneficiaries and 

taxpayers will also save billions of dollars if Congress moves toward a competitive acquisition system. The results of two recent 

competitive bidding demonstration projects in Polk County, Florida 

and San Antonio, Texas show how promising this new policy could 

be if implemented in many parts of the country. Preliminary reports indicate that savings of between 17–20% could be realized for 

certain products. Moreover, because our policy provides the Secretary with the flexibility to exempt products for which competitive 

bidding may be inappropriate or not cost-effective, this policy will 

be precisely targeted to the products for which we are currently 

overpaying. Rather than randomly freezing a fee schedule to reduce 

rates, reimbursement prices will be dictated by market conditions 

within a geographic area—not by a governmental price fixer. 

Recommendation No. 5: Enact sections 302 and 303 of H.R. 1 in 

order to begin immediately reducing the overpayments for drugs 

administered within physician office settings and lowering the excessive prices paid for durable medical equipment. 

I share your strong interest in reducing waste, fraud, and abuse 

government-wide. The previously referenced recommendations are 

by no means an exhaustive list of all of the areas within the Energy and Commerce Committee’s jurisdiction that we will continue 

to examine, nor are they exhaustive of matters within just the 

Medicaid and Medicare programs. We look forward to working with 

you in coming budget resolutions to addressing these issues. 

Please contact me or have your staff contact Patrick Morrisey or 

Chuck Clapton if you would like to discuss the matters contained 

in this letter in more detail. 

Sincerely, 

W.J. ‘‘BILL’’ TAUZIN, 

Chairman. 

(323)

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, DC, July 31, 2003. 

Hon. JIM NUSSLE,

Chairman, Committee on the Budget, 

Cannon House Office Building, Washington, DC. 

DEAR JIM: Pursuant to section 301 of the Conference Report to 

Accompany the Concurrent Resolution on the Budget for Fiscal 

Year 2004, and by direction of the Committee on Financial Services, I transmit herewith a committee print entitled ‘‘Changes in 

Law to Eliminate Waste, Fraud, and Abuse’’ together with Dissenting Views. The committee print was approved by the Committee on July 24, 2003 by a voice vote, a quorum being present. 

An electronic copy is also included. 

Should you have any questions, please do not hesitate to contact 

me. 

Sincerely, 

MICHAEL G. OXLEY, 

Chairman. 

Enclosures. 

CHANGES IN LAW TO ELIMINATE WASTE, FRAUD, AND 

ABUSE 

Pursuant to section 301 of the Conference Report to Accompany 

the Concurrent Resolution on the Budget for Fiscal Year 2004 (H. 

Con. Res. 95; H. Rept. 108–71), the Committee on Financial Services is transmitting herewith its findings on means of eliminating 

waste, fraud, and abuse in spending programs under the Committee’s jurisdiction. 

Section 301 of the resolution requires committees to ‘‘submit findings that identify changes in law within their jurisdictions that 

would achieve the specified level of savings through the elimination 

of waste, fraud, and abuse’’ in mandatory programs. Along with all 

Committee chairmen, the Chairman of the full Committee announced his intention to meet the goals of section 301 with respect 

to all programs under the Committee’s jurisdiction, not just mandatory programs. 

UNLIQUIDATED OBLIGATIONS IN HOUSING PROGRAMS

On June 25, 2003, the Subcommittee on Oversight and Investigations held a hearing entitled, ‘‘Saving Taxpayer Money Through 

Sound Financial Management.’’ The focus of his hearing was to 

identify current and quantifiable savings in appropriated funds 

under the Committee’s jurisdiction which could be easily recaptured to meet the goals of the budget resolution. Upon a review of

the pertinent agencies, the Committee concluded that savings can 

324

be most readily identified in funds labeled as ‘‘unliquidated obligations.’’ Unliquidated obligations are funds that are appropriated 

and obligated for a function but, for a variety of reasons, never actually disbursed. By their nature, grant and subsidy programs and 

long-term contracts maintain a high level of unliquidated obligations at any given time. Through vigilant oversight of the status of 

individual grants, subsidies, and contracts, senior agency managers 

can recapture unliquidated obligations and either apply them for 

other purposes and reduce future appropriations, or deobligate 

them. The funds can be recaptured without any changes to program eligibility or any cuts to program functions or personnel. 

Based on these criteria, the programs under the Committee’s jurisdiction which are most likely to have high levels of unliquidated 

obligaitons are the Section 8 and Section 236 rental assistance programs at HUD and the rural rental assistance program at the 

Rural Housing Service (RHS) of the Department of Agriculture. 

Committee staff, senior HUD and RHSD officials, the Inspectors 

General of HUD and the Agriculture Department, and the GAO are 

collaborating to determine the amount of unliquidated obligations 

that could meet the goals in the budget resolution without changes 

to the programs. 

Department of Housing and Urban Development 

At the hearing, the Chief Financial Officer of the Department of 

Housing and Urban Development (HUD) testified on the level of 

unliquidated obligations at HUD. The Chief Financial Officer announced that for FY 2004 alone, over $1.7 billion in previously appropriated and obligated funds most likely will not be used for the 

purposes appropriated. It has proposed to use these funds to lower 

(offset) what would have been the total cost of the HUD appropriations request in FY 2004 by this amount. 

As of the end of May this year, HUD held $108 billion dollars 

in unexpended appropriated funds, more than 3 times its requested 

appropriation for FY 2004. Of these balances, $34 billion has yet 

to be awarded and obligated by HUD, primarily because Congress 

enacted the FY 2003 Appropriations Act in February of 2003. 

The Chief Financial Officer also discussed the detailed measures 

that her office has undertaken to reduce unliquidated obligations 

and outstanding balances in other areas. For instance, since December 2001, total funds not committed to specific public housing 

authority modernization projects have fallen from $3.4 billion to 

$700 million as of March 31, 2003, meaning that the funds have 

been committed and spent more quickly. 

With respect to the long-term outlook (FY 2004–2013), HUD currently has an additional $30 billion in funds that are owed (mainly 

to landlords and multi-family project owners) that provide subsidized housing to millions of families across the country. It is not 

clear to what extent some of these funds will not be needed in the 

future. Originally, Congress appropriated the full cost of these 

rental subsidy programs based on a certain set of economic assumptions, such as inflation and wages of tenants. These may or 

may not bear out over the many years left on the contracts HUD 

has with the owners. Hence decisions on the amount of excess that 

325

will be available have to be made on a year-by-year basis and can 

not be presumed ahead of time. 

The Committee also requested and received a statement for the 

record from the Inspector General of HUD on his office’s initiatives 

to detect and prevent wasted, fraud, and abuse. The Inspector General stated that HUD is not recapturing unliquidated obligations 

and undisbursed contract authority in a timely manner. 

Additionally, the Inspector General noted that HUD identified 

significant errors in the billings and payments processes, which 

also results in excess rental subsidy payments. The GAO now lists 

rentals subsidy overpayments as one of the Department’s high risk 

areas. While the amount attributable to fraud is unknown, the Department estimates losses linked to improper housing assistance 

payments to exceed one billion dollars annually. The OIG announced a new effort to detect and prevent fraud in housing assistance programs. 

Department of Agriculture 

The Under Secretary for Rural Development at the Department 

of Agriculture, a program also under the Committee’s jurisdiction, 

also testified at the hearing on the level of unliquidated obligations 

in the Section 521 Rental Assistance Program. The Section 521 

Program currently helps 264,000 households to maintain their 

rental residence by providing a subsidy to pay the difference between the basic rent for the apartment and up to 30 percent of an 

eligible tenant’s income. The General Accounting Office is reviewing the Section 521 Program and has raised concerns about the unliquidated balances on the 20-year contracts and 5-year contracts 

on which rental assistance payments continue to be paid on units 

beyond the original terms. 

The Office of Rural Development determined that there is 

$737,000,000 outstanding on active contract that were obligated between 1978 and 1988. These funds are only available for the current contracts or may be transferred to other units on existing contracts. At the hearing, the Chairwoman of the Oversight and Investigations Subcommittee announced that the Committee has asked 

the GAO to review the contracts in question and determined how 

much of the $737 million outstanding can be deobligated through 

legal action or, if needed, legislation. 

CONCLUSION

In its review of its programs, the Committee found that in one 

of its largest categories of spending—housing assistance programs—the agencies have significant unliquidated obligations 

which, if deobligated or otherwise recaptured, could result in significant savings without meaningful reductions in program services. This ensures that both the Department of Hous8ing and 

Urban Development and the Department of Agriculture can continue to serve their customers while assisting in efforts to reduce 

the deficit.

326

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on 

July 23, 2003 and considered a committee print entitled ‘‘Changes 

in Law to Eliminate Waste, Fraud, and Abuse’’. On July 24, 2003, 

the Committee agreed to a motion by Mr. Oxley to approve the 

Committee print and forward it to the Committee on the Budget 

by a voice vote. 

COMMITTEE VOTES

A motion by Mr. Oxley to report the bill to the House with a favorable recommendation was agreed to by a voice vote. The following amendment was considered by a record vote. The names of 

Members voting for and against follow:

An amendment by Mr. Meeks, no. 1, recommending 

elimination of the public housing community service requirement, was not agreed to by a record vote of 29 yeas 

and 30 nays.

RECORD VOTE NO. FC–10

Representative Aye Nay Present Representative Aye Nay Present 

Mr. Oxley ............................... ........... X ............. Mr. Frank (MA) ..................... X ........... .............

Mr. Leach .............................. ........... ........... ............. Mr. Kanjorski ........................ X ........... .............

Mr. Bereuter .......................... ........... ........... ............. Ms. Waters ........................... X ........... .............

Mr. Baker .............................. ........... X ............. Mr. Sanders 1 ....................... X ........... .............

Mr. Bachus ........................... ........... X ............. Mrs. Maloney ........................ X ........... .............

Mr. Castle ............................. ........... X ............. Mr. Gutierrez ........................ X ........... .............

Mr. King ................................ ........... ........... ............. Ms. Vela ́zquez ...................... X ........... .............

Mr. Royce .............................. ........... X ............. Mr. Watt ............................... X ........... .............

Mr. Lucas (OK) ...................... ........... X ............. Mr. Ackerman ....................... X ........... .............

Mr. Ney .................................. ........... X ............. Ms. Hooley (OR) ................... X ........... .............

Mrs. Kelly .............................. ........... X ............. Ms. Carson (IN) .................... X ........... .............

Mr. Paul ................................ ........... ........... ............. Mr. Sherman ........................ X ........... .............

Mr. GIllmor ............................ ........... X ............. Mr. Meeks (NY) .................... X ........... .............

Mr. Ryun (KS) ....................... ........... X ............. Ms. Lee ................................. X ........... .............

Mr. LaTourette ....................... ........... X ............. Mr. Inslee ............................. X ........... .............

Mr. Manzullo ......................... ........... X ............. Mr. Moore ............................. X ........... .............

Mr. Jones (NC) ...................... ........... X ............. Mr. Gonzalez ......................... X ........... .............

Mr. Ose ................................. ........... X ............. Mr. Capuano ........................ X ........... .............

Mrs. Biggert .......................... ........... ........... ............. Mr. Ford ................................ ........... ........... .............

Mr. Green (WI) ...................... ........... X ............. Mr. Hinojosa ......................... X ........... .............

Mr. Toomey ............................ ........... X ............. Mr. Lucas (KY) ..................... ........... ........... .............

Mr. Shays .............................. ........... X ............. Mr. Crowley .......................... X ........... .............

Mr. Shadegg ......................... ........... X ............. Mr. Clay ................................ ........... ........... .............

Mr. Fossella .......................... ........... ........... ............. Mr. Israel .............................. X ........... .............

Mr. Gary G. Miller (CA) ......... ........... X ............. Mr. Ross ............................... X ........... .............

Ms. Hart ................................ ........... ........... ............. Mrs. McCarthy (NY) .............. X ........... .............

Mrs. Capito ........................... ........... X ............. Mr. Baca .............................. X ........... .............

Mr. Tiberi .............................. ........... X ............. Mr. Matheson ....................... X ........... .............

Mr. Kennedy (MN) ................. ........... X ............. Mr. Lynch ............................. ........... ........... .............

Mr. Feeney ............................. ........... X ............. Mr. Miller (NC) ..................... X ........... .............

Mr. Hensarling ...................... ........... X ............. Mr. Emanuel ......................... X ........... .............

Mr. Garrett (NJ) ..................... ........... X ............. Mr. Scott (GA) ...................... X ........... .............

Mr. Murphy ............................ ........... X ............. Mr. Davis (AL) ...................... X ........... .............

Ms. Ginny Brown-Waite (FL) ........... X .............

Mr. Barrett (SC) .................... ........... X .............

Ms. Harris ............................. ........... X .............

Mr. Renzi ............................... ........... X .............

1Mr. Sanders is an independent, but caucuses with the Democratic Caucus. 

327

DISSENTING VIEWS

Section 301 of the FY 2004 Budget Resolution requires committees to ‘‘submit findings that identify changes in law within their 

jurisdictions that would achieve the specified level of savings 

through the elimination of waste, fraud and abuse’’ in ‘‘mandatory 

programs.’’ Report language indicates that such submissions must 

‘‘reduce outlays by an amount to be specified by the chairmen of 

the Budget Committees.’’

The findings contained in this report fail in every respect to meet 

the requirements of Section 301 of the Budget Resolution. The ‘‘unliquidated obligations’’ that are the sole focus of these findings do 

not represent ‘‘waste, fraud, and abuse.’’ These obligations do not 

arise from ‘‘mandatory programs.’’ The admonition contained in the 

findings that agency managers recapture unliquidated obligations 

not needed for programs or services would not, by definition, reduce ‘‘outlays’’ by even a single penny. And, the findings do not 

identify any ‘‘changes in law.’’

WASTE, FRAUD, AND ABUSE

Section 301 of the Budget Resolution requires submissions providing for the elimination of ‘‘waste, fraud, and abuse.’’ The findings in this report conclude that ‘‘savings can be most readily identified in funds labeled as unliquidated obligations.’’ The report cites 

in particular the HUD Section 8 and 236 programs, and the Rural 

Housing Service (RHS) Section 521 program. 

However, nowhere in either the written statement or oral testimony of either HUD’s Chief Financial Officer (CFO) or the RHS 

Undersecretary for Rural Development is there any showing that 

these unliquidated obligations in any way result from or lead to 

‘‘waste, fraud, and abuse.’’

Both of these Bush Administration witnesses explained that balances predominantly reflect funds that will be needed at a future 

date to meet expected obligations. If appropriated funds exceed expected obligations, they are routinely recaptured and used to offset 

the cost of other programs or used for purposes specified by Congress. The written statement of HUD’s CFO addresses the level of 

unexpended balances in HUD programs and concludes that ‘‘In the 

vast majority of cases, these unexpended funds are either fully 

committed to long-term projects and will be spending out normally 

for many years to come, or are obligations from relatively recent 

appropriations and could not reasonably be expected to have been 

expended at this time. 

On the issue of Section 8 balances, in response to the question 

‘‘Would you describe that as fraud or abuse or waste?’’, the HUD 

CFO responded ‘‘Absolutely not.’’

MANDATORY PROGRAMS

The title of Section 301 of the Budget Resolution specifically refers to waste, fraud, and abuse in 11 mandatory programs.’’ However, none of the programs cited in the hearing by either HUD or 

RHS are mandatory programs. Section 8, Section 236, Section 521, 

and the other programs discussed in the hearing are all discreVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00333 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
328

tionary programs. On this point, the ‘‘findings’’ are clearly non-responsive to the Budget Resolution directive. 

OUTLAY SAVINGS

As noted, Section 301 report language clearly specifies that the 

findings must identify programmatic instances of waste, fraud, and 

abuse which reduce ‘‘outlays.’’ Yet, the recapture of unobligated 

balances which are not needed for future obligations, as recommended by the findings, would not achieve any outlay savings. 

This is because if the funds are not expected to be spent, under 

OMB and CBO rules there are no outlay savings from their rescission or recapture. The only scoreable reduction would be in budget 

authority. 

CHANGES IN LAW

Section 301 requires committees to submit findings that identify 

‘‘changes in law’’ to achieve the required savings. The findings 

being submitted herein identify no changes in law, only general admonitions to HUD and RHS to do a better job of tracking unobligated balances, in anticipation of their recapture. We are surprised 

that the majority thinks that the Bush Administration needs to be 

reminded of this, but telling HUD and the Agriculture Department 

to obey the law does not qualify as a change in the law. 

FUNDING CUTS FOR HOUSING PROGRAMS

This is the most serious defect in the majority report. The findings in this report conclude that deobligation or recapture of unliquidated balances ‘‘could result in significant savings without meaningful reductions in program services.’’ We would be pleased if that 

were the case. But, the reality is that the substantial recapture of 

such balances in recent years has contributed to the substantial 

funding cuts to housing programs, which have marked the Republican record. 

The FY 2004 VA–HUD appropriations bill recently adopted includes recapture of over a billion dollars in unobligated Section 8 

budget authority. Yet, these funds did not shield HUD programs 

from program cuts. We believe there are insufficient funds in the 

FY ’04 bill to fully fund Section 8 renewals, which would adversely 

affect both recipients and administrators. That bill also includes a 

devastating $524 million cut in the public housing HOPE VI revitalization program. 

Repeatedly, under Republican control, Congress has rescinded 

unobligated Section 8 funds in supplemental spending bills and diverted such funds for non-housing programs. According to preliminary data provided by CBO, Congress rescinded $6.85 billion in 

Section 8 budget authority in supplemental spending bills from FY 

1997 through FY 2002. The overwhelming majority of these rescissions were used to fund non-housing expenditures. These rescissions took place at a time when the majority party argued there 

were not enough funds in the budget for housing programs, and 

pushed through deep cuts in affordable housing programs. 

Therefore, we are concerned that the findings in this report create the false impression that budget savings can be easily effected 

329

in housing programs through a better job of rooting out waste, 

fraud, and abuse, and without any effect on the families that rely 

on these programs. Cuts to programs such as public housing, Section 8, and rural rental housing have real consequences, denying 

critically needed rental assistance to low-income families, seniors, 

and the disabled, and permitting the unnecessary deterioration of 

our affordable housing stock.

BARNEY FRANK. 

PAUL E. KANJORSKI. 

CAROLYN B. MALONEY. 

LUIS V. GUTIERREZ. 

MELVIN L. WATT. 

JULIA CARSON. 

BRAD SHERMAN. 

JAY INSLEE. 

CHARLES A. GONZALEZ. 

MICHAEL E. CAPUANO. 

HAROLD E. FORD, JR. 

RUBE ́ N HINOJOSA. 

JOSEPH CROWLEY. 

WM. LACY CLAY. 

STEVEN ISRAEL. 

JOE BACA. 

STEPHEN F. LYNCH. 

BRAD MILLER. 

RAHM EMANUEL. 

ARTUR DAVIS. 

(331)

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON GOVERNMENT REFORM, 

Washington, DC, September 23, 2003. 

Hon. JIM NUSSLE, 

Chairman, Committee on the Budget, 

House of Representatives, Washington, DC. 

DEAR CHAIRMAN NUSSLE: Pursuant to H. Con. Res. 95, the Concurrent Resolution on the Budget for Fiscal Year 2004, I respectfully submit the following findings that identify changes in law 

within the jurisdiction of the Committee on Government Reform 

that would achieve at least the level of savings specified by Chairman Nussle under the Resolution through the elimination of waste, 

fraud, and mismanagement. 

Sincerely, 

TOM DAVIS, Chairman. 

FINDINGS ON WASTE, FRAUD, AND MISMANAGEMENT PURSUANT TO SECTION 301 OF HOUSE CONCURRENT RESOLUTION 95

The Concurrent Resolution on the Budget for Fiscal Year 2004, 

H. Con. Res. 95, (the Budget) requires House and Senate authorizing committees to identify waste, fraud, and mismanagement 

within their jurisdictions. The authorizing committees are required 

to submit to their respective Budget Committees findings as to the 

changes in law needed to eliminate waste, fraud, and mismanagement. 

The Budget provides that the Committees on the Budget specify 

the dollar level of savings to be achieved through the elimination 

of waste, fraud, and mismanagement by the authorizing committees. Pursuant to that provision, the House Committee on the 

Budget has directed the Committee on Government Reform to find 

savings of $827 million in fiscal year 2004, $4.496 billion over the 

2004–08 period, and $9.998 billion over the 2004–13 period through 

the elimination of waste, fraud, and mismanagement within its jurisdiction (Congressional Record, May 21, 2003, H4512). 

Under the Rules of the House, the Committee on Government 

Reform’s diverse jurisdiction includes the federal civil service, the 

District of Columbia, and the Postal Service as well as the overall, 

economy, efficiency, and management of government operations, 

federal paperwork reduction, and the relationship of the federal 

government to the states and municipalities (Rule X, clause 1 of 

the Rules of the House of Representatives). Consequently, government-wide cross-agency reforms such as procurement, property 

management, information sharing, performance assessment, and 

the federal grant-making process are within the Committee’s jurisdiction. During consideration of the Budget in the House of RepVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00337 Fmt 6601 Sfmt 6601 E:\HR\OC\A421.XXX A421
332

1 According to the testimony of the OPM Inspector General, the erroneous payment rate in 

OPM’s retirement programs was less than one-half of one percent and the improper payment 

rate in OPM’s health insurance programs was less than one percent (Full Committee Hearing 

on ‘‘Cutting Out Waste, Fraud, Mismanagement, Overlap and Duplication: Exploring Ideas for 

Improving Federal Reorganization, Management and Spending,’’ July 16, 2003). The General Accounting Office has not identified any of these OPM programs as being at high-risk for waste, 

fraud, or mismanagement (Performance and Accountability Series, Major Management Challenges and Program Risks: Office of Personnel Management, January 2003, GAO–03–115). 

resentatives, Chairman Davis and Chairman Nussle engaged in a 

colloquy where the Chairmen clarified that government-wide crossagency reforms within the Committee’s jurisdiction were appropriate targets for savings from waste, fraud, and mismanagement 

(Congressional Record, March 20, 2003, H2196). 

Of potential significance within the Committee’s jurisdiction, the 

Office of Personnel Management (OPM) administers the retirement, health, and life insurance programs for the federal civil service, which taken together, account for more than $900 billion in 

projected mandatory spending (spending not subject to annual appropriations) over the next ten years according to the Congressional Budget Office. Although these programs do not appear to experience high rates of waste, fraud, and mismanagement, small 

percentage improvements in such large programs can result in significant savings.1 Consequently, the Committee’s first finding addresses these programs by proposing an increase in the operating 

budget for the Inspector General of the Office of Personnel Management. 

The Committee also proposes three additional reforms under the 

Committee’s broad jurisdiction over the management of Government operations. These reforms would achieve billions of dollars in 

savings to the federal government without reducing the levels of 

benefits or services provided. The Committee is proposing reforms 

to the management of federal real property, increasing data sharing for the purpose of reducing improper payments in benefit programs, and increasing competition and accountability for federal 

grants. 

Office of Personnel Management Programs 

OPM administers three programs within the sole jurisdiction of 

the Committee on Government Reform that have a significant dollar level of spending commitments. The Committee held a hearing 

on July 16, 2003 on ways to eliminate waste and mismanagement 

in these programs. During fiscal year 2002, the Federal Employees 

Health Benefits Program (FEHBP) had outlays of $24 billion, the 

Retirement Programs had $48 billion, and the Federal Employees 

Group Life Insurance Program had $2 billion. Fraudulent claims in 

FEHBP arise from improper payments to carriers by health care 

providers and suppliers, submitting false claims for services not 

rendered, billing for unnecessary procedures, falsifying billing 

codes to obtain higher rates of reimbursement, ordering illegal procedures for patients, and defective pricing payments. Fraudulent 

payments in the Retirement Programs include erroneous benefits 

paid after the annuitant’s death and computation errors. The OPM 

Inspector General testified that the work his office is doing to recover fraudulent payments in these programs results in approximately $12 recovered for each dollar spent by his office. In fiscal 

333

year 2002, the OPM IG recovered approximately $116 million. The 

Committee proposes the doubling of the IG budget from $12 million 

to $24 million, which should result in an increased savings of $116 

million annually. 

The OPM IG has also initiated a program to utilize computer 

technology to develop effective data warehouse and data mining 

techniques to more effectively recover funds lost to waste, fraud, 

and mismanagement by carriers in FEHBP. Implementation of 

these applications should lead to a more comprehensive claims auditing process, which should, in turn, result in increased recovery 

of fraudulent overpayments from audits. 

Federal Real Property Reform 

Underutilized and excess property and deteriorating facilities 

cost the federal government billions of dollars each year. According 

to the General Services Administration, the upkeep of unused real 

property costs an estimated $4 billion annually. The Committee 

held a hearing on the savings that could result from reform of the 

limitations on government agencies’ authority to revitalize or dispose of federal property (‘‘Wasted Space, Wasted Dollars: Reforming Federal Real Property to Meet 21st Century Needs,’’ June 5, 

2003). 

On July 17, 2003, the Committee approved H.R. 2548, the Federal Property Asset Management Reform Act of 2003, which gives 

federal agencies the authority to exchange or sell unwanted property for better-suited property, sublease or outlease underutilized 

property, and partner with the private sector to redevelop or improve property. The legislation also provides agencies incentives, 

such as allowing retention of proceeds from dispositions and application to the agency’s capital asset needs, and offsetting direct and 

indirect costs associated with property disposal. 

The bill contains a variety of property management tools that 

would improve property management and the condition of the federal workplace. The legislation was developed in consultation with 

the Administration and contains many of the property management 

reforms included in the President’s Freedom to Manage Initiative. 

Specifically, the bill would: 

• Direct the Administrator of General Services to develop 

asset management principles to guide federal agencies and establish performance measures to determine the effectiveness of 

federal property management; 

• Require each agency to appoint a real property officer to 

ensure that assets meet strategic objectives, ensure the observance of asset management principles, prepare asset management plans and generally coordinate agency real property functions and processes; 

• Authorize federal agencies to exchange or transfer property with other federal agencies; 

• Authorize GSA, acting on behalf of landholding agencies, 

to enter into agreements with non-federal entities to exchange 

or sell property as a means of acquiring replacement property 

or services better suited for mission purposes; 

• Authorize GSA, acting on behalf of landholding agencies, 

to sublease unexpired portions of Government-leased property; 

334

2Full Committee Hearing on ‘‘Cutting Out Waste, Fraud, Mismanagement, Overlap and Duplication: Exploring Ideas for Improving Federal Reorganization, Management and Spending,’’ 

July 16, 2003, testimony of Paul Posner, Managing Director for Federal Budget and Intergovernmental Relations Issues, Strategic Issues, General Accounting Office. 

• Authorize GSA, acting on behalf of landholding agencies, 

to lease assets that must remain in federal ownership, and 

partner with private sector entities for the redevelopment or 

improvement of selected federal holdings; • Require GSA to report to Congress on their use of public- private partnerships valued at greater than $700,000; • Authorize agencies to retain the proceeds from the sale of 

surplus personal property, subject to appropriations, to offset 

direct and indirect costs incurred in the disposal of such property; • Authorize agencies to retain the proceeds from real property transactions, subject to appropriations, and allow such 

funds to be used for meeting an agency’s capital asset needs; 

and• Reduce the administrative burdens associated with making real property available for homeless assistance under Title 

V of the McKinney Act. 

The bill also contains provisions intended to reduce its budgetary 

impact, such as subjecting spending associated with public-private 

partnerships and receipts collected by agencies’ property management authorities to Congressional appropriations. Nevertheless, the 

Congressional Budget Office (CBO) score of this legislation is again 

expected to be unreasonably high because it likely will not take 

into account the cost savings associated with public-private partnerships and outleases. Although CBO has yet to score this legislation, the Office of Management and Budget and the Committee believe that full implementation of this legislation would save the 

federal government a significant percentage of the $4 billion annual upkeep of unused real property. 

Sharing Information To Reduce Improper Payments 

Improper payments to recipients of federal benefit and loan pro- grams in the amount of $20 billion has been identified in agency 

financial statements for both fiscal years 2001 and 2002.2 Significant reduction of improper payments could be achieved by more aggressive sharing of information collected by one government agency 

and analyzed by the paying agency if the pertinent information is 

utilized to verify program eligibility and provide improved controls 

over payments. For instance, savings have resulted from the use of 

taxpayer information for locating Department of Education loan default recipients and loan repayment amounts and from the use of 

criminal records to identify fugitive felons ineligible for food stamp 

and Temporary Assistance for Needy Families payments. 

Significant savings could also be achieved in the awarding of Department of Education Pell Grants, where approximately $602 million in excess payments were made during fiscal years 2001 and 

2002 because of underreported income by recipients. Internal Revenue Service data could serve as a check on income levels of recipients. Other grant and loan programs administered by the Department of Education where cost-savings could be achieved by data 

335

sharing include the Supplemental Educational Opportunity Grants, 

Stafford and Parent Loans for Undergraduate Students, Perkins 

loans, and work-study programs. 

Reported problems with federal rent subsidy programs administered by the Department of Housing and Urban Development 

(HUD) also suggest possible savings through better information 

sharing. HUD financial statements for fiscal year 2001 report that 

the federal government overpaid rent subsidies by almost $1 billion 

due to the underreporting of income by tenant beneficiaries. Similar savings could be targeted in Medicare and Social Security payments by relying on state and local death data, in Housing and 

Urban Development mortgage insurance programs by relying on 

IRS data, and in Food Stamp payments by comparing data on IRS 

income levels. 

The Committee proposes that government-wide cross-agency statutory provisions should be enacted that would allow administrators 

of federal benefit programs limited access to certain federal and 

state administrative data, such as federal tax returns and the National Directory of New Hires, for the purpose of verifying beneficiaries’ eligibility. Limited access would be provided only in accordance with appropriate security and control policies to protect 

against unauthorized or inappropriate disclosure of information. 

Enact Office of Management and Budget Recommendations for Expanding Competition and Accountability of Federal Grant 

Awards 

In fiscal year 2001, the federal government awarded $325 billion 

in federal grants (U.S. Chief Financial Officers Council, Federal Financial Assistance Management Improvement Act of 1999, p.2). 

Unlike federal procurement law, there are no uniform procedures 

for competing out federal grants, nor is it possible to establish how 

many grants and how much money are awarded by the federal government by non-competitive means. Because of Congressional earmarks, preferences for past grant recipients, and a lack of uniform 

certification and assurance requirements, many grants are not 

competitively awarded and lack accountability. The Committee believes that significant savings may be achieved by competitively 

awarding federal grants and requiring greater accountability. 

In the 106th Congress, the Committee on Government Reform 

worked to enact the Federal Financial Assistance Management Improvement Act of 1999 (P.L. 106–107). The act requires federal 

agencies to simplify the procedures by which state and local governments and nonprofit organizations apply for federal grant and 

assistance programs. Within three years of enactment, agencies 

were required to develop plans to implement the legislation’s seven 

objectives, and report the plans to Congress. The seven objectives 

are: 

1. Streamline and simplify the application, administrative, 

and reporting procedures for federal financial assistance programs; 

2. Demonstrate active participation in interagency coordination; 

3. Demonstrate appropriate agency use, or plans for use, of 

the common application and reporting systems; 

336

4. Designate a lead agency official for carrying out the responsibilities of the agency under the act; 

5. Allow applicants to electronically apply for, and report on 

the use of, funds from the federal financial assistance program 

administered by the agency; 

6. Ensure recipients of federal financial assistance provide 

timely, complete, and high quality information in response to 

federal reporting requirements; and 

7. Establish specific annual goals and objectives, in cooperation with recipients of federal financial assistance, and measure annual performance. 

The Act also requires OMB to report to the Congress on the 

agencies’ plans and the General Accounting Office to evaluate and 

report to OMB and the Congress on the bill’s effectiveness. On May 

31, 2002, OMB submitted to the Congress its first set of recommendations to identify statutory impediments to competitively 

awarding federal grants. The recommendations included the following: 

1. Rationalize the certifications and assurances required of 

grantees; 

2. Determine the proper use of ‘‘certifications’’ and ‘‘assurances;’’ 

3. Modify program statutes to set aside a specific percentage 

of grant or program funding to pay for third party evaluation; 

4. Shorten area-wide agency review to a reasonable period; 

5. Establish simplified procedures for smaller organizations 

to receive section 501(c)(3) tax status; 

6. Establish uniform requirements for financial assistance 

programs across all thirteen appropriations acts; 

7. Identify common requirements across program areas, consolidate reporting requirements, and establish uniform definitions; 

8. Require the use of a single identifier for all grantees and 

require its use in the administrations E-Grants initiative; and 

9. Raise the threshold that requires grantees to be audited from $300,000 to $500,000 in annual federal assistance.; 

Pursuant to these recommendations, the Committee proposes to 

amend Federal Financial Assistance Management Improvement 

Act of 1999 and enact these recommendations. The Committee believes that the enactment of these recommendations would enable 

and encourage more organizations to compete for the award of federal grants and financial assistance and also ensure greater accountability. Greater competition and accountability for federal 

grants will promote greater efficiencies in the delivery of the intended benefits of the grant programs and allow the federal government to deliver the same benefits at a lower level of spending. 

ADDITIONAL VIEWS

I support ridding the government of waste, fraud, and abuse. I 

do not support, however, the numerical targets for waste, fraud, 

and abuse reduction that were handed out by Budget Committee 

Chairman Nussle. Eliminating waste, fraud, and abuse is inherently a bottom-up endeavor. Congress needs to scrutinize every 

program carefully to find areas of waste, fraud, and abuse—not 

337

cook the books to meet arbitrary targets from the Budget Committee. 

The Budget Committee instructed our Committee to identify 

ways to reduce waste, fraud, and abuse equal to 1% of the total 

mandatory spending subject to our Committee’s jurisdiction, which 

the Budget Committee said was $9.9 billion over 10 years. This 

number is wrong because it double counted the civil service retirement and disability trust fund and the supplemental DC pension 

trust fund. In fact, 1% of the mandatory spending in Committee on 

Government Reform’s jurisdiction is only $7.3 billion over 10 years. 

Moreover, even this $7.3 figure is unachievable. As the majority’s 

findings explain, the amount of funds that can be saved in the 

mandatory spending programs within the jurisdiction of the Committee on Government Reform is relatively small. 

The majority makes several recommendations for reducing waste, 

fraud, and abuse in discretionary spending. I agree with some of 

these recommendations, such as increasing the operating budget 

for the Inspector General (IG) of the Office of Personnel Management. In addition, I support passage of H.R. 2548, the Federal 

Property Asset Management Reform Act of 2003, although there is 

dispute among experts about the amount of savings this legislation 

would produce. 

In other instances, I support the goals articulated by the majority, but have some unanswered questions about the means. For example, the majority recommends reducing improper payments by 

increasing data sharing. Reducing improper payments is an important goal, but there are unanswered questions about data sharing. 

For example, it is important to know what information should be 

shared and with whom while still protecting privacy, confidentiality, and program integrity. The majority also makes recommendations regarding the grants process in the name of increasing competition and accountability. I support more competition and 

more accountability, but it is unclear whether the specific proposals 

in the majority’s findings would achieve those worthy goals. 

One major concern I have about the majority’s submission is the 

blind eye it turns to probably the biggest source of waste, fraud, 

and abuse in discretionary spending in the federal government: 

waste, fraud, and abuse in procurement contracts. 

Although it receives little attention, the government is relying 

heavily on private contractors to provide government services and 

the potential for real waste, fraud, and abuse is staggering. Federal 

contracting now costs the taxpayer $245 billion per year. This Administration’s focus on outsourcing federal jobs is driving these 

numbers even higher. 

In addition, there is an increasing use of abuse-prone contracting 

vehicles. These contract vehicles are a confusing alphabet soup of 

acronyms—ID/IQ, GWACs, and multiple-award contracts—but they 

often spell lucrative sole-source awards for large corporations. In 

the Department of Defense (DOD), whose contracting budget is 

more than double the next nine largest federal agencies combined, 

billions are awarded in noncompetitive contracting, most often to 

companies that are favored campaign contributors like Halliburton, 

Bechtel, and Lockheed Martin. 

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To illustrate the problem, in 1999, the DOD IG audited 124 randomly chosen multiple-award contracts. The IG found that nearly 

half were sole-sourced. Of those that were sole-sourced, only eight 

had a valid justification. In 2001, the IG’s office updated its work 

and found that 72% were awarded on a sole-source or directedsource basis. Injecting competition and ensuring that multiple contractors were eligible to bid on specific task orders could cut costs 

to the taxpayer by up to one third. 

These abuse-prone contracts would invite waste, fraud, and 

abuse even if we had a robust acquisition workforce and adequate 

procurement oversight. We don’t. The federal government’s acquisition workforce has declined 22% in the decade between 1991 and 

2001. This diminishing government oversight is a huge problem. In 

43 out of the 67 cases of so-called ‘‘performance-based’’ contracts reviewed by the DOD IG, contract offices failed to provide adequate 

oversight of payments. 

External oversight is disappearing as well. For example, the 

DOD’s Deputy IG testified, before the Committee on Government 

Reform in 2000, ‘‘our oversight of Defense acquisition has been severely constrained by resource shortfalls and conflicting priorities.’’ 

He added, ‘‘Audit coverage has been inadequate in nearly all defense management sectors that we and the General Accounting Office have identified as high risk areas.’’ Requiring increased contract oversight could save millions. 

Curbing waste, fraud, and abuse in the federal government is imperative. But to do so effectively, we should stick to the old adage: 

‘‘Follow the money.’’ Given the enormous sums of taxpayer dollars 

that are going to private contractors, we should be focusing significantly more resources in reducing government waste, fraud, and 

abuse in government procurement.

HENRY A. WAXMAN. 

(339)

1 An individual may give more than $250 to a primary candidate. However, only $250 of such 

a contribution counts toward the $5,000 threshold. 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON HOUSE ADMINISTRATION, 

Washington, DC, September 2, 2003. 

Hon. JIM NUSSLE, 

Chairman, Committee on the Budget 

Cannon House Office Building, Washington, DC. 

DEAR CHAIRMAN NUSSLE: Pursuant to section 301(b) and (c) of H. 

Con. Res. 95, the Committee on House Administration submits the 

following report identifying means of eliminating waste, fraud, and 

abuse in mandatory spending programs that fall within the Committee’s jurisdiction. 

* * * * * * *

One non-discretionary spending program falls within the jurisdiction of the Committee on House Administration: the Presidential 

Election Campaign Fund (‘‘the Fund’’). The Fund constitutes a separate account in the United States Treasury that funds the general 

election campaigns of presidential candidates who meet certain criteria and who agree to abide by a national spending ceiling. The 

Fund is financed not by a congressional appropriation but by the 

voluntary check-off found on federal tax returns that allows taxpayers to designate $3 to the Fund. 

Within the Fund is the Presidential Primary Matching Payment 

Account (‘‘PPMPA’’), a program enacted in 1974 that is designed to 

defray costs incurred by candidates who seek their party’s presidential nomination. To qualify for matching payments, a candidate 

must raise a minimum of $5,000 in individual contributions of $250 

or less 1 in each of at least 20 states and agree to abide by both 

state-by-state spending limits as well as an overall national spending limit. In other words, a candidate who agrees to the limits 

would only need 20 individuals to contribute $250 in each of at 

least 20 states to be eligible for federal subsidies for his or her primary campaign. During the 2000 election cycle, the Federal Election Commission (‘‘FEC’’), which administers the Fund and the 

PPMPA, certified approximately $240 million in public campaign 

funds: nearly $148 million to qualifying general election candidates; $29.5 for the political party conventions; and $62 million 

for primary matching payments. 

Finding One: Low PPMPA Threshold 

The Committee believes that now is an appropriate time for Congress to consider legislative changes that would raise the qualifying 

threshold established by the PPMPA so that individuals who clearly are not viable presidential candidates are not able to exploit the 

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340

2The FEC has in the past offered legislative recommendations regarding the PPMPA that the 

Committee believes merit consideration. The proposals set forth in this report reflect much of 

what the FEC has recommended. 3The 1996 primary spending limit, which serves as the baseline for this example, was approximately $30.9 million. 

pecially high when first enacted and has been significantly eroded 

by inflation during the intervening 29 years. Strengthening the 

PPMPA threshold would have the potential for saving substantial 

amounts of federal dollars but would need to be crafted so that the 

new threshold is not set so high that legitimate late blooming candidates are deprived of crucial campaign funds. 

Raising the PPMPA threshold could be accomplished in a couple 

of different ways.2 The first possibility would be to raise the current threshold to account for past inflation and then index it for future inflation. For instance, when adjusted for inflation, the $5,000 

threshold established in 1974 would be worth approximately 

$18,650 today. Multiplying this amount by 20 (the minimum number of states in which the candidate would need to reach this 

threshold), a presidential primary candidate seeking federal matching funds would have to raise at least $373,000 under this scenario 

(assuming all other factors remained the same). 

Instead of setting a specific dollar threshold, Congress could instead express the threshold as a percentage of the overall primary 

spending limit during the previous presidential election cycle. For 

example, the primary spending limit for the 2000 election cycle was 

$40,536,000. Taking this dollar figure as a baseline, the following 

table lists different percentages that could serve as potential 

thresholds and the corresponding dollar amounts that would be 

trigger matching payments:

Percentage Threshold amount 

2 ............................................................................................................... $810,720 

3 ............................................................................................................... 1,216,080 

4 ............................................................................................................... 1,621,440 

5 ............................................................................................................... 2,026,800

This approach would also involve a corresponding increase in the 

amount needed to be raised within at least 20 states in order to 

qualify for matching payments. 

Having such a threshold would result in substantial savings of 

tax dollars. For example, if a percentage threshold of five (5) percent had been in place during the 2000 election cycle,3 nearly $2.9 

million in tax dollar savings would have been realized. 

To further strengthen the criteria for receiving primary matching 

payments, Congress may also wish to consider expanding the test 

for broad geographic support by requiring candidates to raise the 

minimum amount in at least 30 states, rather than the current requirement of 20. Tax dollar subsidies for campaign activities should 

be reserved only for those individuals who have demonstrated viable candidacies. Thus, requiring a presidential candidate to collect 

the minimum amount in at least 30 states (which is just over half 

of the total number of U.S. states and territories) seems like a reasonable test of viability. 

341

4FEC Legislative Recommendation, 2001. 

Funding Two: Availability of Public Financing to Criminal Violators of the Fund and/or the PPMPA 

The Committee recommends amending the law to make clear 

that candidates who have been convicted of knowing and willful 

(i.e., criminal) violations relating to the Fund or the PPMPA or who 

have not made repayments with respect to past campaigns will no 

longer be eligible for public funding in future elections. As the FEC 

has clearly stated, ‘‘[t]here is a risk of serious erosion in the public 

confidence in the integrity of the public financing system if the U.S. 

Government . . . provide[s] public funds to candidates who ha[ve] 

been convicted of crimes related to the public funding process, or 

additional funds to those who ha[ve] not made past repayments.’’ 4

However, under current law, the FEC is unable to deny federal 

matching funds on the grounds that the requestor previously 

abused the public financing system. This quirk in the law needs to 

be remedied. 

* * * * * * *

The issue of reforming the Fund and the PPMPA has been the 

subject of much debate and discussion in recent months. On the 

one hand, there are proposals to expand the current system to provide greater resources to candidates during presidential primaries 

and to allow third-party candidates and independents greater access to public funds during the general election. Such proposals 

would obviously significantly increase the amount of federal revenues dedicated to public campaign financing. On the other hand 

are individuals and groups advocating that the presidential public 

finance system be dismantled, thereby saving hundreds of millions 

of dollars in the process. 

The issues surrounding the potential reform or eventual abolishment of the Fund and the PPMPA are complex and multifaceted. 

Therefore, the Committee will likely be holding hearings on the 

subject in the near future. 

Sincerely, 

BOB NEY, 

Chairman, 

Committee on House Administration. 

(343)

COMMITTEE ON INTERNATIONAL RELATIONS, 

HOUSE OF REPRESENTATIVES, 

Washington, DC, September 8, 2003. 

Hon. JIM NUSSLE, 

Chairman, Committee on the Budget, House of Representatives, 

Cannon House Office Building, Washington, DC. 

DEAR JIM: On Thursday, September 4, 2003, the Committee on 

International Relations held a hearing entitled, ‘‘Government Accountability: Efforts to Identify and Eliminate Waste and Mismanagement.’’ This hearing was rescheduled from July 24, 2003. 

The Conference Report that accompanied the budget resolution 

for FY ’04 (House Report 108–71) requires the House and Senate 

authorizing committees to identify means of eliminating waste, 

fraud, and mismanagement in mandatory spending programs (programs not subject to annual appropriations) within their jurisdictions. The specific purpose of the hearing was to examine government accountability and ways to identify and eliminate waste and 

mismanagement within the U.S. Department of State and the 

United States Agency for International Development (USAID). The 

Committee received testimony from the Honorable Christopher 

Burnham, Assistant Secretary for Resource Management and Chief 

Financial Officer for the Bureau of Resource Management, U.S. Department of State; the Honorable Anne M. Sigmund, Acting Inspector General, U.S. Department of State; the Honorable John Marshall, Assistant Administrator for Management and Chief Information Officer, U.S. Agency for International Development; the Honorable Everett Mosley, Inspector General, U.S. Agency for International Development; and Mr. Jess Ford, Director, International 

Affairs and Trade, General Accounting Office. 

Background 

The International Relations Committee has jurisdiction over 

Budget Function 150, International Affairs Accounts. Based on the 

Congressional Budget Office’s review, the 150 Account has very little money that is designated as mandatory funds. The designated 

mandatory accounts are organized as follows: 

1. State Department and USAID foreign service retirement 

and disability funds; 

2. Various accounts related to credit programs (such as 

OPIC, EXIM Bank, food aid); and 

3. Trust funds—most of them are small with the exception 

of the approximate $10 billion in the foreign military sales 

trust fund. 

The credit programs and the foreign military sales trust fund do 

not represent money that is appropriated by the U.S. Government. 

The $10 billion in the military sales trust fund is the amount of 

money that foreign governments are required to deposit with the 

344

U.S. Government in advance of delivery of U.S. military sales. We 

would suggest that these programs are not funded with appropriated dollars, and that they should be exempted from the targeted cuts. Therefore, only the State Department and USAID foreign service retirement and disability funds are eligible for program reductions under this exercise, which will not yield the levels 

of funding anticipated in the budget resolution. Given the limited 

international affairs funds available in mandatory accounts, the 

Committee examined areas beyond mandatory spending in order to 

meet the Budget Committee’s targeted levels. 

On the discretionary side, the Function 150 accounts include 

funding for the domestic and overseas operations of the State Department and USAID, U.S. international broadcasting, U.S. foreign 

assistance, U.S. security assistance programs, the Peace Corps, embassy construction and security upgrades, and U.S. participation in 

international organizations. The President’s FY ’04 request for foreign affairs spending is $28.5 billion. This Committee reviewed the 

budget request through a hearing with Secretary Powell in February 2003. In large part, the budget is authorized at or above the 

President’s request in the House-passed bill, H.R. 1950, which incorporates the Millennium Challenge Account, the Peace Corps, Security Assistance, and State Department Operations. 

Hearing Results 

The International Relations Committee directed the State Department and USAID, and the agencies’ respective Inspectors General, to testify regarding the ongoing efforts to combat waste, fraud 

and mismanagement and to recommend legislative changes that 

may further these efforts. GAO also provided a detailed analysis on 

these issues.

The testimony on the ongoing efforts of each agency to promote 

and achieve cost savings and better government accountability 

identified the following:

The State Department is relocating the Department’s Financial Service Center operations and its employees from 

Paris to South Carolina. This will save the Department 

$1.2 million annually, and eliminate 21 State Department 

positions. This move will consolidate operations and will 

result in a cost savings due to the reduced cost of overseas 

placements. 

The State Department has blocked the merchant category codes for all items not directly related to travel in 

an effort to prevent misuse of taxpayer funds, fraud and 

identity theft. New policies are also being circulated for approval which better define misuse and credit card delinquency issues. 

In addition to developing a joint strategic plan, State 

and USAID are working together to implement a shared financial management system, which will reduce duplicative 

efforts. In addition, many of the features being developed 

have been baselined into the software for reuse by other 

federal departments. This will reduce long-term maintenance costs and provide benefits to other federal agencies 

requiring these capabilities. There are other joint projects 

345

underway which will provide better opportunities for cost 

savings and collaboration. 

‘‘Rightsizing,’’ a management approach aimed at 

rationalizing staff at overseas missions, seeks to match all 

government staff to the mission goals. Annual mission 

plans at embassies are designed to set out staffing needs 

to meet the goals of the particular mission. Rightsizing of 

staff will also have implications for the State Department’s 

embassy construction program. A commitment to the principles of rightsizing government-wide will help to ensure 

that embassies are built most cost effectively. Rightsizing 

must remain a priority within the Department. It could 

yield savings from a rationalization of staff, and more accurate information for building new overseas facilities. In 

addition, the State Department is furthering goals of regionalization of support services through the renovation of 

the Creekbed facility in Frankfurt, Germany. 

The Department continues to analyze its need to further 

dispose of properties that are underutilitzed, in excess, or 

vacant. The Department projects millions of dollars may be 

saved by the continued disposal of the appropriate properties. In the last five years, the Department has sold 137 

properties for almost $365 million. GAO observed that the 

Department’s ‘‘performance in selling unneeded property’’ 

has improved. However, proper management of the approximately $12 billion in real estate assets must continue. 

Improved processes for review of property inventory and 

disposal of excess properties will help offset costs of replacing insecure facilities or avoid long-term lease costs for 

housing or office facilities. 

State is redirecting and streamlining its information 

technology systems to provide for ease of use by the consumer and security of use worldwide. The Department responded to a recommendation by the Office of the Inspector General (OIG) to discontinue the Foreign Affairs System Integration (FASI) project, thereby avoiding a cost of 

$200 to $250 million to deploy the system. The OIG contended that the project was imperfectly conceptualized and 

inadequate effort was made in the area of knowledge management. This is being addressed, with a reexamination of 

user requirements and consideration of alternative approaches for meeting the knowledge-sharing requirements. 

The State Department’s Acting Inspector General reported that over the last ten years, the amount reported 

to the OIG as embezzled from the Department is over $5 

million. The OIG conducts investigations and many have 

resulted in successful criminal prosecutions requiring restitution. Restitution of over $3.8 million has either been 

made or ordered. USAID investigations of a bid-rigging 

and fraud in construction projects in Egypt resulted in a 

savings of $260 million over 2 years (2000–2002). Continued oversight of the contracts administered by AID could 

also result in future savings. 

346

USAID has developed customer service standards and 

initiated activity-based costing to improve services, get a 

better handle on costs, and reallocate resources to its most 

important business needs. It also has developed mandatory 

training for Contract Technical Officers within USAID to 

avoid unauthorized obligations that can lead to charges of 

waste, fraud and abuse. Annual mandatory ethics training 

is part of the system.

Questions for the Record are being proposed to each agency and 

the Committee expects detailed responses in the near future. The 

Committee will follow-up with any pertinent issues which should 

arise as a result of the inquiry. Additionally, the Committee will 

request that the Congressional Research Service update international affairs budget trend reports for the Committee’s further 

use. We will also seek information on whistle-blower complaints, as 

oftentimes they are useful tools in rooting out waste, fraud or 

abuse from within a governmental agency. 

As part of this Committee’s commitment to improving management and accountability practices and our ongoing process of conducting oversight over the Department of State and the U.S. Agency for International Development, we will continue to meet with 

agency officials, review program and budget requests, review congressional notifications of reprogramming of funds, and make suggestions as to how to better modernize operations to prevent waste, 

fraud, abuse, and mismanagement in its programs. 

We look forward to working with your Committee in the future 

on these important matters. 

Sincerely, 

HENRY J. HYDE, 

Chairman. 

TOM LANTOS, 

Ranking Member. 

Enclosures: statements of government witnesses.

TESTIMONY OF CHRISTOPHER B. BURNHAM, ASSISTANT SECRETARY

FOR RESOURCE MANAGEMENT AND CHIEF FINANCIAL OFFICER

Mr. Chairman and Members of the Committee: 

Thank you for this opportunity to appear before the House Committee on International Relations to address the Department of 

State’s efforts to identify and eliminate waste, fraud, abuse and 

mismanagement, and any cost saving reviews that are in process. 

I am the first Assistant Secretary for the Bureau of Resource 

Management. The bureau was created in this Administration from 

elements in different parts of the Department to provide for a more 

systematic budget review process, link performance to the budget 

process, and achieve other economies and efficiencies. As you know, 

efficient management of the Department is a high priority of the 

Secretary, Deputy Secretary, and Under Secretary for Management 

and my Bureau is empowered to carry out this mandate. 

I will highlight in my testimony sound examples of what we are 

engaged in to make the most efficient use of the funding that the 

Congress authorizes to accomplish the Department’s goal to create 

347

a more secure, democratic and prosperous world for the benefit of 

the American people and the international community. 

We are committed to being vigilant stewards of the taxpayers 

hard earned dollars and will endeavor to strive to increase our efforts in this noble cause. 

SUMMARY

I will divide my testimony into three parts. They are the Department’s: 

— Efforts to Eliminate Fraud, Waste, and Mismanagement; 

— Cost Savings Efforts; and 

— Status toward Achieving ‘‘Green’’ in the President’s Management Agenda.

We have many initiatives in process that are contributing to a 

better-managed organization—one where leadership and state-ofthe-art technology receive the highest consideration and recognition. 

I. Department’s Efforts To Eliminate Fraud, Waste, and Mismanagement 

A. Management Control Program 

The Management Control Steering Committee (MCSC) oversees 

the Department’s management control program. The Committee is 

chaired by myself and is composed of nine other Assistant Secretaries (including the Chief Information Officer and the Inspector 

General (the OIG is non-voting)), the Deputy Chief Financial Officer, and the Deputy Legal Advisor. Individual assurance statements from Ambassadors assigned overseas and Assistant Secretaries in Washington, D.C. serve as the primary basis for the Department’s assurance that management controls are adequate. The 

assurance statements are based on information gathered from various sources including the managers’ personal knowledge of day-today operations and existing controls, management program reviews, and other management-initiated evaluations. In addition, 

the Office of the Inspector General (OIG) and/or the General Accounting Office (GAO) conduct reviews, audits, inspections, and investigations. 

Each year, Department organizations with material weaknesses 

are required to submit corrective action plans for the weaknesses, 

to the Committee for review and approval. These plans, combined 

with the individual assurance statements, provide the framework 

for monitoring and improving the Department’s management controls on an on-going basis. 

B. Status of Management Controls and Material Weaknesses 

and Nonconformance 

The Department evaluated its management controls for the fiscal 

year ending September 30, 2002. This evaluation provided reasonable assurance that the objectives of the Federal Managers’ Financial Integrity Act (FMFIA) were achieved in FY–2002. 

The MCSC voted to close the Department’s three remaining material weaknesses: Inadequate Administrative Staffing Overseas, 

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formation System. No new material weaknesses were identified. 

Since there were no outstanding material weaknesses, the Secretary of State provided an unqualified Statement of Assurance for 

FY–2002 regarding the Department’s systems of management control. 

During the past five years, the Department has made significant 

progress by reducing the number of material weaknesses from 

twelve to zero, including the closure of fourteen and the addition 

of two. This is the first time since the inception of the FMFIA that 

the Department has no outstanding material weaknesses—a significant accomplishment. In addition, there are no items specific to 

the Department on the General Accounting Office’s High Risk List, 

and there has not been any since 1995. 

The Department will soon complete its evaluation of its management controls for the fiscal year ending September 30, 2003. 

C. Independent Audit of the Department’s Financial Statements (6 Clean Opinions) 

The Department’s FY–2002 financial statements received an unqualified opinion—the sixth consecutive year that the Department’s 

financial statements have achieved such an opinion. 

The Department’s Performance and Accountability Report (PAR) 

for FY–2002, which includes the Statements, Auditor’s Report, and 

Performance Report was submitted to the Office of Management 

and Budget (OMB) by the required February 1 due date. The PAR 

provides meaningful financial and program performance information about the Department of State. Publication of the PAR is an 

integral part of our efforts to improve our accountability to our customers, constituents, and the public. The Association of Government Accountants (AGA) has awarded the Certificate of Excellence 

in Accountability Reporting (CEAR) to the Department for its FY–

2002 Performance and Accountability Report. The CEAR Program 

is the preeminent award for accounting and reporting in the Federal government. This is the second consecutive year that the Department has received this prestigious award. This year, only three 

cabinet departments won the award, (and four other non-cabinet 

level USG agencies). Further, State’s FY–2002 PAR received a citation for ‘‘most improved report’’ on the Mercatus Center’s annual 

Performance Report Scorecard, which evaluated reports from 24 

CFO Federal agencies. 

The Department also received recognition for its annual report 

(Highlights’ version) in a head-to-head competition with the private, state and non-profit sectors. Each year the League of American Communications judges the best 100 annual reports in America known as the ‘‘Vision Awards Annual Report Competition.’’ This 

year more than 900 entries were submitted. From this group, the 

Department of State was ranked first out of all government entrants, and fourth overall. In achieving this, the Department’s annual report placed ahead of such companies as Dell, Citigroup, 

Lockheed Martin, Caterpillar, General Electric, Booz Allen Hamilton, and Coca Cola. 

The Independent Auditor’s Report on our financial statements 

brings to management’s attention four significant internal control 

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349

mation system networks for domestic operations, the adequacy of 

controls over the management of Unliquidated Obligations (ULO), 

the adequacy of the Department’s financial and accounting systems, and implementation of managerial cost accounting standards. 

The auditor’s report acknowledges that significant progress has 

been made on the first three weaknesses, but that additional work 

remains. 

Going forward, the Department is installing a comprehensive 

framework and process for lifecycle management of Information 

Technology (IT) security. The framework and process will provide 

for continual evaluation and improvement. Our efforts to address 

this weakness include periodic meetings with OIG staff, the independent auditors (Leonard G. Birnbaum and Company), senior 

managers in the Bureau of Information Resource Management and 

our office. The purpose is to identify and coordinate actions needed 

to resolve the weakness and monitor progress. Beginning in March 

2003, we periodically provide a status of these efforts to the OMB 

as part of our reporting on the President’s Management Agenda 

(PMA). Also, we have included this initiative in our FFMIA Remediation Plan. The Department is hopeful that our collaborative efforts will result in the status of this weakness being downgraded 

to a reportable condition by no later than June 2004. 

The weaknesses in the Department’s financial management systems are a long-standing problem. Substantial compliance with 

FFMIA is a top priority of the Department, and improvement initiatives to achieve that goal are well underway. As required by 

FFMIA, the Department submitted our initial Remediation Plan to 

OMB in March 2000, and an updated Plan in October 2001. The 

Department has completed a significant portion of the Plan, including the installation of the worldwide RFMS to replace our overseas 

financial systems. 

Strengthening the management of Unliquidated Obligations is an 

important financial management initiative. As mentioned in the 

Independent Auditor’s Report, the Department has made significant improvements in this area. The ULO System was implemented in FY–2000. We use this system to facilitate the reconciliation, monitoring, reporting and oversight of ULOs worldwide. 

Data in the system is analyzed in various strata and reports to facilitate the review and management of open items. These processes 

were expanded on during FY–2003. We continue to develop reports 

and procedures to use in working with offices to improve the management of ULOs. 

Implementation of Managerial Cost Accounting Standards 

(MCAS) is an important financial management initiative. The Department is making reasonable progress in implementing MCAS, 

but acknowledges that additional work is needed to fully comply 

with these standards. To address MCAS requirements and account 

for expenditure information necessary for budgeting information 

and performance measurement, the Department is developing a 

Central Financial Planning System (CFPS). CFPS, which is included in our FFMIA Remediation Plan, will enable the timely and 

accurate reporting of cost information and associate that information with budget, strategic goals, and program outputs. 

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D. Mission Performance Plan (MPP) and Bureau Performance Plan (BPP) Process 

The process begins at the individual mission level with the Mission Performance Plan (MPP), rolls up into the Bureau Performance Plans (BPP), and eventually is summarized into the Department’s Performance Plan. The Senior Review process provides the 

means to review the Department’s programs as a whole. During 

the Senior Review the Deputy Secretary of State personally assesses Department-wide priorities and looks for all opportunities to 

maximize efficiency. 

Through the Department’s strategic planning and budgeting 

processes the Department is carrying-out policy priorities based on 

the most effective allocation of resources. We are working to develop clear measures of success, as accountability is paramount to 

ensuring that taxpayer dollars are used wisely and efficiently. This 

is essential to serve our country’s interests in and the Department’s mission to create a more secure, democratic, and prosperous 

world for the benefit of the American people and the international 

community. 

1. Department Strategic Plan.—This past year, the Department 

of State has created a new Strategic Planning Framework that 

brings greater clarity, direction, and alignment to the Department’s 

vision. For the first time, the Department and the U.S. Agency for 

International Development (USAID) have developed a consolidated 

Strategic Planning Framework. The new Strategic Plan covers FYs 

2004–2009 and will be updated every three years. 

We have made significant improvements to streamline the plan. 

Four overarching Strategic Objectives cover the major areas of 

work involved, with twelve Strategic Goals linked to them. Relevant outcome oriented performance goals, closely linked to the 

Strategic Goals that address the Department’s progress in achieving its objectives on an annual basis, are also included in the new 

framework. 

2. Mission Performance Plans.—Development of the Mission Performance Plan (MPP) is the first critical step in the Department’s 

annual planning and budgeting cycle. Each Embassy prepares its 

annual MPP that essentially functions as its business plan for all 

Agencies under Chief of mission authority at post. Regional and 

functional bureaus use the MPPs to develop their Bureau Performance Plans (BPPs), and to support their policy, program, and resource requests at the annual Senior Policy, Performance and Resource Reviews chaired by the Deputy Secretary. MPPs are authoritative U.S. Government strategy documents prepared annually 

and covering all agencies at a post on the basis of the goals set 

forth in the Department of State Strategic Plan. 

3. Bureau Performance Plans.—Bureau Performance Plans are a 

key component of the planning process and serve as the basis for 

the interagency annual Senior Policy, Performance and Resource 

Reviews chaired by the Deputy Secretary. They are also used in 

the preparation of Department-wide performance plans and the annual combined performance and accountability report, as well as 

for budget submissions sent to OMB and the Congress, including 

Foreign Operations and State Operations resource requests. They 

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quirements and hiring plans. In preparation for the annual Senior 

Policy, Performance, and Resource Reviews, I chair individual sessions with bureaus to ensure the best bureau business plans are 

put forth to the Deputy Secretary. 

4. Senior Reviews.—Each summer, the Deputy Secretary of State 

chairs the Senior Policy, Performance and Resource Reviews that 

focus on current year Bureau accomplishments in support of Strategic Objectives, Strategic Goals, and Programs of the Department 

and resource decisions for the budget year. The Senior Policy, Performance and Resource Reviews involve clarification of Bureau 

goals and program initiatives for the plan year, budget year, and 

out-year. Prioritization of requested resources and alignment with 

goal priorities is also assessed. The sessions address crosscutting 

issues and other major initiatives that require coordination among 

Bureaus and other agencies. Senior Department managers and officials from other government agencies participate on the review 

panels. As part of this process, the Deputy Secretary also examines 

the USAID plans and resource requests. 

Follow-on reviews with each Bureau are conducted after the Senior Reviews. The purpose of these reviews is to provide the Bureaus 

the opportunity to respond in more detail to issues developed 

through the Senior Review process and provide further clarification 

and prioritization of critical resource requirements. 

E. Regional Financial Management System (RFMS) (Moving 

toward One Worldwide, Integrated Financial Management System) 

For financial systems, the Department is in substantial compliance with applicable Federal accounting standards and the U.S. 

Government Standard General Ledger at the transaction level. 

However, the Department does not substantially comply with the 

Federal financial management systems requirements, and reports 

this area as a material nonconformance. Therefore, the Secretary 

is unable to certify that our financial systems fully comply with requirements of the FMFIA and FFMIA at this time. The Department has developed a Remediation Plan (Plan) to resolve this issue 

by FY–2004. 

The cornerstone of the Plan is implementation of the RFMS. Development and implementation of RFMS supports the Department’s goal of integrating and standardizing worldwide financial 

and information systems, and establishing a single, integrated 

worldwide financial management system. RFMS reduces the number of overseas financial systems from two to one, incorporated 

State’s standard account code structure, and enables financial 

transactions to be standardized between RFMS and Department of 

State’s Central Financial Management System (CFMS), which will 

result in consistent processing and recording of financial data 

worldwide. RFMS was implemented on-schedule and our worldwide 

implementation is complete. 

F. Travel Card Program 

RM has monitored misuse of the travel card since June 2002, 

when the oversight office began data mining to review every purchase made by the Department’s travelers for high-risk items (e.g., 

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jewelry stores, massage parlors, escort services, gambling transactions, ticket agencies, and cash advances greater than $7,500). If 

one of these categories was found, the Bureau Program Coordinator 

(BPC) was immediately notified and asked to counsel the employee. 

Beginning July 2003, RM and Citibank have blocked the Merchant

Category Codes for all items not directly related to travel. This was 

done not because the Department had a pattern of misuse, which 

it does not, but to protect Citibank and the Department against 

fraud through identity theft. 

To reduce internal control vulnerabilities and address the issues 

raised by the OIG, including those concerning oversight of the 60–

day past due category of delinquencies, duplicate account holders, 

and the failure to cancel accounts, the oversight office has begun 

(1) drafting new policies and procedures (currently being circulated 

for approval by OIG, Bureau of Diplomatic Security, and Bureau of 

Human Resources) which better define misuse and delineate more 

clearly the roles of BPCs in reducing delinquencies, (2) data mining 

for duplicate and departed employee accounts, (3) to improve training of Financial Management Officers at the Foreign Service Institute, (4) developing a training program for domestic BPCs, and (5) 

centralizing the travel card regulations and step-by-step procedures 

on a newly created Travel Card Program Intranet Homepage. 

II. Cost Savings Efforts in the Department of State 

A. Consolidation of Financial Operations at the Charleston 

Financial Services Complex 

The process for closing the Department’s Financial Service Center (FSC) in Paris, France, is on schedule to be completed by December 2003. This will result in the elimination of 109 State Department (Foreign Service Officer (FSO), Foreign Service National, 

and contractor) positions in Paris. The movement of most of the 

work previously performed in Paris to the Department’s FSC in 

Charleston, South Carolina will necessitate International Cooperative Administrative Support Services (ICASS) funding for only 88 

(FSO, General Schedule, and contractor) new positions in Charleston. While there will be budget increases in Charleston related to 

the increase in personnel, travel, facility operations, and workload, 

we are currently on target to realize our goal of $1,200,000 in annual savings from the consolidation of these operations. 

B. USAID/State Financial Systems Integration Collaboration 

Project 

• State and USAID are working together to implement a shared 

financial management system for the beginning of FY–2006, as recommended by a study commissioned by State and USAID. 

• The Joint Financial Management System (JFMS) will combine 

the State Global Financial Management System (GFMS) and 

USAID Phoenix projects into one, common financial management 

platform. 

During the interim transition period to the joint platform, both 

State and USAID will continue their deployments of their respective financial systems, cognizant of the JFMS project activity in the 

establishment of the joint platform for FY–2006. Any redundancies 

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will be minimized and all investments during the interim period 

will be scrutinized for compliance with the joint platform. This will 

result in each agency being better equipped to reach their financial 

Performance Goals for the GFMS and Phoenix projects during FY–

2004 and FY–2005, while at the same time, moving forward on the 

deployment of the collaborative system for FY–2006. 

In addition, through a unique agreement with the Commercial 

Off-the-Shelf (COTS) software supplier, many of the custom State/

USAID features developed as part of this project have been baselined into the software for reuse by other federal departments. This 

will reduce both State and USAID long-term maintenance costs, as 

well as provide benefit to other federal agencies requiring these capabilities. 

C. Joint USAID/State Enterprise Architecture 

Implementation of the Joint USAID/State Enterprise Architecture provides a rational means for accruing cost savings through 

the simplification and unification of effort across the two agencies 

and among bureaus. From a business perspective, the target section of the Enterprise Architecture is being developed from the 

analysis of each agency’s business functions. Savings will be accrued as similar business functions currently performed separately 

by each agency, are integrated into single units that are responsible for both agencies. Financial functions are an example. 

The Joint Enterprise Architecture Goal is to provide a Joint Enterprise Architecture ‘‘as-is’’ with a modernization blue print for financial management by September 2003, and a complete and integrated modernization blue print (for all business functions) by the 

end of FY–2005. 

The lines of business to be pursued following the financial management initiative will be decided by the Joint Management Council, with representatives from both USAID and State. Given the importance to and impact on both agencies such decisions must be 

made in a senior level forum with participation by both agencies. 

We are working with USAID to develop a common procurement 

system. 

Each of these collaborative efforts asks State and USAID to examine how they currently operate, identify operational gaps and 

strengths, and implement mutual strategies that advance their 

business processes. 

D. Joint USAID/State Policy and Management Councils 

The triennial Joint State/USAID Strategic Plan and its implementation is well underway and provides the opportunity for greater collaboration between the agencies on a number of policy and 

management issues. As part of this coordination effort, the Department has established the State/USAID Joint Management and Policy Councils to include the implementation of joint policy recommendations into Department operations and explore the integration of State/USAID’s annual planning processes and systems. 

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E. Scrubbing the FY–05 Budget Submission 

In addition to the MPP/BPP process and the Deputy Secretary’s 

Senior Reviews that I have already described, the Department subjected all FY–2005 bureau plans to rigorous Budget Reviews. 

• I led Budget Reviews following up on issues raised in the Senior Reviews, and scrubbed resource requests to eliminate waste and 

duplication. 

• These hearings provided a crosscut to identify common requirements, areas of overlap, and possible economies. For example, they 

questioned several regional bureaus (EUR, AF, and NEA) about 

rightsizing and possible regionalization of support services through 

the Creekbed facility being planned for Frankfurt, Germany. 

III. President’s Management Agenda (Moving Toward ‘‘Green’’) 

The Department of State has been a full and enthusiastic participant in the President’s Management Agenda (PMA) since President 

Bush first announced the PMA in the summer of 2001. Like all 

agencies, we started with a mostly ‘‘red’’ scorecard. Over the first 

two years of the PMA, however, we have moved to ‘‘green’’ on 

progress for all PMA initiatives except Competitive Sourcing, and 

for that we have a ‘‘yellow.’’ Our status or baseline scores are still 

‘‘red,’’ except for the ‘‘yellow’’ we received last quarter on Human 

Capital, but we believe we are getting close to improving several 

of them in the near future. I am especially proud of State’s 

progress on the two PMA initiatives for which I am responsible: 

Improved Financial Performance and Budget and Performance Integration. Both of these initiatives have had ‘‘green’’ scores for 

progress for several quarters, and the substantive achievements 

under both are impressive. We have also made significant progress 

in E-Government, principally and I think most importantly on IT 

security—an area that impacts virtually everything the Department does worldwide and affects our Financial Performance scorecard. While our progress on Competitive Sourcing has not been as 

rapid as other agencies, State now has in place the resources and 

human infrastructure to move us forward on this PMA initiative. 

So on balance, Mr. Chairman, I believe State has good news to 

report on its work thus far on the PMA, and I have no doubt that 

we will be in mostly ‘‘green’’ territory by this time next year. 

Mr. Chairman, this completes my prepared statement. I am prepared to answer any questions that you or members of the committee may wish to raise at this time.

TESTIMONY OF AMBASSADOR ANNE M. SIGMUND, DEPUTY INSPECTOR

GENERAL OF THE DEPARTMENT OF STATE AND THE BROADCASTING

BOARD OF GOVERNORS

Mr. Chairman and Members of this Committee: 

Thank for this opportunity to review management controls with 

respect to the State Department’s budget and to discuss the Department’s efforts to use the resources entrusted to its care efficiently and effectively. I am pleased to note that the Department’s 

leadership has exhibited a strong commitment to establishing accountability so that the resources are given proper and careful 

oversight. 

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Department Property 

The Department receives significant resources for acquisition, 

construction, and leasing of property to provide chanceries, consulates, and housing for U.S. government employees serving our 

country abroad. Under General Charles Williams’ leadership, OBO 

has established procedures and management controls to ensure 

that fraud does not occur when buying and selling real property. 

For example, whenever OBO buys or sells property, it gets two 

independent outside appraisals of value. In-house, professionally 

certified senior appraisers review these outside appraisals and 

produce a reconciled estimate of value that forms the basis for subsequent actions and decisions regarding property. All property decisions are formally reviewed by OBO’s director and properly documented. In sales and purchases overseas, the negotiating authority 

of the portfolio manager is established in writing in advance by a 

decision memorandum that includes the reconciled value and is 

cleared by appraisal offices and senior managers. 

The Department actively seeks to identify vacant, excess, or underutilized properties. Each chief of mission, for example, is required annually to certify that he or she is not holding excess property. At every post it inspects, OIG independently validates whether there are excess or underutilized properties and determines 

what the Department and the post are doing to dispose of them. 

It is the Department’s policy to sell vacant, excess, and underutilized property. Currently, the Department reports that it has 39 

vacant properties, valued at approximately $70 million. These are 

in various stages of disposition. In the last five years, the Department has sold 137 properties for almost $365 million. 

The Department owns and leases property that is currently vacant. However, some of these vacancies represent the realities of 

transfers of employees from one post to another with resulting temporary vacancies in residential property inventories. These are the 

normal vacancies associated with managing a housing portfolio. 

OIG does not consider these vacancies as meeting the definition of 

excess or underutilized property. 

For security reasons, the Department also acquires property to 

enhance the security of a chancery if doing so is economically viable and there is no other way to mitigate serious security risks for 

a post in a dangerous environment. The Department has leased or 

purchased nineteen buildings or residences for security reasons in 

Phnom Penh, Kampala, Kigali, Luanda, Ouagadougou, Pristina, 

Tbilisi, Tel Aviv, and Guatemala City. This approach provides missions in potentially dangerous environments much-needed setback 

until such time as a new chancery can be constructed. OIG supports this policy when there are no other alternatives and resources permit. 

The Department also has a new vacant leased property in 

Malabo, a new post ready to open. The property was leased in anticipation of opening and is awaiting necessary approvals. However, 

the Department has the right to terminate this lease on short notice should it decide not to proceed with this property. 

In the course of inspections over the last year, OIG has identified 

the following underutilized or excess property: 

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• In Kinshasa, as the security situation has deteriorated, a number of U.S. government-owned residences have not been occupied 

for many years. The location of these residences is unsafe. Both 

OBO and OIG have recommended selling or trading them in exchange for more suitable property in a safer location. In several of 

the cases, there are title and legal issues. In the case of one property, abandoned and for which payments have not been made for 

ten years, OBO has authorized the embassy to relinquish the property to the host government under a no-cost agreement, a decision 

OIG supports. • In the Bahamas, the disposition of a vacant property should be 

resolved. The Great Inagua Aeorstate site was purchased in 1993 

for use in a now closed narcotics interdiction program. The property was purchased for about $100,000. Efforts to dispose of this 

property have been admittedly slow. OBO has advised OIG that although it has been difficult to place a value on the property, the 

post got an appraisal and has requested bids for brokers to market 

and sell the property. OIG has concluded that OBO and the post 

are proceeding in good faith. • Disposing of U.S. government-owned property in Mandalay has 

been a topic of discussion for over a decade. The U.S. consulate in 

Mandalay was closed in 1980, and for a number of years the property has not been used. Despite recommendations from OIG beginning in 1993, Embassy Rangoon has still not agreed to dispose of 

the property. Reportedly, selling the property would not yield a fair 

market value because foreign entities are restricted to selling real 

property for the original purchase price. • In Laos, the U.S. government occupied a property called Silver 

City from 1955 to 1975. Originally, it was leased and then purchased from a private party in 1961 for $4 million. When Communist Pathet Laotian forces seized it in 1975, they declared the 

U.S. purchase void, which is a matter that the U.S. government 

has contested. However, Laotians now occupy it. Ten years ago, the 

Laotian government proposed trading the property, but the proposal could not be implemented because the two governments could 

not agree on a value nor a property that could be exchanged for 

Silver City. In 1999, the government of Laos again proposed swapping the property for a large parcel of land and an additional 

$50,000. Negotiations broke down in March 2000. Recently the Laotian government again expressed interest in a deal, this time on 

more favorable terms. The vacant land proposed by the Laotian 

government would be suitable for a new chancery. OIG agrees with 

Embassy Vientiane that the U.S. government should fully explore 

this exchange offer. OBO is in the process of working with the post 

to get the action to closure. 

It should be clear from these examples, however, that not infrequently despite the Department’s interest in disposing of excess 

and underutilized property, complicated title issues and even more 

complex host country laws make doing so difficult and less than 

timely. 

Information Technology and Security 

In the area of information technology, OIG has focused on the 

Department’s vulnerabilities with respect to new technology and its 

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efforts to develop new strategies for dealing with the communications challenges facing foreign affairs agencies. For example, OIG 

recently reviewed the Department’s implementation of the Foreign 

Affairs System Integration (FASI) project. The Department was the 

lead agency in this global affairs initiative to acquire and test a 

standard system, featuring a web-based portal, applications, and 

tools for improved communications, information sharing, and 

knowledge management among U.S. foreign affairs agencies at 

overseas missions. In the past, each agency working at an embassy 

overseas had its own information systems, which could not communicate easily with those of other organizations within a diplomatic 

mission, despite the need to share information on a variety of 

issues. OIG reviewed the FASI project, which was being piloted in 

Mexico City, and determined that the project was not meeting its 

objectives. Specifically, OIG found that FASI did not prioritize or 

obtain user input to requirements sufficiently to ensure that only 

the most essential needs were met with the interagency system. In 

OIG’s view, the FASI project did not adequately coordinate with or 

consider using existing systems as potentially less costly alternatives to eliminate duplication. Interagency commitment to the 

system also was uneven due to inadequate marketing to other organizations, whose support also would be critical to supporting 

global system deployment. Furthermore, OIG found that the overseas pilot test of the interagency systems was at risk due to poor 

timing, inadequate communications and coordination, ineffective 

content management, and system and technical difficulties. This 

was not a question of fraud, but a case of imperfect 

conceptualization and inadequate effort in the area of knowledge 

management, an admittedly new field for all of us. Because of its 

concerns, OIG recommended that, after completing the pilot test, 

the project should be streamlined and redirected. The Department 

responded immediately to OIG’s recommendations and discontinued the FASI project, thereby avoiding a cost of $200 to $235 

million to deploy globally the interagency system. The Department 

has merged FASI objectives with those of a related messaging system replacement initiative, which will allow for reexamination of 

user requirements and consideration of alternative approaches for 

meeting the knowledge sharing requirements of the Department 

and the U.S. foreign affairs community. 

Financial Management Issues 

Financial management continues to be a major challenge facing 

the Department. The Department accounts for nearly $11 billion in 

annual appropriations and over $26 billion in assets. In recent 

years, the Department has made significant improvements in this 

area and is striving to fulfill the President’s management agenda 

related to financial performance. In FY 2002, the Department 

closed its remaining three material weaknesses reported in the annual Federal Managers’ Financial Integrity Act report. Moreover, 

the Department issued its FY 2002 Performance and Accountability 

report by the February 1 deadline with an unqualified (clean) opinion that means the statements were free of material misstatements. This was the Department’s sixth consecutive unqualified 

opinion. 

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While the Department has made significant progress, more needs 

to be done. For example, OIG identified significant weaknesses related to information system security that we believe could be exploited to have a detrimental effect on the information used to prepare the financial statements. The Department has initiated a program to assess its information system security on a comprehensive 

basis. However, the work was not sufficiently advanced to determine whether the condition had been corrected during OIG’s last 

audit of the Department’s financial statements. OIG will focus on 

this area during the audit of the FY 2003 financial statements. 

Weaknesses in the Department’s financial management systems 

are a long-standing problem. The audit of the FY 2002 financial 

statements identified that the Department’s financial and accounting systems were not adequate. The Department has made substantial compliance with the Federal Financial Management Improvement Act (FFMIA) a top priority and improvement initiatives 

to achieve that goal are underway. For instance, the Department 

is in the process of implementing a new global financial and accounting system at its overseas posts. As required by FFMIA, the 

Department submitted a remediation plan in March 2000 that calls 

for the Department to achieve substantial compliance by the end 

of FY 2003. OIG is tracking the Department’s progress in implementing the plan. 

In reviewing the Department’s financial management systems, 

OIG noted significant internal control weaknesses related to the 

management of undelivered orders. While the Department has 

made improvements in managing undelivered orders, including developing a database to track them, the balance is extremely high 

and has grown from $3.2 billion in FY 2001 to $5 billion in FY 

2002. During its FY 2003 audit, OIG estimated that at least $230 

million of this amount should have been deobligated financial 

statements. The Department is planning to deobligate automatically certain types of obligations during FY 2003, which it hopes 

will lower the amount of this category on the FY 2003 financial 

statements. 

In addition, OIG identified weaknesses related to managerial 

cost accounting. The Department is developing a Central Financial 

Planning System that it believes will address many of the concerns 

related to managerial cost accounting. 

Management Controls 

OIG reviewed internal controls for several Department programs 

to reduce vulnerabilities for fraud, waste, and mismanagement, 

among them domestic travel card program and the government 

purchase cards. In its review of the Department’s domestic travel 

card program, OIG examined the policies and procedures that were 

in place for managing the program. OIG found that the Department had not addressed the 60-day past due category of delinquencies, which may cause the commercial credit card provider to 

reduce the volume-based refund it gives the Department and can 

lead to account suspensions. Consequently, an employee’s ability to 

travel on Department business may be hindered. Moreover, OIG 

concluded that the Department had not done enough to prevent 

and detect misuse of the cards. OIG also concluded that the DeVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00364 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
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partment’s Bureau of Resource Management was working with the 

Bureau of Human Resources, the Bureau of Diplomatic Security, 

and OIG to develop an acceptable notification process when employees misuse the cards or become delinquent with repayment. 

However, the Department did not have adequate internal controls 

for providing administrative oversight of the program. For example, 

the Department did not ensure that program coordinators were 

managing an appropriate number of accounts; that accounts were 

transferred or canceled as needed, when, for example, an employee 

transferred or left the Department; and that multiple accounts for 

an individual employee were identified and cancelled. OIG recommended that the Department develop guidelines to address travel card delinquencies in the 60-day past due category, provide program coordinators with clear written guidance on an Intranet site 

and through formal training, and improve the oversight of the travel card program by checking for multiple accounts and transferring 

or canceling travel cards when an employee leaves a bureau within 

the Department. 

OIG’s review of the Department’s purchase card program was designed to evaluate the effectiveness of domestic operations for the 

program and determine whether the Department was achieving 

cost savings. In 2001, OIG reported that the program had experienced rapid growth in the number of cardholders since its inception 

and that the Department’s customers were receiving goods and 

services more quickly under the program. However, OIG also found 

that part of the rapid growth in cardholders was attributable to 

purchase card users making infrequent or no transactions, and 

therefore, may not actually need the cards. In its audit, OIG reviewed in detail about $1.5 million in domestic purchases. The review found that about 81 percent of the transactions, or about $1.2 

million, lacked some of the required documentation, although the 

transactions appeared to be legitimate and justified. However, 

about 12 percent, or about $180,000 in transactions, lacked sufficient documentation for OIG to verify independently that the purchases were properly made for legitimate purposes and reconciled 

by supervisors in a timely manner. In addition, not all the responsible officials interviewed by OIG had conducted required annual 

reviews of their offices’ purchase card operations. OIG also found 

that the Department’s method for determining cost savings—the 

reduction in the number of paper purchase orders processed—does 

not necessarily capture the actual administrative cost reductions 

that have occurred. Finally, OIG found inappropriate procurement 

practices that, if changed, could yield additional cost or time savings for the Department. For example, some cards had a self-imposed limit of $1,000 and opportunities to use the cards were often 

missed. As a result of OIG’s report, the Department has addressed 

the documentation and annual review issues. Additionally, the Department has taken steps to examine low purchase card use and 

withdraw unneeded cards, clarify reporting on cost savings from 

the program, and explore additional cost avoidance measures. Finally, OIG suggested and the Department agreed to identify cardholder best practices that can be used throughout the program for 

improving the economy and efficiency of operations. Shortly, OIG 

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will closely review ways for optimizing the overseas use of purchase 

cards and for preventing waste, fraud, and mismanagement. 

Improper payments are a longstanding, widespread, and significant problem in the federal government. The Department does not 

have an adequate process in place to estimate regularly the 

amount of improper payments. Currently, the Department approximates the amount of improper payments at $2 million per year. 

This consists of known overpayments, mostly of Foreign Service retirement benefits. However, the Department has an initiative underway to have an accounting firm develop a process to measure 

and report on the extent of improper payments. The initiative fits 

in with new OMB guidance and is intended to establish a baseline 

of the extent of improper payments in selected programs and activities and determine the causes. The Department piloted the new 

process on grants/financial assistance payments in one bureau and 

was generally pleased with how the process worked. The Department now plans to expand the process to other areas. OIG is completing three audits that reviewed different aspects of improper 

payments. They are: • A review of all of the Department’s FY 2002 payment transactions in order to identify any duplicate payments; 

• A review of the Department’s process for establishing and 

maintaining vendors in CFMS; and 

• A review of the Department’s practice of making payments 

without having an established obligation. 

The Department annually reports on its debt collection efforts in 

its annual Performance and Accountability Report. Outstanding 

debt from nonfederal sources increased from $42.1 million in FY 

2001 to $45.3 million in FY 2002. Nonfederal debt consists of 

money owed to the International Boundary and Water Commission, 

and amounts owed for repatriation loans to American citizens, 

medical costs, travel advances, proceeds from the sale of property, 

and some other miscellaneous receivables. 

Of the delinquent accounts receivable—over 365 days—the majority, $3.8 million, were for repatriation loans. These are loans 

given to destitute American citizens stranded overseas to allow 

them to return to the United States. Due to economic problems, 

many of these individuals are unable to repay their loans on time. 

The Department uses installment agreements, salary offset, and 

restrictions on passports as tools to collect its receivables. It also 

receives collections through its cross-servicing agreement with the 

Department of the Treasury. In accordance with this agreement 

and the Debt Collection Improvement Act of 1996, the Department 

referred $194,000 to Treasury for cross-servicing in FY 2002. Anthrax-related mail disruptions in late 2001 affected the Department’s ability to receive payments and to provide debtors a proper 

due process notification. Of the current and past debts referred to 

Treasury, $206,460 was collected in FY 2002. 

In its review of the Broadcasting Board of Governors (BBG) Controls on Domestic Personal Property, OIG examined whether the 

International Broadcasting Bureau (IBB) had established effective 

policies for inventory controls at six of its property management 

units. OIG found that the IBB did not have fully functioning property management policies and procedures to ensure that governVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00366 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
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ment property was properly used and safeguarded. Furthermore, 

there was no evidence that a complete property inventory had ever 

been conducted by the IBB. Therefore, OIG made several recommendations, including conducting an agency-wide inventory to 

provide an accurate property baseline implementing a plan for 

bringing the agency into compliance with applicable accounting and 

reporting requirements, and establishing a single, centralized receiving operation for all international headquarters’ offices to ensure better accountability. The IBB generally agreed with OIG’s report and is taking steps to implement its recommendations. 

Preventing Fraud 

Central to OIG’s portfolio for preventing fraud, waste, and mismanagement is its investigative work. Since FY 1994, OIG has conducted a number of embezzlement cases, domestically and overseas, involving Department employees, contractors, grantees, and 

Foreign Service Nationals. Some of these cases have resulted in 

successful criminal prosecutions with sentences requiring restitution, the Department’s termination of employment, or referrals to 

host country authorities. Over the last ten years, the amount reported to OIG as embezzled from the Department is over $5 million. Restitution of over $3.8 million has been either made or ordered. 

Mr. Chairman, the Office of Inspector General works closely and 

collaboratively with the Department and BBG to ensure accountability in programs and operations. We believe that this proactive 

partnership has resulted in a more efficient and effective use of appropriated funds. More needs to be done, of course, but I am confident that the Department is moving forward with alacrity in the 

interests of good government. 

Thank you. 

STATEMENT OF JOHN MARSHALL, ASSISTANT ADMINISTRATOR FOR

MANAGEMENT AND CHIEF INFORMATION OFFICER, U.S. AGENCY

FOR INTERNATIONAL DEVELOPMENT

Mr. Chairman, Ranking Member Lantos, thank you for the opportunity to appear before you today to discuss cost saving efforts 

at the U.S. Agency for International Development (USAID). 

When Administrator Natsios first arrived at USAID, he determined that the Agency’s five management systems were in a state 

of disrepair and were in need of modernization and reform. He determined that waste and mismanagement could be eliminated by 

improving the way the Agency conducts business through its systems and processes for finance, personnel, procurement, information technology (IT) and administrative services. Under the Administrator’s leadership, the Agency developed a business transformation plan to implement his management reforms. These reforms are being done in the context of the President’s Management 

Agenda and many are being carried out in close coordination with 

the Department of State. 

In my statement today, I will discuss our management reforms 

under three headings: our work on the President’s Management 

Agenda; our collaborative activities with the Department of State; 

and our financial management reforms. Our financial management 

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reforms will be discussed in detail because proper accountability for 

appropriated funds lies at the heart of both management improvement and the elimination of waste, fraud and abuse. 

USAID MANAGEMENT REFORMS

In close coordination with the President’s Management Agenda, 

USAID is aggressively implementing its own ambitious management reform program. The Agency has established a Business 

Transformation Executive Committee (BTEC), a governing board of 

senior executives from all bureaus and major offices across the 

Agency to oversee our management reforms. Our management reform accomplishments as well as our future plans are listed below 

by PMA initiative. 

Strategic Management of Human Capital 

Like many Federal agencies, USAID is experiencing serious 

human capital challenges. As a result of new program demands 

around the world, deep staffing cuts and decisions to effectively 

shut down recruiting in the 1990s, our workforce is stretched thin, 

rapidly ‘‘graying’’ and approaching a retirement exodus, and lacking in critical skills. To meet these challenges, we are undertaking 

a comprehensive workforce planning effort and ramping up recruitment initiatives at entry and mid-career levels. Our ‘‘Development 

Readiness Initiative’’ (DRI) parallels the Department of State’s successful Diplomatic Readiness Initiative, and is the cornerstone to 

Agency succession planning efforts for the Foreign Service and 

Civil Service. 

We are undertaking a comprehensive and integrated workforce 

analysis, building on competency-related work already performed 

by many parts of USAID to establish the basis upon which further 

workforce planning and general human capital strategic management can be developed. To meet the critical need to create the 21st 

Century Foreign Service corps, we are undertaking a Development 

Readiness Initiative that parallels the Department of State’s Diplomatic Readiness Initiative; this will include the recruitment of junior officers, called International Development Interns, to assure a 

regular infusion of new blood into our system. The Development 

Readiness Initiative (DRI) is the cornerstone to Agency succession 

planning efforts for the Foreign Service and Civil Service. 

We have developed an electronic database (e-World) that provides current high quality data regarding the Agency’s workforce. 

This information allows knowledge of the number, skills, and deployment of Agency personnel to meet our future programmatic 

needs and to develop strategies for succession planning and leadership continuity. This accountability tool facilitates workforce planning and resource reallocation decision-making. 

We are finalizing a comprehensive human capital strategic plan 

that will describe the specific core competencies needed by our 

overseas staff to make the Agency operate effectively and efficiently. In developing this plan, we considered the recommendations from a report by the National Policy Association that contains 

25 recommendations for reforming personnel practices at USAID. 

The Human Capital Strategy will be carried out in the context 

of an overall Agency ‘‘right sizing’’ that will improve our ability to 

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do comprehensive workforce planning. This effort will consider regionalizing USAID processes to perform work more efficiently. 

Improved Financial Management 

We are collaborating with Department of State on a joint financial management system in furtherance of our business systems 

modernization initiative. 

We have developed customer service standards and initiated activity based costing to improve services, get a better handle on 

costs and reallocate resources to our most important business 

needs. 

We have developed mandatory training for Contract Technical 

Officers (CTOs) in the agency to better manage obligations that can 

lead to charges of waste, fraud and abuse. Annual mandatory ethics training is part of this program. We are working with the Department of State to develop a common procurement system. Instead of developing separate systems, both agencies are collaborating on this project that will reduce redundancies and waste and 

save considerable taxpayer dollars. 

Budget and Performance Integration 

We have developed a strategic budgeting model to enable us to 

link performance and resource allocation more efficiently. 

Competitive Sourcing 

We have provided training for our procurement staff on performance based contracting to focus on desired results and outcomes. 

We are developing comprehensive USAID Competitive Sourcing 

and Action Plans to achieve efficient and effective competition between public and private sources that will generate savings and 

performance improvements. 

Expanded Electronic Government 

We are partners on several of the President’s 25 e-gov initiatives 

collaborating on projects where standardization and integration of 

similar business processes and systems make sense and are more 

cost effective. Our efforts are directed at ensuring high quality 

services for citizens while reducing the cost of delivery of these 

services. We are developing a joint enterprise architecture with the 

Department of State that will serve as a strategic management tool 

to identify IT redundancies and duplications and inform decisions 

about program implementation and IT investments. We have established procedures for capital planning and investment control to 

ensure that we spend our IT resources efficiently. We are providing 

training for the Agency’s project managers to ensure appropriate 

best practices and standards are adhered to in order to reduce redundant spending and improve the return on IT investments. 

Our management reform activities have and will continue to provide significant cost savings while promoting management efficiencies that directly support the PMA. Our activities have improved our e-Gov scores on the PMA. For the last two quarters we 

received ‘‘Green’’ ratings for progress based on our efforts in the 

areas of enterprise architecture, capital planning and investment 

control, and IT security. 

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JOINT STATE/USAID ACTIVITIES

For the first time, USAID and the Department of State have developed a joint strategic plan. The new strategic plan covers fiscal 

years 2004 to 2009 and will be updated every three years. The new 

plan clearly outlines the shared mission, core values, goals and priorities of State and USAID in both policy and management areas. 

Our joint management priorities are closely linked to the goals of 

the President’s Management Agenda (PMA).

To achieve cost savings, we are pursuing opportunities where the 

Department and USAID can create more integrated management 

structures to reduce redundancies and costs for the taxpayer where 

possible. We have identified concrete activities where we hope to 

explore greater coordination and in some instances integration. 

Department—USAID Management Council 

A joint State/USAID Management Council has been established 

to oversee and implement collaborative management activities that 

will result in cost saving reforms and improve services for both 

agencies in the areas of human resources, e-Government, resource 

management, administrative services, overseas facilities, and security. Examples of issues for the JMC’s consideration are as follows. 

Human Resources 

In the area of human resources, USAID and State are developing 

parallel and complementary human capital strategies to include 

joint training of our employees; formal cross-assignments; and 

plans to rightsize and regionalize our overseas presence. The latter 

initiative is focused on determining the appropriate number of U.S. 

staff deployed overseas to assure effective and efficient planning 

and management of programs. We have reviewed the main criteria 

proposed by the General Accounting Office for determining overseas staffing levels and, not only do we agree with them, we have 

been using them in setting our field staffing levels. As you are 

aware, President Bush has made the rightsizing of overseas official 

U.S. presence an agency-specific reform in his management agenda 

and our efforts are directed at supporting this initiative by assuring the most effective overseas presence. 

E–Government 

The Department and USAID are committed to implementing the 

requirements of the Federal e-Government Initiative under the 

PMA. We will strengthen our administrative systems and pursue 

collaborative solutions to Web-base, centralize, and integrate our IT 

systems; expand our recently established infrastructure; coordinate 

IT planning and common use of architecture and infrastructure; develop a joint enterprise architecture to enable an integrated accounting system worldwide; strengthen core information management systems and collaboration by implementing one modern messaging system for the Department and USAID headquarters, posts, 

and missions worldwide; and consolidate overseas technical and 

operational support. 

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Administrative Services 

The Department and USAID jointly will review their operations 

at U.S. diplomatic missions abroad to implement a pilot project in 

which selected administrative support operations would be combined where costs are reduced and/or the quality of services are enhanced. The combined service(s) would operate under the agency 

best able to offer the service through International Cooperative Administrative Support Services (ICASS) to all U.S. Government entities under the Chief of Mission authority. ICASS has proved very 

effective as a system to allocate costs fairly among users, and all 

agencies are working to make it a stronger tool for efficiency as 

well. 

A joint Department/USAID acquisition and assistance system 

will be integrated with the Agency’s core accounting system to facilitate production of timely, reliable information on program and 

development expenditures. The proposed web-based application allows for data entry at the source, reducing the risk of erroneous or 

redundant entry of transactions. 

The Department and USAID will jointly review the use of competitive sourcing. Commercial activities will be reviewed continually to ensure the best possible service at the best possible price, 

regardless of the source. We will review the use of contractors 

across the Department and USAID in order to streamline contracts 

and minimize duplication and costs. 

Resource Management 

To improve our accountability to the American taxpayers, we will 

improve our financial performance and integrate budgeting with 

strategic and performance planning. The Department and USAID 

will implement a joint financial management system that will integrate the financial systems of both agencies. To increase our budget 

process transparency, both agencies will institute operations budget review meetings to ensure understanding of each organization’s 

workforce, technology, and policy programs. And we will explore developing a joint methodology to allocate resources by strategic goal 

to better understand how much funding and human resources are 

devoted to achieving our goals. 

Facilities 

Looking to the future, an area where the factors of cost and security come together is that of office space for our field missions. A 

prime objective for USAID is to assure that our overseas staff 

works in the safest possible environment. Consistent with the Secure Embassy and Counter Terrorism Act of 1999, USAID seeks to 

co-locate with the embassies wherever possible. 

Security 

Close coordination and cooperation between the Department and 

USAID security professionals will be key to maximizing our effectiveness and determining acceptable levels of security risk versus 

our ability to operate. We will leverage Diplomatic Security (DS) 

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curity infrastructure that allows timely and accurate exchange of 

security information to enhance protection of our personnel. 

Through these cooperative efforts that I have described, USAID 

and Department of State will reduce redundancies and waste while 

reinforcing management accountability and cost savings.

FINANCIAL MANAGEMENT IMPROVEMENTS

In the area of financial management, USAID’s story continues to 

improve. As had been reported by the Office of the Inspector General (OIG), the Agency previously lacked a core financial management system that complied with the requirements of the Federal 

Financial Management Improvement Act (FFMIA). There has also 

been a major impediment in providing information for USAID managers on a day-to-day basis, thereby hindering the Agency’s ability 

to manage its resources. To address the system weaknesses, 

USAID implemented a new core accounting system at headquarters 

in FY 2001. 

The next phase of our financial management system improvement effort is the deployment of the headquarters accounting system to our field missions. We are currently planning to have the 

system fully deployed by the end of FY 2005. At the same time, as 

mentioned previously, we are working closely with the State Department to have a joint financial management system by FY 2006. 

When the system is fully deployed, USAID will have for the first 

time an integrated financial management system that can produce 

timely and reliable Agency-wide financial information for program 

managers and decision-makers. Full deployment of the system will 

also bring the Agency into compliance with the FFMIA. 

In FY 2002, we received an unqualified audit opinion on four of 

five principal financial statements and an overall qualified audit 

opinion. This marked the first time since enactment of the Government Management Reform Act that USAID received an opinion on 

all of its financial statements. Within the 2002 GMRA Audit, the 

OIG recognized seven internal control material weaknesses. Six of 

the seven internal control material weaknesses have been addressed and the last one will be addressed by September 30, 2003. 

We are working closely with the OIG on resolving all remaining obstacles so that the OIG may issue an unqualified audit opinion for 

FY 2003. 

Additionally, we have recently implemented improvements to the 

Headquarters core accounting system, improved financial and performance reporting, and improved the quality of data available to 

field program managers. We have expanded cross-servicing and 

outsourcing, including grant management (HHS), loan management (Riggs Bank) and payroll (National Finance Center). 

USAID’s Management Control Review Committee plays an active 

role in ensuring corrective action for deficiencies identified through 

OIG audits and management control reviews in accordance with 

the Federal Managers’ Financial Integrity Act. The Committee, 

chaired by our Deputy Administrator, monitors the status of corrective actions Agency-wide and determines when material weaknesses have been corrected. Parallel committees operate within the 

Agency’s overseas operating units. 

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We continue to improve the quality of USAID’s financial management systems and we continue to improve the internal control systems and processes affecting the day-to-day management of our 

programs as well as our financial statements. 

IN CONCLUSION

Mr. Chairman, I would like to assure Congress that USAID is 

committed to improving our management and accountability practices. USAID is committed to enhanced collaboration with the Department and looks forward to participating actively in the Joint 

Management Council’s efforts to produce improved, cost effective 

administrative services for both agencies. We will continue to work 

diligently to implement agency-specific management reforms and to 

identify areas of cost savings I hope my remarks today have been 

helpful in explaining our management reforms for transforming 

USAID into a more effective and efficient humanitarian assistance 

and development organization as we move our foreign policy agenda forward.

STATEMENT OF EVERETT L. MOSLEY, INSPECTOR GENERAL, U.S. 

AGENCY FOR INTERNATIONAL DEVELOPMENT

Mr. Chairman, other committee members, and committee staff, 

thank you for the opportunity to provide my testimony on efforts 

to identify and eliminate waste, fraud, abuse, and mismanagement 

with respect to the U.S. Agency for International Development 

(USAID) programs and operations. Based on input provided by 

your staff, I will focus on opportunities for USAID to improve its 

operations and other items that your staff indicated would be of interest to the committee. I know that the primary interest for this 

hearing is mandatory versus discretionary programs. There are two 

mandatory spending programs at USAID: (1) The foreign service 

retirement and disability fund; and (2) any upward reestimate of 

the credit subsidy under the Agency’s development credit authority. 

The Foreign Service Retirement and Disability Fund is managed by 

the Department of State and Audited by the State Department Office of Inspector General. Reviews of USAID’S credit subsidy under 

the Agency’s Development credit authority are included within 

USAID’S annual GMRA audit, and no issues have been reported 

regarding the subsidy. 

With regards to the discretionary programs operated by USAID, 

my office conducts several reviews that can potentially identify opportunities for savings. I will list these reviews and then describe 

their results that may be of interest to the committee. 

First, my office conducts an annual audit of USAID’S consolidated financial statements in accordance with the Government 

Management and Reform Act and other laws and regulations. 

Second, we perform or oversee financial audits of USAID contractors and grantees. 

Third, we conduct performance audits of USAID’S programs. 

These audits examine the extent to which USAID’S programs have 

achieved planned results or the degree to which USAID is following 

sound management practices. 

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Fourth, the OIG also conducts investigations into alleged violations of laws, and rules or regulations by recipients of USAID 

funds or by employees. 

I will now briefly discuss the results of these reviews, placing 

emphasis on areas of possible savings or areas that your staff has 

indicated could be of interest to the committee. 

Audit of USAID’S financial statements 

Based on our audit of USAID’S financial statements as of september 30, 2002, we expressed unqualified opinions on USAID’S 

balance sheet, statement of changes in net financial position, statement of budgetary resources, and statement of financing. We expressed a qualified opinion on USAID’s statement of net costs. 

Based on discussions with your staff, the following findings from 

this audit may be of interest to the committee: As of September 30, 2002, USAID had $153 million of unliquidated obligations that had no payment activity for at least one 

year. The lack of payment activity for these obligations indicated 

that the obligations may no longer be needed and may be available 

for deobligation. At the same time, it is important to recognize that 

some unliquidated obligations are in fact still needed. This can be 

illustrated by the experience of a working group established by 

USAID’s business transformation executive committee (also known 

as btec) to review all contracts and grants with expiration dates of 

September 30, 2000 or earlier and unliquidated balances of at least 

$100,000. The working group found that about one-third of the unliquidated amounts for these awards could be deobligated while the 

other two-thirds was needed to pay expenses under the awards. As 

of September 30, 2001, the amount of unliquidated obligations that 

had no payment activity for at least one year was $186 million. As 

of September 30, 2002, one year later, USAID reduced that amount 

by $33 million to $153 million. USAID has begun a process of estimating quarterly accruals. While this practice does not necessarily 

result in The agency deobligating funds, it does require managers 

to review the status of program funds. Funds that are deobligated 

through this practice may be reused for other similar activities or 

are returned to the U.S. Treasury. 

Financial Audits of Usaid Contractors and Grantees 

Under the improper payments information act of 2002, agencies 

are required to institute a systematic method of reviewing all programs and identifying those it believes are susceptible to significant erroneous payments. An erroneous payment is defined as any 

payment that should not have been made or that was made in an 

incorrect amount under statutory, contractual, administrative, or 

other legally applicable requirement. Significant erroneous payments are defined as annual erroneous payments in the program 

exceeding both 2.5 percent of program payments and $10 million. 

We are currently working with USAID managers to assist them in 

determining whether the agency will meet those thresholds. 

We also assist usaid in meeting their audit requirements under 

federal regulations and our own policies. Audits are conducted of 

U.S.-based contractors, grantees, and enterprise funds, and of foreign-based contractors and grantees. The defense contract audit 

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agency and private CPA firms conduct these audits and we provide 

oversight of their work. Financial audits of USAID contractors and 

grantees may identify questioned costs, that, if sustained by the 

contract or agreement officer, must be reimbursed to USAID. Questioned costs include (1) costs that are ineligible under the terms of 

underlying contract, grant, or agreement, as well as (2) unsupported costs that lack sufficient supporting documentation to permit the auditor to make an informed judgment on the eligibility of 

the cost or that lack required approvals. 

From October 1, 2001 through March 31, 2003, USAID reached 

management decisions on audit recommendations that questioned 

$28.0 million in contractor and grantee costs. This amount included 

$8.3 million in costs that were unsupported. Of the $28.0 million 

in questioned costs, USAID did not allow $10.5 million of which 

$8.2 million was not allowed because the costs were not eligible 

and $2.3 million was disallowed because the contractor could not 

support the costs claimed when the audit was performed. The $10.5 

million was Deobligated by USAID and, as I Indicated Previously, 

Funds that are deobligated may be reused for other similar activities or are returned to the U.S. Treasury. 

Performance Audits 

My testimony for the record, dated July 9, 2003 to the House 

Committee on Budget talked about a cargo preference audit we 

performed. When providing food assistance to Nations overseas, 

both USAID and the U.S. Department of Agriculture (USDA) are 

required by law to ship a certain percentage of tonnage on privately owned U.S. Flag commercial vessels. This cargo preference 

helps ensure that the united states maintains an adequate and viable merchant marine. In 1985, Congress increased this requirement 

from 50 TO 75 percent for commodities shipped under certain U.S. 

Food Assistance Programs. At the same Time, Congress directed 

that the U.S. Department of Transportation (DOT) finance any increases in food assistance shipping costs due to the application of 

this new requirement. Under a memorandum of understanding, 

USDA agreed to apply for all cargo preference reimbursements 

from DOT. After receiving funds from DOT, USDA would then apportion to USAID’S P.L. 480 Title II and title III Food Shipments. 

In March 2001, we conducted an audit of cargo preference reimbursements under section 901d of the Merchant Marine Act OF 

1936. We found that, in accordance with established laws, policies, 

and procedures governing the administration of cargo preference 

reimbursements, USDA could be entitled to as much as $289 million in additional reimbursements. Of that amount, up to $175 million could be made available to the two programs administered by 

USAID. Our recommendations included seeking that $175 million 

in unclaimed reimbursements for excess ocean freight costs dating 

back to 1994. USAID management concurred with the audit findings. U.S. Department of Agriculture and USAID managers have 

been working to resolve this issue and have taken their case to 

OMB. 

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Investigations 

OIG investigations can result in fines, cost recoveries, or savings, 

to either USAID or to the U.S. Treasury. For example, a major investigation by the OIG of bid rigging and fraud in USAID-funded 

construction contracts in Egypt resulted in fines, savings and restitution of over $260 million in fiscal years 2000 TO 2002. While 

most of this money went to the general fund of the U.S. Treasury, 

approximately $10 million in restitution was returned to the 

USAID program in April of 2001. 

THank you for this opportunity to present testimony concerning 

efforts to identify and eliminate waste, fraud, abuse, and mismanagement with respect to USAID. I will be happy to respond to 

any questions you may have.

STATEMENT OF JESS T. FORD, DIRECTOR INTERNATIONAL AFFAIRS

AND TRADE

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss the Department of 

State’s and the U.S. Agency for International Development’s 

(USAID) stewardship of their resources and areas within their 

budgets where applying strong management practices has the potential to produce efficiencies that could result in cost savings. To 

put this in perspective, in fiscal year 2003, State was appropriated 

about $6 billion for the administration of foreign affairs and 

USAID received approximately $12 billion in total program funding. 

In carrying out its mission of forming, representing, and implementing U.S. foreign policy, State faces complex challenges, some 

of which have intensified since the terrorist attacks of September 

11, 2001, including the provision of secure facilities overseas. Over 

the last several years, funding for State’s operations has increased, 

particularly for security upgrades at embassies and consulates 

around the world and for a major hiring program to meet U.S. foreign policy needs. USAID has also received significant funding increases for foreign assistance programs, in Afghanistan and Iraq in 

particular, as well as for HIV/AIDS relief programs. However, resources are not unlimited, and sound management practices can affect the utilization of large sums of money. 

Over the years, GAO, State’s Office of the Inspector General 

(OIG), and various commissions and studies have identified numerous management weaknesses at State. In addition, GAO and others 

have identified management challenges and operational deficiencies at USAID that affect the agency’s ability to implement its 

programs. Ongoing attention to resource management issues at 

both State and USAID will be needed to ensure that the department and the agency take advantage of opportunities for more efficient operations and achieve budget savings wherever possible. 

My statement today is based on our work at State and USAID 

over the last several years. I will focus on our observations regarding State’s management in the following five areas: (1) unneeded 

real estate; (2) embassy construction; (3) overseas presence and 

staffing, including rightsizing; (4) information technology; and (5) 

strategic planning. I will also discuss key areas where USAID has 

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faced challenges, including (1) human capital management and 

workforce planning, (2) program evaluation and performance measurement, (3) information technology, and (4) financial management. 

A list of relevant GAO reports is attached to the end of my statement (see app. I). 

SUMMARY

Overall, our work at the Department of State shows that it has 

paid more attention to managing resources, and this effort is starting to show results-including the potential for cost savings and improved operational effectiveness and efficiency. For example, • In 1996, GAO was critical of State’s disposal of unneeded facilities. We reported that State did not have an effective process for 

identifying and selling unneeded real estate, and that decisions 

concerning the sale of some properties valued at hundreds of millions of dollars had been delayed for years. In recent years, State 

has brought a more businesslike approach to managing its overseas 

real estate portfolio-valued at approximately $12 billion-and has 

accelerated the sale of unneeded property and generated revenue 

that can be used to replace unsafe, deteriorating facilities worldwide. In total, between fiscal years 1997 through 2002, State sold 

properties for more than $459 million. The proceeds from these 

sales will be used to construct new facilities in Germany, Angola, 

and other locations worldwide. State estimates proceeds from additional property sales valued at $300 million between fiscal years 

2003 through 2008 that could be used for other priorities. If State 

continues to streamline its operations and dispose of additional facilities over the next several years, it can potentially avoid having 

to request additional funding from the Congress for other real 

property needs. 

• In the past, we reported that State’s embassy construction 

projects took longer and cost more than budgeted. Due to delays in 

State’s construction program of the late 1980s, and subsequent 

funding cutbacks, facilities lacked adequate security and remained 

vulnerable to terrorist attack. State has also begun taking a more 

businesslike approach with its embassy construction program, 

which it expects will cost an additional $17 billion beginning in fiscal year 2004. For example, State has instituted reforms, such as 

using standard building designs and ‘‘fast-track’’ contracting, that 

could lower the cost of embassy construction and lessen the 

chances of cost overruns and schedule delays. We reported in January 2003 that cost-cutting efforts allowed State to achieve about 

$150 million in potential cost savings during fiscal year 2002. State 

should continue to promote a streamlined approach as it determines requirements for, designs, and constructs new embassies in 

an effort to find other opportunities to cut costs while continuing 

to provide safe and secure facilities. • We have also reported that State and most other foreign affairs agencies lacked a systematic process for determining appropriate overseas staffing levels. As a result, there was no assurance 

that personnel stationed abroad represented the right number of 

people with the right skills. Since 2001, State has directed significant effort to improving the management of its overseas presence 

in an effort to address workforce planning and staffing issues. In 

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response to management weaknesses that we have previously identified, State has begun addressing rightsizing options and staffing 

shortages at hardship posts. For example, the department has indicated that it is pursuing regionalization in Europe, as well as opportunities to relocate positions from overseas back to the United 

States, which should result in lower operating costs. State should 

continue to review its workforce planning policies to ensure that 

the U.S. government has the right people in the right places at the 

right times to support U.S. foreign policy goals. Moreover, in determining overseas staffing levels, State should adopt industry best 

practices, such as competitive sourcing of administrative and support functions, which could result in cost reductions and streamlined services overseas. • Previous GAO and State’s Office of Inspector General (OIG) reports cited weaknesses in the information technology system, including State’s inability to collaborate with other foreign affairs 

agencies, as significant challenges for the department. State officials have recognized deficiencies in the department’s management 

of information technology programs. The Secretary of State has 

made a major commitment to modernizing information technology 

and plans to spend $262 million over fiscal years 2003 and 2004 

on information technology modernization initiatives overseas. For 

example, State is now working to replace its antiquated cable system with a new integrated messaging and retrieval system. According to State, its information technology is now in the best shape 

it has ever been, including improved Internet access and upgraded 

computer equipment. Due to the level of investment the department is making in information technology, continued oversight will 

be necessary to minimize the risks of spending large sums of 

money on systems that do not produce commensurate value. • From 1998 through 2000, we found major weaknesses in 

State’s strategic planning processes. The department had not developed overall priorities for achieving its strategic goals, and consequently, had no overall basis for allocating resources to priorities. 

Since 2001, State has made improvements both at headquarters 

and overseas that are intended to link staffing and budgetary requirements with policy priorities. State is now working to forge a 

stronger link between resources and performance, strategic plans, 

annual performance plans, and annual performance reports. This 

effort will enable State to show what is being accomplished with 

the money it is spending. Improvements in strategic planning will 

also ensure that State is setting clear objectives, tying resources to 

these objectives, and monitoring its progress in achieving them-all 

of which are key to efficient operations. 

Our work at the U.S. Agency for International Development 

(USAID) indicates that the agency has begun taking corrective actions in areas that, over the years, GAO and others have identified 

as having weak management and operational deficiencies. These 

areas include human capital management and workforce planning, 

program evaluation and performance measurement, information 

technology, and financial management. Improved management of 

these critical systems is essential if USAID is to ensure that its foreign assistance objectives are being met and its funds and resources are effectively safeguarded. Our recent work on USAID’s 

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democracy and rule of law programs also revealed certain management weaknesses that, if corrected, would help ensure that these 

programs can be sustained in difficult overseas environments, are 

better coordinated with other U.S. agencies and international donors to maximize resources, and achieve their intended results. 

Mr. Chairman, State, USAID, and all government agencies have 

an obligation to ensure that taxpayer resources are managed wisely. The programs and activities that I am covering today have benefited and will continue to benefit from sound management practices that could result in more savings and efficiencies. 

BACKGROUND

Approximately 4 percent of discretionary spending in the United 

States’ federal budget is appropriated for the conduct of foreign affairs activities. This includes funding for bilateral and multilateral 

assistance, military assistance, and State Department activities. 

Spending for State, taken from the ‘‘150 Account,’’ makes up the 

largest share of foreign affairs spending. Funding for State’s Diplomatic and Consular Programs-State’s chief operating account, 

which supports the department’s diplomatic activities and programs, including salaries and benefits-comprises the largest portion 

of its appropriations. Embassy security, construction, and maintenance funding comprises another large portion of State’s appropriation. Funding for the administration of foreign affairs has risen 

dramatically in recent fiscal years, due, in part, to enhanced funding for security-related improvements worldwide, including personnel, construction, and equipment following the bombings of two 

U.S. embassies in 1998 and the events of September 11, 2001. For 

example, State received about $2.8 billion in fiscal year 1998, but 

by fiscal year 2003, State’s appropriation was approximately $6 billion. For fiscal year 2004, State is seeking approximately $6.4 billion, which includes $4 billion for diplomatic and consular affairs 

and $1.5 billion for embassy security, construction, and maintenance. In addition, State plans to spend $262 million over fiscal 

years 2003 and 2004 on information technology modernization initiatives overseas. 

Humanitarian and economic development assistance is an integral part of U.S. global security strategy, particularly as the United 

States seeks to diminish the underlying conditions of poverty and 

corruption that may be linked to instability and terrorism. USAID 

is charged with overseeing U.S. foreign economic and humanitarian 

assistance programs. In fiscal year 2003, Congress appropriated 

about $12 billion-including supplemental funding-to USAID, and 

the agency managed programs in about 160 countries, including 71 

overseas missions with USAID direct-hire presence. Fiscal year 

2004 foreign aid spending is expected to increase due, in part, to 

substantial increases in HIV/AIDS funding and security-related 

economic aid.

DEPARTMENT OF STATE

I would like to discuss State’s performance in managing its overseas real estate, overseeing major embassy construction projects, 

managing its overseas presence and staffing, modernizing its inforVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00379 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
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mation technology, and developing and implementing strategic 

plans. 

Management of Real Property 

State manages an overseas real property portfolio valued at ap- proximately $12 billion. The management of real property is an 

area where State could achieve major cost savings and other operational efficiencies. In the past, we have been critical of State’s 

management of its overseas property, including its slow disposal of 

unneeded facilities. Recently, officials at State’s Bureau of Overseas Buildings Operations (OBO), which manages the government’s 

real property overseas, have taken a more systematic approach to 

identifying unneeded properties and have significantly increased 

the sale of these properties. For example, in 2002, OBO completed 

sales of 26 properties totaling $64 million, with contracts in place 

for another $40 million in sales. But State needs to dispose of more 

facilities in the coming years as it embarks on an expensive plan 

to replace embassies and consulates that do not meet State’s security requirements and/or are in poor condition. 

Unneeded Property 

Unneeded property and deteriorating facilities present a real 

problem-but also an opportunity to improve U.S. operations abroad 

and achieve savings. We have reported that the management of 

overseas real estate has been a continuing challenge for State, although the department has made improvements in recent years. 

One of the key weaknesses we found was the lack of a systematic 

process to identify unneeded properties and to dispose of them in 

a timely manner. In 1996, we identified properties worth hundreds 

of millions of dollars potentially excess to State’s needs or of questionable value and expensive to maintain that the department had 

not previously identified for potential sale. As a result of State’s inability to resolve internal disputes and sell excess property in an 

expeditious manner, we recommended that the Secretary of State 

appoint an independent panel to decide which properties should be 

sold. The Secretary of State created this panel in 1997. As of April 

2002, the Real Property Advisory Board had reviewed 41 disputed 

properties and recommended that 26 be sold. By that time, State 

had disposed of seven of these properties for about $21 million. 

In 2002, we again reviewed State’s processes for identifying and 

selling unneeded overseas real estate and found that it had taken 

steps to implement a more systematic approach that included asking posts to annually identify properties for disposal and increasing 

efforts by OBO and officials from State’s OIG to identify such properties when they visit posts. For example, the director of OBO took 

steps to resolve disputes with posts that have delayed the sale of 

valuable property. OBO has also instituted monthly Project Performance Reviews to review all aspects of real estate management, 

such as the status of acquisitions and disposal of overseas property. 

However, we found that the department’s ability to monitor property use and identify potentially unneeded properties was hampered by errors and omissions in its property inventory. Inaccurate 

inventory information can result in unneeded properties not being 

identified for potential sale. Therefore, we recommended that the 

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department improve the accuracy of its real property inventory. In 

commenting on our report, OBO said that it had already taken action to improve its data collection. For example, State sent a cable 

to all overseas posts reminding them of their responsibilities to 

maintain accurate real estate records. 

State has significantly improved its performance in selling 

unneeded property. In total, between fiscal years 1997 through 

2002, State sold 129 properties for more than $459 million. Funds 

generated from property sales are being used to help offset embassy construction costs in Berlin, Germany; Luanda, Angola; and 

elsewhere. State estimates it will sell additional properties between 

fiscal years 2003 and 2008 valued at approximately $300 million. 

More recently, State has taken action to sell two properties (a 0.4 

acre parking lot and an office building) in Paris identified in a GAO 

report as potentially unneeded. After initially resisting the sale of 

the parking lot, the department reversed its decision and sold both 

properties in June 2003 for a total of $63.1 million-a substantial 

benefit to the government. The parking lot alone was sold conditionally for $20.7 million. Although this may be a unique case, it 

demonstrates how scrutiny of the property inventory could result 

in potential savings. The department should continue to look closely at property holdings to see if other opportunities exist. If State 

continues to streamline its operations and dispose of additional facilities over the next several years, it can use those funds to help 

offset the cost of replacing about 160 embassies and consulates for 

security reasons in the coming years. 

Embassy Construction 

In the past, State has had difficulties ensuring that major embassy construction projects were completed on time and within 

budget. For example, in 1991 we reported that State’s previous construction program suffered from delays and cost increases due to, 

among other things, poor program planning and inadequate contractor performance. In 1998, State embarked on the largest overseas embassy construction program in its history in response to the 

bombings of U.S. embassies in Africa. From fiscal years 1999 

through 2003, State received approximately $2.7 billion for its new 

construction program and began replacing 25 of 185 posts identified as vulnerable by State. To better manage this program, OBO 

has undertaken several initiatives aimed at improving State’s stewardship of its funds for embassy buildings, including cutting costs 

of planned construction projects, using standard designs, and reducing construction duration through a ‘‘fast track’’ process. Moreover, State hopes that additional management tools aimed at ensuring that new facilities are built in the most cost-effective manner, including improvements in how agencies determine requirements for new embassies, will help move the program forward. 

State is also pursuing a cost-sharing plan that would charge other 

federal agencies for the cost of their overall overseas presence and 

provide additional funds to help accelerate the embassy construction program. 

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Replacing Vulnerable Facilities 

While State has begun replacing many facilities, OBO officials 

estimated that beginning in fiscal year 2004, it will cost an additional $17 billion to replace facilities at remaining posts. As of February 2003, State had begun replacing 25 of 185 posts identified by 

State as vulnerable after the 1998 embassy bombings. To avoid the 

problems that weakened the previous embassy construction program, we recommended that State develop a long-term capital construction plan that identifies (1) proposed construction projects’ cost 

estimates and schedules and (2) estimated annual funding requirements for the overall program. Although State initially resisted implementing our recommendation, OBO’s new leadership reconsidered this recommendation and has since produced two annual planning documents titled the ‘‘Long-Range Overseas Building Plan.’’ 

According to OBO, the long-range plan is the roadmap by which 

State, other departments and agencies, the Office of Management 

and Budget (OMB), the Congress, and others can focus on defining 

and resolving the needs of overseas facilities. 

In addition to the long-range plan, OBO has undertaken several 

initiatives aimed at improving State’s stewardship of its embassy 

construction funds. These measures have the potential to result in 

significant cost savings and other efficiencies. For example, OBO 

has 

• Developed Standard Embassy Designs (SED) for use in 

most embassy construction projects. SEDs provide OBO with 

the ability to contract for shortened design and construction 

periods and control costs through standardization; 

• Shifted from ‘‘design-bid-build’’ contracting toward ‘‘designbuild’’ contracts, which have the potential to reduce project 

costs and construction time frames; 

• Developed and implemented procedures to enforce cost 

planning during the design phase and ensure that the final designs are within budget; and * 

• Increased the number of contractors eligible to bid for construction projects, thereby increasing competition for contracts, 

which could potentially result in lower bids. 

OBO has set a goal of a 2–year design and construction period 

for its mid-sized, standard embassy design buildings, which, if met, 

could reduce the amount of time spent in design and construction 

by almost one year. We reported in January 2003 that these costcutting efforts allowed OBO to achieve $150 million in potential 

cost savings during fiscal year 2002. These savings, according to 

OBO, resulted from the application of the SEDs and increased competition for the design and construction of these projects. 

Despite these gains, State will face continuing hurdles throughout the life of the embassy construction program. These hurdles include meeting construction schedules within the estimated costs 

and ensuring that State has the capacity to manage a large number of projects simultaneously. Because of the high costs associated 

with this program and the importance of providing secure facilities 

overseas, we believe this program merits continuous oversight by 

State, GAO, and the Congress. 

377

Staffing Requirements for New Embassy Compounds 

In addition to ensuring that individual construction projects meet 

cost and performance schedules, State must also ensure that new 

embassies are appropriately sized. Given that the size and cost of 

new facilities are directly related to agencies’ anticipated staffing 

needs, it is imperative that future requirements be predicted as accurately as possible. Embassy buildings that are designed too small 

may require additional construction and funding in the future; 

buildings that are too large may have unused space-a waste of government funds. State’s construction program in the late 1980s encountered lengthy delays and cost overruns in part because it 

lacked coordinated planning of post requirements prior to approval 

and budgeting for construction projects. As real needs were determined, changes in scope and increases in costs followed. OBO now 

requires that all staffing projections for new embassy compounds 

be finalized prior to submitting funding requests, which are sent to 

Congress as part of State’s annual budget request each February. 

In April 2003, we reported that U.S. agencies operating overseas, 

including State, were developing staffing projections without a systematic approach. We found that State’s headquarters gave embassies little guidance on factors to consider when developing projections, and thus U.S. agencies did not take a consistent or systematic approach to determining long-term staffing needs. Based on 

our recommendations, State in May 2003 issued a ‘‘Guide to Developing Staffing Projections for New Embassy and Consulate Compound Construction,’’ which requires a more serious, disciplined approach to developing staffing projections. When fully implemented, 

this approach should ensure that overseas staffing projections are 

more accurate and minimize the financial risks associated with 

building facilities that are designed for the wrong number of people. 

Capital Security Cost Sharing 

Historically, State has paid all costs associated with the construction of overseas facilities. Following the embassy bombings, 

the Overseas Presence Advisory Panel (OPAP) noted a lack of cost 

sharing among agencies that use overseas facilities. As a result, 

OPAP recommended that agencies be required to pay rent in government-owned buildings in foreign countries to cover operating 

and maintenance costs. In 2001, an interagency group put forth a 

proposal that would require agencies to pay rent based on the 

space they occupy in overseas facilities, but the plan was not enacted. In 2002, OMB began an effort to develop a mechanism that 

would require users of overseas facilities to share the construction 

costs associated with those facilities. The administration believes 

that if agencies were required to pay a greater portion of the total 

costs associated with operating overseas facilities, they would think 

more carefully before posting personnel overseas. As part of this effort, State has presented a capital security cost-sharing plan that 

would require agencies to help fund its capital construction program. State’s proposal calls for each agency to fund a proportion of 

the total construction program cost based on its respective proportion of total overseas staffing. OBO has reported that its proposed 

378

cost-sharing program could result in additional funds, thereby reducing the duration of the overall program. 

Overseas Presence and Staffing 

State maintains a network of approximately 260 diplomatic posts 

in about 170 countries worldwide and employs a direct-hire workforce of about 30,000 employees, about 60 percent of those overseas. 

The costs of maintaining staff overseas vary by agency but in general are extremely high. In 2002, the average annual cost of placing 

one full-time direct-hire American family of four in a U.S. embassy 

was approximately $339,000. These costs make it critical that the 

U.S. overseas presence is sized appropriately to conduct its work. 

We have reported that State and most other federal agencies overseas have historically lacked a systematic process for determining 

the right number of personnel needed overseas-otherwise known as 

rightsizing. Moreover, in June 2002, we reported that State faces 

serious staffing shortfalls at hardship posts-in both the number of 

staff assigned to these posts and their experience, skills, and/or 

language proficiency. Thus, State has been unable to ensure that 

it has ‘‘the right people in the right place at the right time with 

the right skills to carry out America’s foreign policy’’-its definition 

of diplomatic readiness. However, since 2001, State has directed 

significant attention to improving weaknesses in the management 

of its workforce planning and staffing issues that we and others 

have noted. Because personnel salaries and benefits consume a 

huge portion of State’s operating budget, it is important that the 

department exercise good stewardship of its human capital resources. 

Overseas Staffing 

Around the time GAO designated strategic human capital management as a governmentwide high-risk area in 2001, State, as 

part of its Diplomatic Readiness Initiative (DRI), began directing 

significant attention to addressing its human capital needs, adding 

1,158 employees over a 3–year period (fiscal years 2002 through 

2004). In fiscal year 2002, Congress allocated nearly $107 million 

for the DRI. State requested nearly $100 million annually in fiscal 

years 2003 and 2004 to hire approximately 400 new staff each 

year. 

The DRI has enabled the department to boost recruitment. However, State has historically lacked a systematic approach to determine the appropriate size and location of its overseas staff. To 

move the rightsizing process forward, the August 2001 President’s 

Management Agenda identified it as one of the administration’s 

priorities. Given the high costs of maintaining the U.S. overseas 

presence, the administration has instructed U.S. agencies to reconfigure the number of overseas staff to the minimum necessary to 

meet U.S. foreign policy goals. This OMB-led initiative aims to develop cost-saving tools or models, such as increasing the use of regional centers, revising the Mission Performance Planning (MPP) 

process, increasing overseas administrative efficiency, and relocating functions to the United States. According to the OPAP, although the magnitude of savings from rightsizing the overseas 

presence cannot be known in advance, ‘‘significant savings’’ are 

379

achievable. For example, it said that reducing all agencies’ staffing 

by 10 percent could yield governmentwide savings of almost $380 

million a year. 

GAO’s Rightsizing Framework 

In May 2002, we testified on our development of a rightsizing 

framework. The framework is a series of questions linking staffing 

levels to three critical elements of overseas diplomatic operations: 

security of facilities, mission priorities and requirements, and cost 

of operations. It also addresses consideration of rightsizing options, 

such as relocating functions back to the United States or to regional centers, competitively sourcing functions, and streamlining 

operations. Rightsizing analyses could lead decision makers to increase, decrease, or change the mix of staff at a given post. For example, based on our work at the U.S. embassy in Paris, we identified positions that could potentially be relocated to regional centers 

or back to the United States. On the other hand, rightsizing analyses may indicate the need for increased staffing, particularly at 

hardship posts. In a follow-up report to our testimony, we recommended that the director of OMB ensure that our framework is 

used as a basis for assessing staffing levels in the administration’s 

rightsizing initiative. 

In commenting on our rightsizing reports, State endorsed our 

framework and said it plans to incorporate elements of our 

rightsizing questions into its future planning processes, including 

its MPPs. State also has begun to take further actions in managing 

its overseas presence-along the lines that we recommended in our 

June 2002 report on hardship posts-including revising its assignment system to improve staffing of hardship posts and addressing 

language shortfalls by providing more opportunities for language 

training. In addition, State has already taken some rightsizing actions to improve the cost effectiveness of its overseas operating 

practices. For example, State • Plans to spend at least $80 million to purchase and renovate a 23-acre, multi-building facility in Frankfurt, Germanyslated to open in mid-2005-for use as a regional hub to conduct 

and support diplomatic operations; 

• Has relocated more than 100 positions from the Paris embassy to the regional Financial Services Center in Charleston, 

South Carolina; and 

• Is working with OMB on a cost-sharing mechanism, as 

previously mentioned, that will give all U.S. agencies an incentive to weigh the high costs to taxpayers associated with assigning staff overseas. 

In addition to these rightsizing actions, there are other areas 

where the adoption of industry best practices could lead to cost reductions and streamlined services. For example, in 1997, we reported that State could significantly streamline its employee transfer and housing relocation processes. We also reported in 1998 that 

State’s overseas posts could potentially save millions of dollars by 

implementing best practices such as competitive sourcing. 

In light of competing priorities as new needs emerge, particularly 

in Iraq and Afghanistan, State must be prepared to make difficult 

strategic decisions on which posts and positions it will fill and 

380

which positions it could remove, relocate, or regionalize. State will 

need to marshal and manage its human capital to facilitate the 

most efficient, effective allocation of these significant resources. 

Information Technology 

Up-to-date information technology, along with adequate and 

modern office facilities, is an important part of diplomatic readiness. We have reported that State has long been plagued by poor 

information technology at its overseas posts, as well as weaknesses 

in its ability to manage information technology modernization programs. State’s information technology capabilities provide the foundation of support for U.S. government operations around the world, 

yet many overseas posts have been equipped with obsolete information technology systems that prevented effective interagency information sharing. 

The Secretary of State has made a major commitment to modernizing the department’s information technology. In March 2003, we 

testified that the department invested $236 million in fiscal year 

2002 on key modernization initiatives for overseas posts and plans 

to spend $262 million over fiscal years 2003 and 2004. State reports that its information technology is now in the best shape it 

has ever been, including improved Internet access and upgraded 

computer equipment. The department is now working to replace its 

antiquated cable system with a new integrated messaging and retrieval system, which it acknowledges is an ambitious effort. 

State’s OIG and GAO have raised a number of concerns regarding the department’s management of information technology programs. For example, in 2001, we reported that State was not following proven system acquisition and investment practices in attempting to deploy a common overseas knowledge management 

system. This system was intended to provide functionality ranging 

from basic Internet access and e-mail to mission-critical policy formulation and crisis management support. We recommended that 

State limit its investment in this system until it had secured stakeholder involvement and buy-in. State has since discontinued the 

project due to a lack of interagency buy-in and commitment, thereby avoiding additional costs of more than $200 million. 

Recognizing that interagency information sharing and collaboration can pay off in terms of greater efficiency and effectiveness of 

overseas operations, State’s OIG reported that the department recently decided to merge some of the objectives associated with the 

interagency knowledge management system into its new messaging 

system. We believe that the department should try to eliminate the 

barriers that prevented implementation of this system. As State 

continues to modernize information technology at overseas posts, it 

is important that the department employ rigorous and disciplined 

management processes on each of its projects to minimize the risks 

that the department will spend large sums of money on systems 

that do not produce commensurate value. 

Strategic Planning 

Linking performance and financial information is a key feature 

of sound management-reinforcing the connection between resources 

consumed and results achieved-and an important element in giving 

381

the public a useful and informative perspective on federal spending. A well-defined mission and clear, well understood strategic 

goals are essential in helping agencies make intelligent trade-offs 

among short- and long-term priorities and ensure that program 

and resource commitments are sustainable. In recent years, State 

has made improvements to its strategic planning process both at 

headquarters and overseas that are intended to link staffing and 

budgetary requirements with policy priorities. For instance, State 

has developed a new strategic plan for fiscal years 2004 through 

2009, which, unlike previous strategic plans, was developed in conjunction with USAID and aligns diplomatic and development efforts. At the field level, State revised the MPP process so that posts 

are now required to identify key goals for a given fiscal year, and 

link staffing and budgetary requirements to fulfilling these priorities. 

State’s compliance with the Government Performance and Results Act of 1993 (GPRA), which requires federal agencies to prepare annual performance plans covering the program activities set 

out in their budgets, has been mixed. While State’s performance 

plans fell short of GPRA requirements from 1998 through 2000, the 

department has recently made strides in its planning and reporting 

processes. For example, in its performance plan for 2002, State 

took a major step toward implementing GPRA requirements, and 

it has continued to make improvements in its subsequent plans. 

As we have previously reported, although connections between 

specific performance and funding levels can be difficult to make, efforts to infuse performance information into budget deliberations 

have the potential to change the terms of debate from simple outputs to outcomes. Continued improvements to strategic and performance planning will ensure that State is setting clear objectives, 

tying resources to these objectives, and monitoring its progress in 

achieving them-all of which are essential to efficient operations. 

U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT

Now I would like to discuss some of the challenges USAID faces 

in managing its human capital, evaluating its programs and measuring their performance, and managing its information technology 

and financial systems. I will also outline GAO’s findings from our 

reviews of USAID’s democracy and rule of law programs in Latin 

America and the former Soviet Union. 

Human Capital Management 

Since the early 1990s, we have reported that USAID has made 

limited progress in addressing its human capital management 

issues and managing the changes in its overseas workforce. A 

major concern is that USAID has not established a comprehensive 

workforce plan that is integrated with the agency’s strategic objectives and ensures that the agency has skills and competencies necessary to meet its emerging foreign assistance challenges. Developing such a plan is critical due to a reduction in the agency’s 

workforce during the 1990s and continuing attrition-more than half 

of the agency’s foreign service officers are eligible to retire by 2007. 

According to USAID’s OIG, the steady decline in the number of foreign service and civil service employees with specialized technical 

382

expertise has resulted in insufficient staff with needed skills and 

experience and less experienced personnel managing increasingly 

complex programs. Meanwhile, USAID’s program budget has increased from $7.3 billion in 2001 to about $12 billion in fiscal year 

2003, due primarily to significant increases in HIV/AIDS funding 

and supplemental funding for emerging programs in Iraq and Afghanistan. The combination of continued attrition of experienced 

foreign service officers, increased program funding, and emerging 

foreign policy priorities raises concerns regarding USAID’s ability 

to maintain effective oversight of its foreign assistance programs. 

USAID’s lack of progress in institutionalizing a workforce planning system has led to certain vulnerabilities. For example, as we 

reported in July 2002, USAID lacks a ‘‘surge capacity’’ that enables 

it to quickly hire the staff needed to respond to emerging demands 

and post-conflict or post-emergency reconstruction situations. We 

also reported that insufficient numbers of contract officers affected 

the agency’s ability to deliver hurricane reconstruction assistance 

in Latin America in the program’s early phases. 

USAID is aware of its human capital management and workforce 

planning shortcomings and is now beginning to address some of 

them with targeted hiring and other actions. 

Program Evaluation and Performance Measurement 

USAID continues to face difficulties in identifying and collecting 

the data it needs to develop reliable performance measures and accurately report the results of its programs. Our work and that of 

USAID’s OIG have identified a number of problems with the annual results data that USAID’s operating units have been reporting. USAID has acknowledged these concerns and has undertaken 

several initiatives to correct them. Although the agency has made 

a serious effort to develop improved performance measures, it continues to report numerical outputs that do not gauge the impact of 

its programs. 

Without accurate and reliable performance data, USAID has little assurance that its programs achieve their objectives and related 

targets. In July 1999, we commented on USAID’s fiscal year 2000 

performance plan and noted that because the agency depends on 

international organizations and thousands of partner institutions 

for data, it does not have full control over how data are collected, 

reported, or verified. In April 2002, we reported that USAID had 

evaluated few of its experiences in using various funding mechanisms and different types of organizations to achieve its objectives. 

We concluded that with better data on these aspects of the agency’s 

operations, USAID managers and congressional overseers would be 

better equipped to analyze whether the agency’s mix of approaches 

takes full advantage of nongovernmental organizations to achieve 

the agency’s purposes. 

Information Technology and Financial Management 

USAID’s information systems do not provide managers with the 

accurate information they need to make sound and cost-effective 

decisions. USAID’s OIG has reported that the agency’s processes 

for procuring information technology have not followed established 

guidelines, which require executive agencies to implement a procVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00388 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
383

ess that maximizes the value and assesses the risks of information 

technology investments. In addition, USAID’s computer systems 

are vulnerable and need better security controls. USAID management has acknowledged these weaknesses and the agency is making efforts to correct them. 

Effective financial systems and controls are necessary to ensure 

that USAID management has timely and reliable information to 

make effective, informed decisions and that assets are safeguarded. 

USAID has made progress in correcting some of its systems and internal control deficiencies and is in the process of revising its plan 

to remedy financial management weaknesses as required by the 

Federal Financial Management Improvement Act of 1996. To obtain its goal, however, USAID needs to continue efforts to resolve 

its internal control weaknesses and ensure that planned upgrades 

to its financial systems are in compliance with federal financial 

system requirements. 

Democracy and Rule of Law Programs 

Our reviews of democracy and rule of law programs in Latin 

America and the former Soviet Union demonstrate that these programs have had limited results and suggest areas for improving 

the efficiency and impact of these efforts. 

In Latin America, we found that U.S. assistance has helped bring 

about important criminal justice reforms in five countries. This assistance has also help improve transparency and accountability of 

some government functions, increase attention to human rights, 

and support elections that observation groups have considered free 

and fair. In several countries of the former Soviet Union, U.S. 

agencies have helped support a variety of legal system reforms and 

introduced some innovative legal concepts and practices in the 

areas of legislative and judicial reform, legal education, law enforcement, and civil society. In both regions, however, sustainability of these programs is questionable. Establishing democracy 

and rule of law in these countries is a complex undertaking that 

requires long-term host government commitment and consensus to 

succeed. However, host governments have not always provided the 

political support and financial and human capital needed to sustain 

these reforms. In other cases, U.S.-supported programs were limited, and countries did not adopt the reforms and programs on a 

national scale. 

In both of our reviews, we found that several management issues 

shared by USAID and the other agencies have affected implementation of these programs. Poor coordination among the key U.S. 

agencies has been a long-standing management problem, and cooperation with other foreign donors has been limited. U.S. agencies’ 

strategic plans do not outline how these agencies will overcome coordination problems and cooperate with other foreign donors on 

program planning and implementation to maximize scarce resources. Also, U.S. agencies, including USAID, have not consistently evaluated program results and have tended to stress output 

measures, such as the numbers of people trained, over indicators 

that measure program outcomes and results, such as reforming law 

enforcement practices. Further, U.S. agencies have not consistently 

384

shared lessons learned from completed projects, thus missing opportunities to enhance the outcomes of their programs. 

Mr. Chairman, this completes my prepared statement. I would be 

happy to respond to any questions you or other members of the 

committee may have at this time. 

CONTACTS AND ACKNOWLEDGMENTS

For future contacts regarding this testimony, please call Jess 

Ford or John Brummet at (202) 512–4128. Individuals making key 

contributions to this testimony include Heather Barker, David 

Bernet, Janey Cohen, Diana Glod, Kathryn Hartsburg, Edward 

Kennedy, Joy Labez, Jessica Lundberg, and Audrey Solis. 

Appendix I: GAO Reports on Resource Management 

DEPARTMENT OF STATE

Overseas Security, Presence, and Facilities 

Overseas Presence: Conditions of Overseas Diplomatic Facilities. 

GAO–03–557T. Washington, D.C.: March 20, 2003. 

Overseas Presence: Rightsizing Framework Can Be Applied at 

U.S. Diplomatic Posts in Developing Countries. GAO–03–396. 

Washington, D.C.: April 7, 2003. 

Embassy Construction: Process for Determining Staffing Requirements Needs Improvement. GAO–03–411. Washington, D.C.: April 

7, 2003. 

Overseas Presence: Framework for Assessing Embassy Staff Levels Can Support Rightsizing Initiatives. GAO–02–780. Washington, 

D.C.: July 26, 2002. 

State Department: Sale of Unneeded Property Has Increased, but 

Further Improvements Are Necessary. GAO–02–590. Washington, 

D.C.: June 11, 2002. 

Embassy Construction: Long-Term Planning Will Enhance Program Decision-making. GAO–01–11. Washington, D.C.: January 22, 

2001. 

State Department: Decision to Retain Embassy Parking Lot in 

Paris, France, Should Be Revisited. GAO–01–477. Washington, 

D.C.: April 13, 2001. 

Staffing and Workforce Planning 

State Department: Staffing Shortfalls and Ineffective Assignment 

System Compromise Diplomatic Readiness at Hardship Posts. 

GAO–02–626. Washington, D.C.: June 18, 2002. 

Foreign Languages: Human Capital Approach Needed to Correct 

Staffing and Proficiency Shortfalls. GAO–02–375. Washington, 

D.C.: January 31, 2002. 

Information Management 

Information Technology: State Department-Led Overseas Modernization Program Faces Management Challenges. GAO–02–41. 

Washington, D.C.: November 16, 2001.

Foreign Affairs: Effort to Upgrade Information Technology Overseas Faces Formidable Challenges. GAO–T–AIMD/NSIAD–00–214. 

Washington, D.C.: June 22, 2000. 

385

Electronic Signature: Sanction of the Department of State’s System. GAO/AIMD–00–227R. Washington, D.C.: July 10, 2000. 

Strategic and Performance Planning and Foreign Affairs Management 

Major Management Challenges and Program Risks: Department 

of State. GAO–03–107. Washington, D.C.: January 2003. 

Department of State: Status of Achieving Key Outcomes and Addressing Major Management Challenges. GAO–02–42. Washington, 

D.C.: December 7, 2001. 

Observations on the Department of State’s Fiscal Year 1999 Performance Report and Fiscal Year 2001 Performance Plan. GAO/

NSIAD–00–189R. Washington, D.C.: June 30, 2000. 

Major Management Challenges and Program Risks: Department 

of State. GAO–01–252. Washington, D.C.: January 2001. 

U.S. Agency for International Development: Status of Achieving 

Key Outcomes and Addressing Major Management Challenges. 

GAO–01–721. Washington, D.C.: August 17, 2001. 

Observations on the Department of State’s Fiscal Year 2000 Performance Plan. GAO/NSIAD–99–183R. Washington, D.C.: July 20, 

1999. 

Major Management Challenges and Program Risks: Implementation Status of Open Recommendations. GAO/OCG–99–28. Washington, D.C.: July 30, 1999. 

The Results Act: Observations on the Department of State’s Fiscal Year 1999 Annual Performance Plan. GAO/NSIAD–98–210R. 

Washington, D.C.: June 17, 1998. 

U.S. Agency for International Development 

Major Management Challenges and Program Risks: U.S. Agency 

for International Development. GAO–03–111. Washington, D.C.: 

January 2003. 

Foreign Assistance: Disaster Recovery Program Addressed Intended Purposes, but USAID Needs Greater Flexibility to Improve 

Its Response Capability. GAO–02–787. Washington, D.C.: July 24, 

2002. 

Foreign Assistance: USAID Relies Heavily on Nongovernmental 

Organizations, but Better Data Needed to Evaluate Approaches. 

GAO–02–471. Washington, D.C.: April 25, 2002. 

Major Management Challenges and Program Risks: U.S. Agency 

for International Development. GAO–01–256. Washington, D.C.: 

January 2001.

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Insert graphic folio 101 89421A.001
(387)

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC, September 10, 2003. 

Hon. JIM NUSSLE, 

Chairman, House Budget Committee, 

309 Cannon House Office Building, Washington, DC. 

DEAR CHAIRMAN NUSSLE: Pursuant to section 301(b) and (c) of 

the conference report accompanying H. Con. Res 95, I am pleased 

to submit the following recommendations to reduce waste, fraud, 

and abuse for the 2004 fiscal year. 

Misuse of Non-Federal Training Facilities at the Department of 

Justice 

The Justice Department should reduce employee training and 

meeting costs by using federal facilities instead of more expensive 

non-governmental facilities for such purposes. For example, the 

Justice Department maintains the National Advocacy Center, an 

extensive training facility for Department employees located in Columbia, South Carolina to train federal, state, and local prosecutors 

and litigators in advocacy skills and management of legal operations. On occasion, however, the Justice Department has conducted training and meeting functions for its employees at non-governmental facilities located in exotic or far-flung venues such as 

the Florida Keys and Santa Monica. 

Accordingly, the Justice Department should be required to use 

the most cost-effective training and meeting facilities for its employees. For any predominantly internal training or conference 

meeting, the Justice Department should be required to use only a 

facility that does not require a payment to a private entity for the 

use of such facility, unless specifically authorized in writing by the 

Attorney General. In addition, the Attorney General should be required to prepare an annual report to the Chairmen and ranking 

members of the House and Senate Judiciary Committees that details each training or conference meeting requiring authorization. 

The report should explain why the facility was chosen and provide 

a breakdown of any expenditures incurred in excess of the cost of 

conducting the training or meeting at a governmental facility. 

While savings resulting from this recommendation are difficult to 

ascertain with quantifiable certainty, this requirement would save 

at least $2 million during FY 2004. 

COPS Grants Misuse 

Waste, fraud and abuse in Community Oriented Policing Services 

(COPS) Grants can be reduced by replacing on-site reviews by program officers with on-site audits and requiring a immediate stop to 

fund disbursements ‘‘in process’’ when grant conditions are not met 

by the grantee. 

388

Office of Inspector General reports issued in 1999 found that 

many grantees did not submit the required program monitoring 

and financial reports, and that COPS on-site reviews did not seek 

to cover whether grant conditions were being met. Subsequent audits confirmed that COPS had not corrected its grant management 

approach to require compliance, based on testimony from Glenn 

Fine on March 14, 2002, before the Subcommittee on Crime. In his 

testimony, he provided numerous instances of fraud by COPS 

grantees, and stated that between 1992 and 1999, there were $52 

million in questioned costs and $71 million in funds that could be 

better used, comprising 24% of the total COPS funds during the period. He testified that of the subsequent 185 audits for the period 

from 1999 through the close of 2001, auditors identified more than 

$63 million in questioned costs and $32 million in funds to better 

use. 

The Committee is considering legislation to establish through its 

Department of Justice Reauthorization legislation an Office of 

Audit and Assessment that will conduct on-site audits and have 

the authority to cease active funding of COPS grants where grant 

conditions are not met, or there circumstances that suggest fraud 

or abuse. The authorizing legislation will require OJP to conduct 

these audits on at least 10% of the amount of the total grants, and 

requires the entire grant disbursement to be suspended if more 

than 1% of the grant is misused. This solution will reduce the total 

questioned costs (possible fraud and abuse) and poorly used funds 

(waste). 

Because the FY 2004 Commerce Justice State Appropriations bill 

has not been enacted into law, potential costs savings and more effective use of funds estimates will be based on the FY 2003 enacted 

budget for COPS of $923 million. Extrapolating from the Inspector 

General’s conclusion that 24% of the funds received by grantees 

prior to 1999 were either questioned costs or could be better used, 

roughly $222 million of FY2003 funds may be questionably used. 

If the Office of Audit and Assessment is able to audit 10% of the 

total (or $92 million), as required in the authorizing statute, and 

it identifies 20% of the grants so audited as questionably deployed 

or exceeding 1% in misused funds, the cost savings per year to the 

federal government would be as much as $18 million. If the Office 

is eventually able to audit as much as 50% of the total ($461 million), the savings per year could reach $90 million.

OJP Grant Funds Abuse 

Waste, fraud and abuse in the OJP Local Law Enforcement 

Block Grant Program (LLEBG) and the Byrne Formula Grant programs can be reduced by consolidating the programs and by applying the same on-site audits to these grants as to the COPS grants, 

together with immediate fund cessation when grant conditions are 

discovered to be unmet by the grantee. 

The Committee has prepared draft legislation to authorize the 

establishment of a Community Capacity Development Office, headed by a Director appointed by the Attorney General to provide 

training to actual and prospective participants under grant programs to assist such participants in understanding the substantive 

and procedural requirements for participating in such programs. 

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We believe that much of the waste and abuse derives from ignorance both of the program requirements and of a lack of awareness 

of the consequences of misuse of grant proceeds. 

The draft Department of Justice Reauthorization bill requires the 

new Office of Audit and Assessment to conduct on-site audits and 

exercise its authority to cease active funding where grant conditions are not met, or there circumstances that suggest fraud or 

abuse. The authorizing legislation will require OJP to conduct 

these audits on at least 10% of the amount of the total grants, and 

requires the entire grant disbursement to be suspended if more 

than one percent of the grant is misused. 

Based on the FY 2003 enacted budget for LLEBG ($380 million) 

and Byrne Formula ($497 million) and Discretionary Grants ($150 

million), the funds subject to audit will total $927 million. Using 

the same formula applied above to COPS grants, it can be assumed 

that 24 percent of the funds, or $223 million of FY2003 funds may 

be questionably used. If the Office of Audit and Assessment is able 

to audit 10% of the total (or $92 million), as required in the authorizing statute, and it identifies 20% of the grants so audited as questionably deployed or exceeding 1% in misused funds, the cost savings per year to the federal government would be as much as $18 

million. If the Office is eventually able to audit as much as 50% 

of the total ($463 million), the savings per year could reach $90 

million. 

State Criminal Alien Assistance Program (SCAAP) 

The State Criminal Alien Assistance Program (SCAAP) provides 

payments to state and local jurisdictions that have had criminal 

aliens in their custody during the previous year. SCAAP pays each 

jurisdiction based on its share of the overall estimated expenditures for housing such aliens for all applicants combined. It does 

not fully reimburse jurisdictions for such expenditures. To ensure 

equity in comparisons and to simplify the application process, expenditure comparisons are done using the cost of correctional officers for a facility, rather than total costs, which can vary widely 

in their methods of calculation. 

Applicants for the SCAAP program provide information on those 

inmates assumed to be criminal aliens including—A-number (INS 

identifier) if available, last name, first name, middle name, date of 

birth, inmate number, country of birth, date taken into custody, 

date released from custody, and FBI number, if any. BJA then forwards this information to the Immigration and Naturalization 

Service, where it is checked against databases of known aliens. 

This most recent year, BJA received 284,325 inmate records. Of 

those 93,489 (33%) were actual illegal aliens and could be verified 

by INS. Of the remaining, 121,618 (43%) were unverifiable, 51,680 

(18%) were aliens with a legal status, and 17,538 (6%) were 

verifiable American citizens. When determining the amount to pay 

a jurisdiction, BJA ‘‘discounts’’ the amount paid for unverifiable 

aliens. This discount differs based on the type of facility and of the 

amount a jurisdiction would receive for a verifiable illegal alien, 

BJA pays 60% of that amount to city facilities, 80% to county jails, 

and 65% to state prisons. These differences are based on the experVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00395 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
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tise of the INS, which concludes that the percentage of actual illegal aliens in a facility differs with the type. 

The application of more verifiable requirements for recipients of 

the Bureau of Justice Assistance’s State Criminal Alien Assistance 

Program (SCAAP) will provide positive incentives for State and 

Municipal law enforcement to positively identify apprehended 

aliens suspected of crimes through better cooperation with the Department of Homeland Security’s federal law enforcement component, improve record keeping to reduce possible fraud, and to prosecute and convict criminal aliens promptly. While the savings from 

the implementation of more rigorous application requirements are 

not precisely ascertainable, such a program will result in savings 

at least $40 million for FY 2004. 

Uncollected Student and Exchange Visitor Program (SEVP) Fee 

Revenue 

The U.S. Government is losing revenue by not collecting a fee 

that Congress mandated students and exchange visitors seeking to 

enter the United States pay to fund the Student and Exchange Visitor Program (SEVP). 

Section 641 of the Illegal Immigration Reform and Immigrant 

Responsibility Act (IIRIRA) mandated the imposition of a fee on 

students and exchange visitors to fund the design, development, 

and operation of a program for tracking alien students. That tracking system, which is now fully implemented, is known as SEVIS. 

On December 21, 1999, the INS published a proposed rule to implement this provision, setting a fee of $95 per student. Following the 

language in section 641(e) of IIRIRA, which required that ‘‘an approved institution of higher education and a designated exchange 

visitor program’’ collect and remit the fee to the Attorney General, 

the proposed regulation identified these two groups as the designated fee collectors. The INS received over 4,600 comments to the 

proposed regulation, most of which opposed the role of educational 

institutions and exchange visitor programs as fee collectors as inappropriate for such institutions. 

In response, the INS worked with Congress, the State Department, and stakeholder groups to amend section 641(e). The resulting legislation was included in section 404 of the Visa Waiver Permanent Act, Pub. L. 106–396 (2000). The three most significant 

changes in that section were: (1) the removal of the requirement 

that educational institutions and exchange visitor programs collect 

SEVIS fees, and the requirement that aliens pay fees directly to 

the Attorney General; (2) a requirement that the alien pay the fee 

before being classified as an F, J, or M nonimmigrant; and (3) a 

reduction in the fee amount for certain J–1 nonimmigrants, specifically au pairs, camp counselors, and summer work/travel participants. 

The INS subsequently submitted a fee collection rule to OMB, 

but withdrew that rule following the passage of the USA PATRIOT 

Act, which authorized funding to accommodate the fast track implementation of SEVIS. Staff has been told that the Administration 

is currently working on an interim fee rule. On April 8, 2003, the 

Chairman and Chairman Hostettler sent a letter to Secretary 

Ridge asking that the fee regulation be implemented by May 31, 

391

2003. On May 1, 2003, DHS responded, stating that ‘‘DHS intends 

to resubmit a revised regulation to OMB shortly.’’ To date, no proposed rule implementing the fee has been issued. In FY 2001, 

625,133 student and exchange visitor visas were issued. At $95 per 

visa, the fee set in the 1999 proposed regulation, this would have 

provided $59,387,635 in revenue for the federal government. In 

FY2002, 547,191 visas were issued. This would have totaled 

$51,983,145 in revenue. It is reasonable to extrapolate out those 

numbers for FY 2003, and expect such a fee to generate at least 

$50,000,000 in revenue. 

I trust that these recommendations will assist the Budget Committee’s efforts to identify and eliminate waste, fraud, and abuse 

at federal agencies. Thank you for your consideration of these proposals. 

Sincerely, 

F. JAMES SENSENBRENNER, JR., Chairman. 

(393)

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC, September 5, 2003. 

Hon. JAMES NUSSLE, 

Chairman, Committee on the Budget, 

Cannon HOB, Washington, DC. 

DEAR MR. CHAIRMAN: I am pleased to present to you the findings 

of waste, fraud, and abuse identified by the House Small Business 

Committee. Please find enclosed a copy of the Small Business Committee’s findings in compliance with FY 2004 Budget Resolution (J. 

Con. Res. 95). 

Sincerely yours, 

DONALD A. MANZULLO, 

Chairman.

FINDINGS OF WASTE, FRAUD AND ABUSE IDENTIFIED BY 

THE HOUSE COMMITTEE ON SMALL BUSINESS 

1. Loan defaults under the Small Business Administration’s 

(SBA) 504 Loan Program are currently collected by SBA personnel. 

The current collection rate of these defaulted loans is only 17 percent. The SBA re-authorization bill (HR 2802) passed by the committee on July 24 corrects this inadequate collection rate by mandating that the SBA contract out the collection function to firms 

that have expertise in this field. It is anticipated that the collection 

rate will be significantly higher in the future because of this 

change. 

2. Loan defaults under the SBA’s 7(a) Loan Program have averaged 14 percent for the last three years. In 2002, preferred lending 

institutions made up 55 percent of the SBA’s 7(a) loans totaling $7 

billion. SBA has delegated authority to these lenders, yet guarantees to pay up to 85 percent of the defaulted loan amount. HR 2802 

increases the qualifications to become a preferred lender, ensuring 

that only truly qualified institutions are in the program. It is anticipated that the default rate will be significantly lower in the future because of this change. 

3. HR 2802 also eliminates an overhead position in each SBA district, that of Deputy District Administrator. Instead that position 

shall be re-assigned to one of direct assistance to small businesses 

for the purpose of obtaining federal contracts. This change will result in a more efficient SBA workforce with more employees directly assisting small businesses and fewer in redundant management. 

4. On May 7, 2003 the full committee held a hearing titled ‘‘Are 

Big Businesses being awarded contracts intended for Small Businesses?’’ The testimony presented by the witnesses established numerous examples of this happening. In some instances fraud on the 

part of the big businesses may have occurred; more commonly the 

394

agencies were inconsistently recording the size status of companies 

in the various contracts they awarded. The Office of Management 

and Budget (OMB) has acknowledged the problem. OMB has 

issued guidelines for agencies to minimize future occurrences of the 

problem. This committee is pursuing this issue and will hold future 

hearings if necessary to determine if the OMB guidelines have corrected the problem.

5. On June 11, 2003 the full committee held a hearing titled ‘‘Revitalizing America’s Manufacturers: SBA Business Administration 

Development Programs.’’ The SBA gave testimony on its new electronic catalog website for small businesses to sell to federal agencies. As explained at the SBA website: 

‘‘NEXGEN’s Solutions (NEXGEN) is a commercially owned site 

which operates SBAExchange under a contract with SBA. SBA’s 

participation on the Exchange does not constitute or imply an endorsement of any of NEXGEN’s additional products, services or operations or those of any other participant or vendor on SBA Exchange. 

The United States Small Business Administration (SBA) has entered into a contract with NEXGEN’s Solutions, Inc. to bring you 

a national E-Procurement initiative to automate procurements by 

creating an Internet-based exchange for the procurement of goods 

and services from the members of the small business community. 

Under this initiative, small businesses can participate in conducting e-business transactions with a relatively low cost of entry 

and little or no technical expertise. 

The annual cost for a small business to participate in the SBAExchange is $1,500. Additionally, a transaction fee of 2 percent 

will be added to all orders. The first 2,500 small businesses to register will receive a $450.00 discount. Instructions regarding payment arrangements and discounts can be found at 

www.SBAExchange.gov.’’ 

The Committee finds the charges quoted above to be excessive in 

relation to the value given. Furthermore there are similar electronic catalogs offered by other agencies such as the General Services Administration and the Defense Logistics Agency. Another 

such site merely wastefully duplicates existing sites and confuses 

the small business community about where they should be registered. 

6. The Small Business Administration (SBA) has admitted ineligible companies into the HUBzone program. The agency has attributed this error to ‘‘inadequate resources to monitor the program.’’ 

The Committee feels that the agency has sufficient funds devoted 

to the program to monitor it properly and that any abuses of the 

program should be fixed by the SBA with its existing resources. 

7. A National Oceanic and Atmospheric Administration (NOAA) 

contract was solicited in 2002 as a total small business set aside. 

There were five awardees. Two large businesses were included in 

these five. The Committee received a complaint from one of the 

small businesses affected by this action. The two large businesses 

have received and continue to receive most of the resulting task orders. The negatively affected small business further alleged that 

the other two small business awardees were merely American front 

companies for foreign companies based in Canada and India. At the 

395

request of this committee, the SBA began an investigation into this 

case. Final determination by SBA is pending. 

8. The Committee was contacted several times this session by 

small businesses and their representative associations regarding 

practices discouraging small business utilization by the United 

States Postal Service (USPS). In June, 2003 the Postmaster General agreed to have the USPS modify its exclusive contract with 

Boise Cascade, Inc. for office products, to allow small businesses to 

be utilized whenever they offer office products at a lower price than 

what Boise Cascade offers. The value of that contract is estimated 

at $50 million annually, thereby allowing small businesses to compete for that much more business each year of the contract (until 

2006). 

9. The Committee is aware of and has concerns about the potential waste involved in the proposed multi-million dollar ‘‘Circulator’’ 

bus system planned by the Washington DC Transportation Authority. This bus system is designed to transport riders around the 

Capital Mall area and downtown Washington. Federal funding 

would be required in the amount of many millions of dollars and 

the result will be a bus system in direct competition with existing, 

for-profit, non-subsidized local businesses such as the Landmark 

Services Tourmobile, Inc. and several small van companies currently serving Federal agencies. This problem first came to the attention of the Committee at a hearing held July 18, 2001 titled 

‘‘Federal Government Competition with Small Business.’’ The Committee has been following the ‘‘Circulator’’ proposal since that time. 

10. On November 21, 2002 the full committee held a hearing titled ‘‘Federal Prison Industry’s Unfair Competition with Small 

Business: Potential Interim Administrative Solutions.’’ Testimony 

was given of instances of the Federal Prison Industries (UNICOR) 

unfairly fulfilling federal agency requirements in which they merely procured, repackaged, and delivered items without assembling or 

manufacturing the items themselves, thereby negating the ‘‘learning a trade’’ purpose behind UNICOR’s reason for existing. The extent of this abusive practice was not given but UNICOR’s total 

sales in 2002 were $679 million. If even a small percentage of sales 

are attributable to this ‘‘reselling’’ practice, then millions of dollars 

are being unfairly contracted to this mandatory-sourced agency. 

This problem was also identified in an earlier hearing held on June 

6, 2001 titled ‘‘Federal Prison Industries Procurement and its effects on Small Business.’’ At the November hearing, it was stated 

that the UNICOR Board of Directors recently announced that it is 

eliminating the practice of ‘‘pass-through’’ sales. The Committee 

will monitor UNICOR to determine if the practice has indeed been 

discontinued. 

11. In July 2003, The General Accounting Office (GAO), at the 

request of another committee, began an audit of selected agencies 

to determine how widespread is the abuse of federal executives 

holding degrees from non-accredited universities. Several examples 

of holders of these ‘‘diploma mill degrees’’ in high positions have 

been publicized in the media. 

In August 2003, the committee requested that GAO include the 

SBA in the list of agencies being audited. The GAO agreed to the 

request and informed the committee that the audit of the approxiVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00401 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
396

mately 250 SBA executives of GS–15 grade or higher should be 

completed no later than October 2003. 

(397)

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE, 

Washington, DC, July 25, 2003. 

Hon. JIM NUSSLE, 

Chairman, Committee on the Budget, House of Representatives, 

Cannon House Office Building, Washington, DC. 

DEAR CHAIRMAN NUSSLE: In accordance with section 301 of the 

Concurrent Resolution on the Budget for Fiscal Year 2004, there is 

transmitted herewith the Transportation and Infrastructure Committee’s findings as to changes in law necessary to eliminate waste, 

fraud, and abuse in mandatory spending programs under its jurisdiction. This report was adopted by a voice vote of the Full Committee at a July 23, 2003 business meeting. Not all Members of the 

Committee agree with each and every aspect of this report and also 

submitted are dissenting Member views on certain findings. 

Thank you for the opportunity to present this report. We look 

forward to continued discussions with the Budget Committee on 

how reductions in waste, fraud, and abuse in programs within the 

Committee’s jurisdiction may be met. 

Sincerely, 

DON YOUNG, 

Chairman. 

Enclosure. 

TRANSPORTATION AND INFRASTRUCTURE COMMITTEE—

WASTE, FRAUD, AND ABUSE REPORT 

OVERVIEW

The Concurrent Resolution on the Budget for Fiscal Year (FY) 

2004 requires House and Senate authorizing committees to identify 

opportunities to eliminate waste, fraud, and abuse in the mandatory spending programs under their jurisdiction. The purpose for 

this activity is to achieve savings and ensure that taxpayers are 

getting the most for their money. Accordingly, the Transportation 

and Infrastructure (T&I) Committee held a hearing on July 22, 

2003, regarding the Federal-aid Highways, the Federal Transit administration (FTA) programs, Essential Air Service (EAS), and 

Railroad Retirement programs. This report outlines the Committee’s plans for addressing the issues raised in that hearing. Additionally, this Committee will continue to exercise oversight in all 

programs under its jurisdiction to ensure that tax dollars are used 

as efficiently as possible. 

This report was circulated to all Members of the T&I Committee 

for their review and comment, and was approved in a Full Committee meeting on July 23, 2003. While the report reflects a bipartisan effort, the Committee wishes to emphasize that not all Members of the Committee necessarily agree with every aspect. AccordVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00403 Fmt 6601 Sfmt 6601 E:\HR\OC\A421.XXX A421
398

ingly, the Committee reserves its flexibility to determine program 

needs as the Committee and Congress work their will through the 

legislative process. 

FEDERAL-AID HIGHWAYS AND FTA PROGRAMS

The Federal Highway Administration (FHWA) provides funding 

to the states for construction and improvement projects through a 

number of programs that are referred to collectively as Federal-aid 

Highways. Although the states have considerable discretion in 

choosing which projects to pursue with apportioned funds, FHWA 

exercises varying levels of oversight depending on the project. FTA 

is similar to FHWA in that localities have discretion in pursuing 

these projects with oversight by FTA. 

In recent years significant variances have developed between the 

need to build, repair, and improve roadways and transit systems 

and the amount of funding available. In addition to proposals to increase highway and transit funding, more must be done to ensure 

that existing tax dollars are used efficiently. Savings in the Federal-aid Highways and FTA programs will mean more money invested more efficiently for this nation’s transportation infrastructure. The Committee is working toward that objective and is addressing the specific measures outlined below through the legislative process of the ongoing TEA 21 reauthorization. 

In a July 22, 2003 hearing, the Department of Transportation 

(DOT) Inspector General (IG), the General Accounting Office 

(GAO), and the FWHA Administrator testified before this Committee, identifying a number of ways to make the most of the federal dollars used in state transportation projects. Those options include:

• Strengthening project management skills and the oversight 

ability of FHWA and FTA and requiring better project management at the state and local level. 

• Improving financial management through the use of finance 

plans on transportation projects costing $100 million or more. 

• Increasing revenue collections by stopping fuel tax evasion. 

• Continuing efforts to detect and prevent fraud by making debarment mandatory and final when a contractor is convicted of a 

fraud. 

• Support fraud deterrence and detection efforts by the states by 

allowing them to share in recoveries from fraud investigations. 

• Redirecting funds that are no longer needed from inactive 

projects to new projects. The IG has identified $238 million that 

states could redeploy to projects in need of funding. 

In addition to the suggestions above, the issue of reducing yearly 

excess contract authority in Federal-aid Highways was addressed 

in the July 22 hearing. According to the witnesses, this could be 

done by bringing contract authority more in line with the obligation limits would make this planning more accurate. Additionally, 

it would limit build up of cumulative budget authority over time, 

thereby improving the accuracy of budget planning by Congress 

and the Administration. FHWA has pointed out, however, that 

states use the cumulative excess contract authority to continue obligations for active projects, thereby allowing the project to conVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00404 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
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tinue independently of potential timing difficulties in the appropriations process. 

ESSENTIAL AIR SERVICE (EAS) 

Costs for the EAS program have increased significantly since 

1995. According to the General Accounting Office, federal appropriations to the program have grown from $37 million in 1995 to 

$113 million in fiscal year 2002 (in constant 2002 dollars). The 

costs of the program increased gradually until September 11, 2001. 

To address the problems outlined above, the Committee recommended several reforms to the Essential Air Service program. 

These reforms were proposed in section 415 of H.R. 2115 as recently reported by this Committee. 

First, the Committee-reported bill provided that certain EAS 

communities located close to hub airport be required to pay a local 

share. Currently, EAS communities do not pay a local share toward 

the cost of the subsidized service they receive. The Committee-reported bill included a modest local share of up to 10 percent be 

gradually phased in such that communities have an opportunity to 

adjust their budgets to address this new requirement. 

Second, the Committee-reported bill establishes a Community 

and Regional Choice program as an alternative to the EAS program. All EAS subsidy-eligible communities will have the option to 

switch from EAS to this alternative program. Under the Community and Regional Choice program, rather than receiving service 

from an airline subsidized by DOT, the community could receive a 

grant from DOT to establish and pay for the type of transportation 

service that best meets its needs. For example, the community 

could choose to use its grant to pay for scheduled air service, ondemand air taxi service, fractional ownership of aircraft where passengers pay for the service, surface transportation, or some other 

approach approved by DOT. It could also adopt a regional approach 

and pool its grant funds with other nearby communities that are 

also participating in the Community and Regional Choice program. 

It is difficult to estimate the savings associated with these reforms for several reasons. First, it is not clear how many EAS subsidy-eligible communities would choose to stay in the traditional 

EAS program and pay a local share rather than switch to the new 

Community and Regional Choice Program, in which no local share 

is required. 

Second, for those communities that do switch to the new program, it is not clear what amount of subsidy will be required to 

support the transportation services that they choose to establish. 

Presumably, the subsidy will be less, but that is not certain. 

Finally, the number of EAS subsidy-eligible communities changes 

each year and has recently trended upward as aviation traffic has 

declined due to the weak economy and other factors. According to 

DOT, since September 11, 2001, carriers at 60 additional eligible 

communities filed notice to discontinue unsubsidized service, triggering first-time subsidy at 28 of them. Therefore, the Committee 

anticipates that the reforms discussed above may result in cost 

avoidance, rather than cost savings. In addition to restraining further cost increases, the Committee believes that these reforms 

would result in a much more effective use of federal funds. 

400

RAILROAD RETIREMENT PROGRAMS

The Railroad Retirement Board (RRB) administers comprehensive retirement-survivor, unemployment-sickness insurance, and 

Medicare Part B benefit programs for railroad workers and their 

families. These benefit program are funded by payroll taxes on railroad workers and industry. The RRB is responsible for ensuring 

that these funds are properly managed and dispersed while maintaining excellent customer service. 

Erroneous payments to ineligible recipients are typically made 

because the RRB has out-date information about a recipient’s eligibility. Once current information is obtained the RRB has a recovery 

rate of more than 90 percent of these overpayments within one 

year of payment. Cases where beneficiaries either provide false information about their current status or refuse to return funds to 

the RRB are pursued by the RRB Inspector General (RRB IG).

The RRB IG does not currently have authority for oversight or 

to investigate fraud for any of the over $787 million in Medicare 

funds that are distributed to railroad beneficiaries. Previously this 

was a responsibility of the IG but was transferred in a 1997 appropriations bill. The RRB IG has estimated, based on experience at 

the Social Security Administration, that over $49 million in fraudulent spending in these programs could be avoided through increased oversight and investigation. The Committee supports reinstating oversight authority for the Medicare benefits managed by 

the RRB, in coordination with the Health and Human Services 

(HHS) IG, and believes it will result in further program savings 

through the identification, investigation, and elimination of waste 

and fraud. 

At the July 22, 2003 hearing the RRB IG outlined several options 

for changing the RRB’s operating structure with hopes of improving performance and garnering savings through operating efficiencies. Those options included delegating decision-making authority to a Chief Executive Officer and senior agency managers; consolidation of 20 operating bureaus; reducing the number of field 

service locations; transferring Social Security Equivalent benefits 

to the Social Security Administration; and pursuing a change in 

the entity structure of the RRB to function as a government corporation or become part of the National Railroad Retirement Investment Trust (NRRIT). 

Members of the Railroad Retirement Board also testified at the 

July 22 hearing and expressed their viewpoints and concerns with 

the IG’s organizational recommendations. At the hearing, the 

Chairman of the RRB and its members confirmed their commitment to reviewing RRB operations in their continuing efforts to improve service and maximize operating effectiveness. Board members outlined their efforts to address the IG’s improvement recommendations, recently creating the role of a Senior Executive Officer to oversee the Executive Committee and improve accountability, as well as reducing the number of field offices by more than 

40 percent while maintaining excellent customer service. The consolidation of field offices alone has saved an estimated $28 million 

annually. The Board is strongly opposed to the IG’s recommendations of transferring the Social Security Equivalent benefits to the 

401

Social Security Administration and changing the structure of the 

RRB. 

The Committee applauds the RRB’s improvement efforts and encourages continued collaborative efforts by the IG and the Board 

members to eliminate fraud and pursue operating efficiencies. The 

Committee also maintains its position of supporting the current 

RRB structure so that rail beneficiaries will continue to receive excellent customer service.

DISSENTING VIEW

Mr. Chairman, I want to thank you for yesterday’s hearing for 

the purpose of identifying waste, fraud, and abuse in Transportation spending programs under our jurisdiction, and possible solutions that would save taxpayers’ money. I am concerned, however, 

that we are targeting a program that is very important for many 

rural communities across America. 

Yesterday, we discussed the merits of the Essential Air Service 

(EAS) program—a program that ensures that small, rural communities have reliable air service from their local airport and keeps 

rural communities connected to the nation’s aviation and commerce 

system. As you know, Essential Air Service funding increases a 

community’s ability to retain air service—important for communities who are struggling with a difficult economy and where increased travel options have made it extremely difficult for many 

carriers to continue to serve small communities. 

Yet, without EAS funding, subsidized carriers would no longer 

find it economical to service many small, rural communities and 

without air service, these communities may face the possibility of 

closing their local airport. This possible scenario would have a devastating impact on many communities in South Central Pennsylvania. For example, according to a study conducted by the Commonwealth of Pennsylvania, the Altoona-Blair County airport contributes $27.7 million to the local area in terms of jobs, tourism, 

business and consumer travel. If air service is discontinued, then 

enplanements at the Altoona-Blair County airport will eventually 

decrease to a level where they may not be eligible to receive Airport Improvement Program (AIP) funding of $1 million. 

Considering the economic benefit that local airport service provide to small, rural communities across America like Blair County; 

I do not believe that the EAS program raises to the level of waste, 

fraud, or abuse. Instead, the EAS program must be continually 

strengthened and funded at levels so that all rural communities remain connected to our national aviation system, and prosper by attracting new businesses who in turn create jobs. 

Therefore, I strongly believe that it is inappropriate to include 

the EAS program as part of the committee’s recommendation to 

eliminate fraud, waste, and abuse. Thank you Mr. Chairman for 

hearing my views on this very important matter, and would like 

my statement submitted for the record.

BILL SHUSTER.

402

STATEMENT OF REPRESENTATIVE NICK RAHALL

Mr. Chairman, I ask that my remarks be included to accompany 

the Committee’s Report. 

As much as any Member of Congress, I oppose waste, fraud, and 

abuse in government. For that reason, I applaud our Committee 

Chairman, Don Young, and our Committee Ranking Member, Jim 

Oberstar, for their leadership in exploring opportunities to ensure 

that we only dedicate federal resources to worthwhile programs. 

While I agree with almost every aspect of the Committee’s Report, I believe that the Essential Air Service (EAS) program should 

be recognized as appropriate and necessary government spending 

rather than a program in need of cuts or local match requirements. 

EAS is very important to rural airports, which have seen their air 

service and ridership cut dramatically over the years. We need to 

ensure that rural airports can continue to operate, and to provide 

much-needed air service and jobs. 

Although the Committee’s Report on Waste, Fraud, and Abuse 

does not note the Committee’s actions at the Markup, it should be 

known that Committee Members from both parties agreed to insert 

a hardship provision designed to ensure that local communities will 

not suffer by forced to operate beyond their economic means if they 

are incapable of meeting the local match requirement. 

Subsequently, on the floor of the House of Representatives, my 

colleague and friend from the other side of the aisle, Bill Shuster, 

led the effort to have the local match requirement removed altogether from the bill in its final form as it passed out of our chamber. I applaud Mr. Shuster for his efforts on behalf of rural air 

service, and I understand that he shares my sentiment on the topic 

of EAS within the Committee’s Report. 

Earlier this year, Congress provided the airline industry with almost $3 billion in emergency wartime supplemental appropriations. 

However, the small communities of America will see very little of 

this money because the airlines will focus on their service to urban 

areas. 

What is good for airline travel in urban sectors of the country 

ought to be good for airline usage throughout the entire country. 

We need to preserve air travel throughout rural America, and the 

EAS program has proven its worth over the years. Small communities in over 35 states rely on EAS funding to help them manage 

through this time of economic distress at the state and local levels. 

For the reasons, although I agree with the substance of the Committee’s Report, I remain firmly in the belief that the EAS program 

is entirely worthwhile and in need of continuing federal support. 

(403)

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON VETERANS’ AFFAIRS, 

Washington, DC, September 2, 2003. 

Hon. JIM NUSSLE, 

Chairman, Committee on the Budget, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: Enclosed with this letter is the report of 

the Committee on Veterans’ Affairs with its findings on means of 

eliminating waste, fraud and abuse in spending programs under 

the Committee’s jurisdiction. 

The Committee conducts regular oversight of veterans programs 

in accordance with its Oversight Plan for the 108th Congress. Pursuant to the requirement of the Conference Report to Accompany 

the Concurrent Resolution on the Budget for Fiscal Year 2004, the 

full Committee held hearings on waste, fraud and abuse in veterans’ programs on May 8 and June 10, 2003. The topics of the 

hearings included barring payment of veterans benefits to fugitive 

felons, stopping erroneous benefits payments in the Philippines, 

improving management of long-term care for veterans, ensuring 

that part-time VA physicians meet their employment obligations, 

strengthening debt management, and reducing costs in worker’s 

compensation. 

Additionally, the Committee has held hearings on the findings of 

the President’s Task Force to Improve Health Care Delivery for our 

Nation’s Veterans, and VA’s medical care collections program. As 

reflected in the enclosed report, the Committee has utilized both 

the U.S. General Accounting Office and the VA Office of the Inspector General in its oversight and evaluations of spending programs 

for veterans. 

Much of the potential savings in spending programs for veterans 

the Committee report has identified can be appropriately achieved 

through improvements in VA program management, and legislation is not recommended. However, the Committee has reported 

legislation discussed in the enclosed report that would enable VA 

to significantly increase medical care collections from nonfederal 

sources. This legislation, H.R. 1562, was requested by the Administration and reported favorably by the Committee, but the House 

has not acted on it. 

The Committee intends to continue its aggressive oversight of 

spending programs for veterans to ensure that tax dollars are efficiently used in the programs under its jurisdiction, and will continue its efforts to identify the changes in law to eliminate waste, 

fraud and abuse. The support of the Committee on the Budget in 

these endeavors is most appreciated. 

Sincerely, 

CHRISTOPHER H. SMITH, Chairman. 

404

LANE EVANS, 

Ranking Democratic Member. 

Enclosures.

ELIMINATING WASTE, FRAUD AND ABUSE IN VETERANS’ 

PROGRAMS 

Pursuant to section 301 of the Conference Report to Accompany 

the Concurrent Resolution on the Budget for Fiscal Year 2004 (H. 

Con. Res. 95; H. Rept. 108–71), the Committee on Veterans’ Affairs 

is transmitting herewith its findings on means of eliminating 

waste, fraud, and abuse in spending programs under the Committee’s jurisdiction. 

ENHANCING MEDICAL CARE COLLECTION AUTHORITY

The Committee is concerned that the Department of Veterans Affairs (VA) health care system is seriously under-funded and unable 

to meet the demands being placed on it by the health care needs 

of enrolled veterans. The VA health care system is under obvious 

stress, as increasing enrollment and rising health care costs have 

resulted in hundreds of thousands of veterans being forced to wait 

months, some even more than a year, for an initial appointment. 

VA recently reported in January 2003 that over 200,000 veterans 

were waiting six months or more to be seen in VA primary care. 

This waiting list has been reduced, but VA still fails to meet its 

own access standards for a very large number of enrolled veterans. 

The Committee conducted hearings and other oversight during 

this Congress and previous Congresses to identify additional funding sources and promote management efficiencies to address the 

rising demand for VA medical care services. As a consequence of 

this oversight, on April 2, 2003, H.R. 1562, the Veterans Health 

Care Cost Recovery Act of 2003, was introduced by Honorable Bob 

Beauprez; the Committee’s Chairman, Honorable Christopher H. 

Smith; the Committee’s Ranking Member, Honorable Lane Evans; 

the Subcommittee on Health’s Chairman Honorable Rob Simmons; 

and the Subcommittee’s Ranking Member, Honorable Ciro D. Rodriquez. After subcommittee and full committee consideration, on 

May 15, 2003, H.R. 1562, as amended, was ordered reported favorably to the House by unanimous voice vote. To date, the House has 

not acted on this bill. 

In 1986, in Public Law 99–272, Congress provided VA authority 

to collect from third-party insurers of nonservice-connected veterans receiving VA health care. These funds are used by VA to supplement appropriated funds to maintain high quality health care. 

However, VA is currently unable to collect fully from the sizeable 

preferred provider sector, which now accounts for a major portion 

of all health plans in the United States. H.R. 1562, as amended, 

would enhance the ability of VA to collect reimbursements from 

third-party insurers by clarifying VA’s power to recover costs for 

medical care provided to veterans at VA facilities covered by preferred provider organizations and other non-traditional coverage. 

Specifically, H.R. 1562, as amended, would deem VA as a ‘‘preferred provider’’ for purposes of collection when a payer has payVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00410 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
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ment arrangements with preferred provider organizations and a 

covered veteran receives VA health care under an equivalent arrangement. This legislation would prevent a third-party payer from 

denying or reducing reimbursement to VA solely because VA does 

not have a participation agreement with that third-party payer. 

Additionally, the legislation would grant specific authority for VA 

to recover the cost of providing medical care to non-veterans from 

any private health plan. Under current law, the collections recovered would be deposited into the Medical Care Collections Fund 

(MCCF) and treated as offsets to discretionary spending. Subject to 

annual appropriation, VA can spend the money in the MCCF to 

provide medical care to veterans. 

The Congressional Budget Office (CBO) estimates that under 

H.R. 1562, as amended, collections from nonfederal sources would 

increase by $111 million in 2004 and $737 million over the 2004–

2008 period. CBO estimates that implementing this legislation 

would result in net discretionary savings of $24 million in 2004, 

and $38 million over the 2004–2008 period, assuming appropriation 

of the estimated collections and after accounting for the typical lag 

between collections and spending. 

IMPROVING MEDICAL CARE COLLECTIONS

In 1997, Congress gave VA the authority to retain third party 

collections it recovered instead of returning the funds to the U.S. 

treasury. This authority was requested by the Department as a 

part of its 5-year plan to obtain 10 percent of its funding from third 

party collections and other revenue sources. In 1999, the Committee received VA’s outsourcing business plan for health care revenue collection. The plan involved consolidating certain revenue 

collection processes (pre-registration, insurance verification, billing 

collections, and customer service) into a ‘‘Consolidated Revenue 

Unit’’ at the network level. Also, in 1997 VA adopted a new fee 

schedule called ‘‘reasonable charge’’ authorized by Public Law 105–

33, the Balanced Budget Act of 1997. By November 2000, VHA had 

initiated four pilot tests—two in-house and two by contract. VA 

also received a Price Waterhouse report with 24 major recommendations for improving MCCF revenue operations. 

In 2001, the U.S. General Accounting Office (GAO) reported in 

hearing testimony that for the first time since 1995, VA had reversed the general decline in its third party collections. GAO largely attributed the increase to VA’s implementation of the reasonable 

charges billing system. However, GAO reported recurring problems, 

including: (1) VA billing times that were 14 times greater on average than the private sector; (2) continuing weaknesses in VA’s collections information systems; and (3) a lack of department-wide 

standardization for collections. The VA’s Inspector General’s Office 

(IG) also reported problems and weaknesses in a number of areas, 

including: (1) determination of veterans’ eligibility and entitlement 

status; (2) verification and coordination of patient care with insurance carriers; (3) medical record documentation of care provided; 

(4) coding of bills to insurance carriers; (5) billing of insurance carriers; and (6) collection of insurance carriers’ delinquent accounts.

VA was also mandated by Congress to acquire and implement a 

commercial patient financial system. VA is implementing the PaVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00411 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
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tient Financial Services System project, which is intended to improve the business process and information technology in revenue 

collections. In May of 2002, VA created a new office in the Veterans 

Health Administration (VHA), the Chief Business Office, to improve collections. However, VA’s compliance with established policies and procedures for MCCF management continues to be inconsistent. In his April 1, 2002, to September 30, 2002, Semiannual 

Report to Congress, the IG reported that deficiencies in the collections system result from the inability to properly bill for services. 

The VA’s budget proposal for fiscal year 2003 proposed a new 

outsourcing business plan to reconfigure the revenue collection program. However, of the four network pilot tests, only one produced 

an outsourcing contract model. VA’s budget proposal for fiscal year 

2004 indicated VA had made considerable progress in executing its 

new business plan. The new plan would reconfigure the revenue 

collection program to include both in-house and contract models. 

MCCF collections have shown a steady improvement since fiscal year 2000. Actual collections from third parties have been: $394 

million for fiscal year 2000; $540 million for fiscal year 2001; and 

$690 million for fiscal year 2002. Projected collections are $760 million for fiscal year 2003. 

On May 7, 2003, the Subcommittee on Oversight and Investigations held its third oversight hearing on third-party collections and 

received an update from GAO on VA’s third-party collections since 

September of 2001. GAO also provided an overview of continuing 

operational problems in collections for fiscal year 2002, including 

missed billing opportunities, insufficient documentation of services 

for billing and coding staff, insufficient pursuit of accounts receivable, and unidentified insurance for some patients. 

The Deputy Secretary of Veterans Affairs, Honorable Leo S. 

Mackay also testified at the May 7, 2003, hearing about VA’s efforts to improve third party collections. He informed the Subcommittee that the strategies being pursued include establishment 

of health care industry based performance and operational metrics, 

technology enhancements and integration of proven business approaches, including establishment of centralized revenue operations 

centers. He further stated that VA is developing a demonstration 

project to fully outsource the revenue process functions at a VA 

Medical Center to test the feasibility of this approach to enhancing 

revenue. The Committee will conduct oversight of the demonstrations projects. 

STRENGTHENING DEBT MANAGEMENT

According to the IG’s Report of the Audit of the Department of 

Veterans Affairs Consolidated Financial Statements for Fiscal 

Years 2002 and 2001, Report No. 02–0163847, January 23, 2003, 

as of December 2002, debts owed to the VA totaled $3 billion. The 

majority of these (52 percent) were active vendee loans. The debts 

owed to the VA are derived from the payment of home loan guaranties; direct home loans; life insurance loans; Medical Care Collections Fund receivables; and compensation, pension, and educational 

benefits overpayments. 

The IG made several recommendations to the Department concerning its debt management activities. During his testimony on 

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May 8, 2003, Honorable Richard Griffin, VA Inspector General, reported that the Strategic Plan for 2003–2008 shows that VA is addressing his recommendations to be more aggressive in collecting 

debts; improve debt avoidance practices; streamline and improve 

quality and uniformity of debt waiver decisions. The IG also 

stressed that debt management activities could be improved. 

The Committee will continue its oversight and working with VA 

to ensure that the IG’s recommendations are implemented. 

RESTRUCTURING CAPITAL ASSETS

As a result of improved technologies, new treatments and national changes in practice patterns of health care professionals, VA 

has shifted its focus from inpatient to outpatient care. This shift 

resulted in many instances of shortened lengths of stay when hospitalization is required and established needs for many new outpatient facilities. Consequently, many structures formerly used for 

inpatient care have been converted for new uses. However, the vacant space that cannot be converted for effective uses has become 

a significant burden and waste of VA resources that could be used 

for direct health care for veterans. 

GAO concluded in 1999 that VA’s existing infrastructure could be 

the biggest obstacle confronting its ongoing transformation efforts. 

During a hearing before the Subcommittee on Health in 1999, GAO 

pointed out that although VA was addressing some realignment 

issues, it did not have a plan in place to identify buildings that 

were no longer needed to meet veterans’ health care needs. GAO 

recommended that VA develop a market-based plan for restructuring its delivery of health care in order to reduce funds spent on 

underutilized or inefficient buildings. In turn, those funds could be 

reinvested to better serve veterans’ needs by placing health care resources closer to veterans’ homes. 

In addition, GAO reported that most delivery locations had mission-critical buildings that VA considers functionally obsolete. The 

functional obsolescence included inpatient rooms that failed to 

meet contemporary standards for patient privacy; outpatient clinics 

with too few examination rooms; and buildings with life safety concerns. 

In 1999, based on recommendations and actions of the Committee, VA began an effort to realign its capital assets, primarily 

buildings, to better serve veterans’ needs as well as institute other 

needed efficiencies. The Capital Asset Realignment for Enhanced 

Services (CARES) initiative includes: (1) assessing a target population’s needs; (2) evaluating the capacity of existing assets; (3) 

identifying any performance gaps (excesses or deficiencies); (4) estimating assets’ life cycle costs; and (5) comparing such costs to other 

alternatives for meeting the target population’s needs. Alternatives 

to be considered included: (1) partnering with other public or private providers; (2) purchasing care from other providers; (3) replacing obsolete assets with modern ones; and (4) consolidating services

duplicated at multiple locations serving the same market. CARES 

is the most ambitious such effort undertaken by VA. 

Recent data from VA’s CARES office provided an overview of VA 

facilities as follows: VA owns 5,044 buildings and 118.5 million 

square feet. The average age of VA buildings is 50.4 years. The reVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00413 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
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placement life cycle at the current rate of investment is 155 years. 

VA operates 162 hospitals, 677 community-based outpatient clinics, 

137 nursing home units and 43 domiciliaries. 

During the CARES process, VA has projected veterans’ demand 

for acute health care services through fiscal year 2022, evaluated 

available capacity at its existing delivery locations, and targeted 

geographic areas where alternative delivery strategies might allow 

VA to operate more efficiently and effectively while ensuring access 

consistent with its standards for travel time. Efficiencies through 

economies of scale have been identified in 30 geographic areas 

where two or more major health care delivery sites were located in 

close proximity and or provided duplicative inpatient and outpatient health care services. Also, six high priority collocations of 

regional benefits offices have been proposed. VA has also identified 

more than 70 opportunities for partnering with DOD to better align 

the infrastructure of both agencies. Twenty-one of the collaborations or joint ventures with DOD are considered high priority. Four 

years after GAO recommended the formation of CARES, VA expects to issue its final plans by the end of 2003. 

An exemplary model of public/private partnering supported by 

the Committee is proposed at the site of the former Fitzsimons 

Army Medical Center in Aurora, Colorado. This multi-acre tract 

was deeded by the federal government to the University of Colorado to enable it to consolidate one of the largest regional medical, 

educational and biomedical research complexes in the country. Discussions are underway between VA and DOD to negotiate a joint 

venture to construct and staff a Regional Federal Medical Center, 

sharing resources, services and research with the University of Colorado at that site. H.R. 116, as amended, was reported by the Committee on July 14, 2003, to authorize the Secretary of Veterans Affairs, in consultation with the Secretary of Defense, to construct, 

lease, or modify major medical facilities at the site of the former 

Fitzsimons Army Medical Center, Aurora, Colorado. 

The Committee will continue to monitor carefully the progress of 

CARES and expects to hold a public hearing after the plan has 

been completed. 

IMPROVING EFFICIENCY AND ACCESS THROUGH VA-DOD SHARING

For approximately twenty years, the Committee has promoted 

the sharing of health care resources between the Departments of 

Veterans Affairs and Defense (DOD). The goal of sharing between 

the two Departments is to improve the quality of health care for 

VA and DOD beneficiaries and to reduce costs that exist in both 

Departments. By collaborating, the two Departments can improve 

access to care and reduce the overall costs of furnishing that care 

to both veterans and the military beneficiary population. 

In 1982, Congress enacted Public Law 97–174, (the Sharing Act) 

to foster more effective sharing of health care resources between 

VA and DOD. The law was enacted not only to remove legal barriers, but also to provide incentives for military and VA health care 

facilities to engage in health resources sharing through local agreements, joint ventures, national sharing initiatives, and other collaborative efforts pointed to better and more efficient use of Federal health care resources. The Sharing Act provides broad authorVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00414 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
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ity to both VA and DOD to share health resources across the spectrum of health care and health-related activities. With advent of 

the Sharing Act, a flurry of VA–DOD sharing activity occurred, and 

hundreds of agreements were executed among military and VA 

medical centers and their clinics. However, over the succeeding 

years, sharing waned as military health care shifted from a facilities-based system to the TRICARE program that relies on private 

health care networks. 

On July 27, 2001, Chairman Smith introduced H.R. 2667, the 

Department of Defense-Department of Veterans Affairs Health Resources Access Improvement Act of 2001. H.R. 2667 sought to establish a health care facilities sharing demonstration project in 

keeping with the intent of the original legislation for VA–DOD 

sharing. Under the bill, five qualifying sites would be selected for 

participation in a demonstration project. The purpose of the demonstration project was to identify and measure the advantages of 

sharing and work through the challenges of the two systems becoming true partners in health care delivery. The two Departments’ 

medical information systems are incompatible, but this legislation 

would have created a framework for greater technology compatibility. By improving such communication, the Departments could 

better ensure continuity of care, equality of access, uniform quality 

of service and seamless transmission of data. Most of the original 

concepts and objectives of H.R. 2667 were incorporated in Subtitle 

VII of Public Law 107–314, the Bob Stump National Defense Authorization Act for Fiscal Year 2003. 

On March 7, 2002, the Subcommittee on Health and the Committee on Armed Services Subcommittee on Military Personnel 

held a joint hearing to examine collaboration and health resources 

sharing by the two Departments, including consideration of H.R. 

2667. Chairman Smith testified to urge both subcommittees to aggressively increase resource sharing between these two health care 

systems. Defense Under Secretary David S. Chu assured the Committees that he and VA Deputy Secretary Mackay share a common 

vision of quality health care for the men and women serving our 

country, their families, and those that have served. According to 

Under Secretary Chu, the cooperative efforts of DOD and VA are 

focused on a proactive partnership that meets the missions of both 

agencies while benefiting the servicemember, veteran and taxpayer 

with new initiatives and increased efficiency. 

On June 3 and June 17, 2003, the Committee held hearings to 

receive the Final Report of the President’s Task Force to Improve 

Health Care Delivery for our Nation’s Veterans (PTF). One of the 

four organizing principles which this task force used in developing 

recommendations was that committed leadership from VA and 

DOD is essential to achieve VA–DOD collaboration to improve 

health care for veterans and military retirees. The PTF found that 

VA and DOD should maximize the use of resources and infrastructure that each Department currently retains individually. Dr. Gail 

Wilensky, Co-Chair of the PTF, stated in her June 3, 2003, testimony, ‘‘The goal of improved collaboration between VA and DOD 

is not collaboration for the sake of collaboration, but rather that, 

through such activity, VA and DOD can improve timely access to 

410

quality health care and reduce the overall costs of furnishing services.’’ 

H.R. 1911, to amend title 38, United States Code, to enhance cooperation and the sharing of resources between the Department of 

Veterans Affairs and the Department of Defense, introduced by 

Honorable John Boozman, was passed by the House on May 21, 

2003, and would establish a DOD–VA Joint Executive Committee 

to: (1) expand oversight of collaborative efforts beyond health care 

issues to include benefits and other areas as determined by the cochairs; and (2) promote increased resource sharing. 

Existing law allows each Department to determine individually 

the number of employees each would designate to support the committee, but requires each one to share equally in the cost, notwithstanding parity in the numbers. It also requires a permanent staff 

be assigned to the committee. This bill would delete these personnel requirements, thereby enhancing the flexibility of each Department to use its personnel in the most efficient manner possible, 

while at the same time authorizing the establishment of subordinate committees and work groups as deemed appropriate by the cochairs. 

Existing law specifically authorizes the recommendations of the 

committee for sharing of resources to improve access, quality, and 

cost effectiveness. Under H.R. 1911, the committee would also identify changes in policies to improve services, efficiencies, and opportunities for collaboration for delivery of benefits and services to 

beneficiaries of both Departments. 

According to CBO, this bill would have a negligible cost. Although CBO did not project any cost savings in its reported estimate, the Committee expects that cost savings would result from 

the enactment of this bill, as it would further promote the sharing 

between VA and DOD and create new methods by which the two 

Departments would share resources and eliminate duplicate activities. The substance of H.R. 1911 was incorporated into H.R. 1588, 

the National Defense Authorization Act for Fiscal Year 2004, which 

the House passed on May 22, 2003. 

MANAGING LONG-TERM CARE FOR VETERANS

In 1999, Public Law 106–117, the Veterans’ Millennium Health 

Care and Benefits Act, was enacted to ensure VA better meets the 

needs of its aging patient population. The Act required VA for the 

first time to provide nursing home care and certain non-institutional long-term care services to eligible veterans. Some studies 

have shown that appropriate use of case management in long-term 

care can reduce both the number and the intensity of expensive 

acute care hospitalizations. Due to recent reports the Committee 

has received from VA, the Committee is concerned about VA’s ability to meet the nursing home care needs of veterans in accordance 

with the law, particularly considering the World War II generation’s increasing needs for long-term care. 

At the May 8, 2003, Committee hearing on waste, fraud, and 

abuse, Members raised issues related to VA’s role in meeting the 

long-term health care needs of veterans. On May 22, 2003, the Subcommittee on Health held a follow-up hearing to examine existing 

VA long-term care programs and expenditures and appraise VA’s 

411

strategy for addressing future long-term care needs of aging and 

disabled veterans. 

To better meet its oversight responsibilities in this area, the 

Committee requested that GAO provide the Committee with a report on VA’s implementation of the Millennium Act, including analysis of current trends and forecasts in nursing home utilization and 

long-term care expenditures by the Department. The Committee 

also asked GAO to examine VA’s management of its in-house nursing home programs to improve efficiency and assure appropriate 

utilization and access in consonance with the Millennium Act. 

GAO will examine the use of nursing homes VA operates, as well 

as the contract care it purchased between fiscal years 1998 and 

2002. The scope of the study will include examining the expenditures VA incurred to provide nursing home care to these veterans, 

the extent of the use of nursing homes and how their expenditures 

have varied by VA’s 21 health care networks, and the degree to 

which policy differs among VA’s networks on the type and extent 

of nursing home care provided to veterans. GAO has agreed to complete its work and issue a report to the Committee by the fall of 

2003. This next report will provide the Committee with a basis for 

further oversight of VA long-term care programs. 

REDUCING COSTS IN WORKER’S COMPENSATION

VHA has 214,000 employees and is the largest health care system in the United States. Under the Federal Employees Compensation Program, employees are eligible for Worker’s Compensation 

Program benefit payments for lost wages and medical treatment for 

the specific disability associated with a work-related injury. 

In 1998, the IG audited VA’s Federal Employee Compensation 

Act program and concluded the program was not effectively managed. Audit of VA’s Worker’s Compensation Program Cost, Report 

No. 8D2–G01–067, July 1, 1998. The IG estimated VA could reduce 

future payments by $247 million, by returning to work current 

claimants who are no longer disabled. 

In order to decrease program liability, VA issued Directive 7700 

on July 8, 1998, to ensure a safe and healthy workplace for VA employees, and VHA issued specific related directives. Also, the VA’s 

Office of Occupational Safety and Health initiated a case management and injury prevention project designed to reduce compensation costs and the rate of new compensation claims. 

The IG Audit of High-Risk Areas in the Veterans Health Administration’s Workers’ Compensation, Report No. 99–00046, December 

21, 1999, found that the lack of effective case management practices placed the Department at risk for program abuse, fraud, and 

unnecessary costs. In April 1999, the IG provided VA with a handbook for ‘‘VA Facility Workers Compensation Program Case Management and Fraud Detection.’’ By the end of FY 1999, Office of 

Workers Compensation Program costs had decreased by 1.6 percent 

to about $130 million. However, since that time costs have increased to approximately $151 million, which caused the IG to 

begin a follow-up audit. 

On May 8, 2003, the IG in testimony before the Committee on 

Veterans’ Affairs stated, ‘‘* * * VA continues to be at risk for program abuse, fraud, and unnecessary costs because prior IG proVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00417 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
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gram recommendations have not been fully implemented.’’ At the 

urging of the Committee, the Office of Inspector General is conducting further audits of the Workers’ Compensation Program. No 

legislation is recommended by the Department to address this 

issue. 

IMPROVING MANAGEMENT OF PART-TIME PHYSICIANS

VA currently employs 5,129 part-time physicians at a combined 

salary of $400 million with poor or no accountability as to much of 

their time and attendance. Problems with part-time physician time 

and attendance have frequently been reported by the IG Combined 

Assessment Program. In some instances, the affiliated medical 

school determines assignments and work schedules for all the physicians on the VA payroll in violation of VA policy. 

At the May 8, 2003, Committee hearing, the IG also testified concerning the findings in the Audit of the Veterans Health Administration’s Part-Time Physician Time and Attendance, Report No. 

02–001339–85, April 23, 2003. The IG testified that the audit found 

that the VHA’s management controls were not effective in ensuring 

that part-time physicians met their employment obligations and 

that physician staffing was not aligned properly with workload requirements. The IG further testified that some VA medical centers 

do not keep duty schedules and timekeepers do not know which 

physicians are supposed to be on duty. 

The IG provided several examples that showed part-time physicians were not working the hours established in their VA appointments and as a result part-time physicians were not meeting their 

employment obligations to VA. Based on a review at five VA medical centers, the audit specifically found: 

1. There was no documented evidence of any patient care workload (patient encounters, operating room time, progress notes, physician orders, or network log times) for 33 percent of the time in 

a 14–day review, where 223 part-time physicians were scheduled 

for at least four hours of duty. 

2. Part-time physicians did not complete a minimal amount of 

patient care time (at least one hour in surgery or at least two 

progress notes, doctors orders, or encounters per hour worked) on 

53 percent of days the physicians were scheduled to work at least 

four hours. 

3. Surgeons spent 38 percent of their available time on patient 

care obligations. Of the 153 surgeons reviewed, 70 spent less than 

25 percent of their available time in direct patient care. 

4. Part-time surgeons at six VA medical centers reviewed were 

performing surgery at the affiliated medical schools during their 

VA tours of duty. 

5. Attending physicians at four VA medical centers reviewed 

were not present to supervise the residents’ treatment of patients 

in six of 29 clinics reviewed. 

The Committee was advised that the IG had provided the Under 

Secretary for Health with recommendations for corrective actions. 

Specifically, the IG recommended that improvements include quarterly audits of physician time and attendance. The Under Secretary 

generally agreed with the recommendations. 

413

The Committee plans to monitor this matter through oversight 

hearings and briefings with VA officials to ensure that these recommendations are fully implemented. 

IMPROVING MANAGEMENT OF CONTRACTING, PROCUREMENT

AND ACQUISTION 

The IG’s testimony at the May 8 2003, hearing indicated the existence of ineffective management practices involving the procurement of health care items and contracting for health care services 

or resources, especially when service contracts involved an affiliated institution as a party. An IG audit of procurement practices 

found VA facilities often failed to use VA national purchasing or 

Federal Supply Service options, and often chose less cost-efficient 

options such as local procurement. Studies advocate a more centralized focus for the purchase of health care items, but too often this 

course of action is not followed because of a lack of VA procurement 

oversight. 

The IG also commented on the lack of rigor in contracting for 

health care resources, noting an absence of evidence that VA had 

assessed its actual needs or that the contract was in the Government’s best interests. The IG noted the potential conflict of interest 

in the general process. Other IG concerns involved construction 

contracting, purchase card activities, and inventory management—

all of which lack adequate oversight at critical points in their respective processes. On June 10, 2003, at the Committee’s second 

hearing on waste, fraud and abuse, Deputy Secretary Mackay acknowledged that problems exist with VA’s report to Congress regarding contracts for services other than scarce medical specialties. 

The Committee believes that improved management of contracting, 

procurement and acquisitions has the potential for considerable 

savings and the Committee intends to conduct further oversight of 

these areas. 

BARRING BENEFITS FOR FUGITIVE FELONS

In 1996, Congress enacted Public Law 104–193, which barred fugitive felons from receiving Supplemental Security Insurance from 

the Social Security Administration and food stamps from the Department of Agriculture. The intent of the law was to discontinue 

the means of federal support that allow fugitive felons to continue 

to flee. However, the law did not prevent a fugitive felon who was 

a veteran from receiving benefits from VA. 

In 2001, the Committee on Veterans’ Affairs reported H.R. 1291, 

as amended, to prohibit veterans who are fugitives from receiving 

benefits from VA. The bill became Public Law 107–103. Under the 

law, a fugitive felon is defined as fleeing to avoid prosecution, or 

custody or confinement after conviction, for an offense or an attempt to commit an offense which is a felony under the laws of the 

place from which the veteran flees. The benefits barred include 

those for service-connected disabilities; dependency and indemnity 

compensation for surviving spouses of service-connected veterans; 

nonservice-connected disability/death pension; hospital, nursing 

home, domiciliary and outpatient care; insurance; educational entitlements; training and rehabilitation benefits for veterans with 

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service-connected disabilities; and housing and small business 

loans. 

Public Law 107–103 requires the Secretary to furnish to any 

Federal, State, or local law enforcement official in specific circumstances and upon written request the most current address 

maintained by the Secretary of a person who is eligible for a VA 

benefit. The Secretary is also required to enter into memoranda of 

understanding with Federal law enforcement agencies and may 

enter into agreements with State and local law enforcement agencies for purposes of furnishing information to such agencies. 

On May 8, 2003, the IG testified before the Committee efforts to 

identify fugitive felons. In response to Public Law 107–103, the IG 

has established a fugitive felon program to identify VA benefits recipients and VA employees who are fugitives from justice. Mr. Griffin provided details of the program:

The program consists of conducting computerized matches 

between fugitive felon files of law enforcement organizations and VA benefit and personnel records. Once a veteran or employee is identified as a fugitive, information on 

the individual is provided to the law enforcement organization responsible for serving the warrant to assist in apprehension. Fugitive information is then provided to VA so 

that benefits may be suspended and to initiate recovery action for any overpayments. Based on our pilot study and 

matches conducted to date, I anticipate that between 1 and 

2 percent of all fugitive felony warrants submitted will involve VA beneficiaries.

Based on computer matches to date, the IG has projected savings 

related to the identification of improper and erroneous payments to 

exceed $209 million annually. The IG has also completed memoranda of understanding or agreements with the U.S. Marshals 

Service, the States of California and New York, and the National 

Crime Information Center. These data matching efforts have already identified more than 11,000 potential fugitive beneficiaries 

and VA employees. The Committee intends to monitor and encourage the implementation of the IG’s fugitive felon program through 

oversight hearings and briefings with VA officials. No further legislative action is recommended by the Department to address this 

issue. 

STOPPING ERRONEOUS BENEFITS PAYMENTS IN THE PHILIPPINES

The VA Regional Office in Manila, Republic of the Philippines, 

has long struggled with fraudulent activity due to a combination of 

factors, including the relatively large amount of VA payments, poverty and a lack of economic opportunity for indigenous persons. The 

two main types of cases involve deceased payees and false claims. 

In April 2001, the IG instituted a ‘‘Philippines Benefit Review’’ at 

the request of the Manila Regional Office, which was seeking assistance in combating fraud associated with false claims. 

During the six-week operational phase of the review, the team 

conducted 1,134 interviews and 2,391 fingerprint comparisons, reviewed 2,600 files, took 1,100 digital photographs, initiated nine 

criminal cases, and obtained one search warrant. Five hundred 

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ninety-four beneficiaries were identified for suspension or termination of benefits. Criminal investigations initiated during the review were turned over to the Philippines National Police. 

At the May 8, 2003, Committee hearing, the IG testified on the 

results of the benefits review, and indicated that his office was 

looking at other areas outside the continental United States where 

large numbers of veterans and dependents reside. According to the 

IG, 78,000 benefits recipients outside the continental United States 

are receiving approximately $49 million a month in benefits, including $2.9 million to 5,100 veterans and other beneficiaries in 

Germany, and $28 million to 42,000 veterans and other beneficiaries in Puerto Rico. 

To date, the Philippines Benefit Review has resulted in cost sav- ings to VA of approximately $2.5 million in overpayments, and a 

projected 5–year cost avoidance of over $21 million. The Committee 

believes that these investigations of fraud outside the continental 

United States should be aggressively pursued and intends to continue its oversight of them. No legislative action is recommended 

by the Department to address this issue. 

IMPROVING VOCATIONAL REHABILITATION DATA

VA’s Vocational Rehabilitation and Employment Program provides services and assistance necessary to enable veterans with 

service-connected disabilities to become employable and obtain suitable employment. This program also helps certain veterans with 

service-connected disabilities achieve functional independence in 

daily activities. Program performance against these outcomes is 

measured by the rehabilitation rate, which is defined as the number of veterans who were rehabilitated during a period of time compared to the total number that left the program during that period. 

VA’s Annual Accountability Report for FY 2000 showed the rehabilitation rate for the year was 65 percent, which exceeded the goal 

of 60 percent. 

On February 6, 2003, the Office of Inspector General released a 

report, Accuracy of VA Data Used to Compute the Rehabilitation 

Rate for Fiscal Year 2000, Report No. 01–01613–52, that showed 

the data used to compute the rehabilitation rate for fiscal year 

2000 was not accurate. The counseling, evaluation and rehabilitation folders of 94 randomly selected veterans were reviewed for fiscal year 2000. The audit revealed that 7 of the 94 veterans left the 

program during prior or subsequent years and should not have 

been included in the computation of the rehabilitation rate that fiscal year. Of the remaining veterans in the sample, 57 were classified as rehabilitated and 30 were classified as discontinued. Based 

on the evidence in the veterans’ folders, the IG determined that VA 

regional office personnel incorrectly classified 15 of 57 veterans as 

rehabilitated. However, no errors occurred among the 30 decisions 

to classify veterans as discontinued. VA officials could not readily 

explain the reasons for the discrepancies. They speculated that 

pressure to achieve the performance measure target for the rehabilitation rate may have influenced the inappropriate decisions to 

declare veterans rehabilitated. 

The IG could not estimate the actual rehabilitation rate the program achieved for fiscal year 2000, because regional office perVerDate jul 14 2003 22:12 Sep 25, 2003 Jkt 089421 PO 00000 Frm 00421 Fmt 6601 Sfmt 6602 E:\HR\OC\A421.XXX A421
416

sonnel did not timely classify veterans as rehabilitated or discontinued. As a result, an unknown number of veterans were improperly excluded from the total number of veterans who left the program during the year. Because of the significant discrepancies 

identified, the IG could not attest to the accuracy of the rehabilitation rate included in VA’s Annual Accountability Report for FY 

2000. 

The IG recommended additional training for regional office personnel who make classification decisions and improved supervisor 

accountability. Additionally, the IG recommended strengthened 

oversight of VA regional office personnel to ensure that classification decisions are timely and accurate. The Under Secretary for 

Benefits concurred with the IG’s recommendations and provided acceptable implementation plans. 

Other accuracy problems in VA’s vocational rehabilitation program have also been identified. On January 31, 2003, the VA released its FY 2002 Performance and Accountability Report. Part of 

this report addressed accuracy of outcome decisions and accuracy 

of evaluation and planning services for veterans applying for vocational rehabilitation. In 2002, program managers conducted their 

own quality reviews on 3,243 vocational rehabilitation cases. The 

survey found a 19 percent error rate in rehabilitation rate outcome 

decisions. 

The IG report did not estimate entitlement, administrative, or 

cost implications of VA errors that resulted in an overstated vocational rehabilitation rate. No legislative action is recommended by 

the Department. The Committee expects to hold a public hearing 

to further examine this matter and provide additional oversight. 

REDUCING ERRORS IN EDUCATIONAL ASSISTANCE CLAIMS

The VA’s FY 2002 Performance and Accountability Report noted 

quality assurance deficiencies in education claims. Of the 1,541 

cases reviewed, 100 had payment errors and 340 had service errors 

(some cases had more than one service error). Payment errors 

mean the monthly educational assistance allowances of beneficiaries are being underpaid or overpaid. Service errors largely 

deal with eligibility and entitlement determinations. Within the 

category of service errors, development and due process notification 

errors were 21 and 22 percent, respectively. The Committee finds 

these error rates unacceptable. For 2001 and 2002, payment accuracy remained virtually the same, 92.0 percent and 92.6 percent, 

respectively. The report noted that VA must continue periodic refresher training in these areas until improvement is shown. 

The accountability and performance report also noted workforce 

challenges. In fiscal year 2002, the VA Education Service employed 

864 Full-Time Equivalent Employees (FTEE) in administering its 

programs for about 465,000 veterans, active-duty servicemembers, 

reservists, and survivors/dependents. About 50 percent of the education adjudicators were trainees at the beginning of fiscal year 

2002, although turnover decreased during the year. The VA Education Service is developing standardized training for its employees. The first phase, covering claims processing tasks, will be completed in the summer of 2003. 

417

The Committee notes that the report did not estimate the 

amount that could be saved by reduction of payment errors in education claims. However, the report showed that VA obligated $1.77 

billion in this program during fiscal year 2002 and the Committee 

believes that the savings could be substantial. The Committee 

plans continued close oversight of the Department’s efforts to reduce error rates in its educational assistance claims. No legislative 

action is recommended by the Department to address this issue. 

PREVENTING PENSION OVERPAYMENTS

VA’s improved pension program provides financial assistance 

based upon need to certain wartime veterans with disabilities not 

related to military service. This needs-based program has an income limitation, and it is designed to pay benefits on a graduated 

scale whereby the person with the least amount of income, and 

therefore with the greater need, receives the greater amount of 

pension. There are income exclusions in determining a person’s income for pension purposes, including the exclusion of certain unreimbursed medical expenses. At the request of the Under Secretary 

for Benefits, the IG conducted an audit of beneficiaries receiving increased benefits as a result of unreimbursed medical expense 

claims. The objectives were to: (1) evaluate the effectiveness and efficiency of Veterans Benefits Administration (VBA) procedures for 

verification of these claims; (2) identify the extent of unsupported 

claims and processing errors; (3) determine the extent of any potential program fraud; and (4) determine causes and identify solutions 

for deficiencies. 

During fiscal year 2001, VA paid $2.9 billion in pension benefits 

to 507,149 veterans and their survivors. On September 30, 2002, 

the Office of Inspector General released a report, Audit of Veterans 

Benefits Administration Benefit Payments Involving Unreimbursed 

Medical Expense Claims, Report No. 00–00061–169. The audit 

found that some pension beneficiaries are inappropriately submitting unreimbursed medical expense claims, significantly increasing 

the level of benefit payments. The IG reported that processing errors and potential program fraud have occurred because regional 

offices are not effectively managing the processing of these claims. 

Erroneous benefit payments occurred due to the following: 

Overpayments 

1. Medicare (Part B) premiums expenses were claimed, but not 

actually paid. 

2. Income and net worth were not properly reported. 

3. Continuing Medical Expense Deductions—expenses allowed 

prospectively if they are recurring or reasonably predictable (i.e., 

nursing home fees)—were not properly adjusted to reflect actual 

lower costs. 

4. Claimed nursing home costs were not reduced for Medicaid reimbursements. 

5. Other processing errors occurred because claims were not fully 

developed or mathematical errors were made in computing them. 

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Underpayments 

1. Medicare (Part B) premiums paid were not properly claimed 

or adjusted by VBA to reflect increases in annual expenses. 

2. Claims were not fully developed or mathematical errors were 

made in computing claim amounts. 

Potential Program Fraud 

1. Income, net worth or unreimbursed medical expenses were not 

properly reported. 

2. Claims were for expenses that had already been reimbursed. 

3. Veterans’ deaths were not timely reported to VA, and not all 

pension checks were returned. 

According to the IG, processing errors and potential program 

fraud annually result in overpayments of up to $124.7 million and 

underpayments of up to $19.9 million. The Under Secretary for 

Benefits provided acceptable implementation plans to the IG. The 

Committee will continue oversight of the VA pension program to 

ensure the issues of processing errors and program fraud are adequately addressed. No legislative action is recommended by the Department to address these issues. 

IMPROVING CAPABILITY OF THE OFFICE OF THE INSPECTOR GENERAL

The Committee notes that the VA Office of Inspector General is 

the smallest of the statutory Inspectors General relative to the size 

of the parent agency. The IG has a proven record resulting in savings for the VA by elimination of waste, fraud, abuse and management inefficiencies by finding meaningful cost avoidance opportunities. For every dollar invested in the IG, the Department realizes 

savings or cost avoidance estimated at thirty dollars. Committee efforts resulted in increased IG capabilities, with an additional 92 

FTEE authorized in 2003, and should result in annual savings of 

over $180 million VA-wide. 

(419)

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC, September 9, 2003. 

Hon. JIM NUSSLE, 

Chairman, Committee on the Budget, 

309 Cannon House Office Building, Washington, DC. 

DEAR CHAIRMAN NUSSLE: As required by the Conference Report 

accompanying the budget resolution for fiscal year 2004, and in response to your letter dated May 20, 2003, this letter is intended to 

discuss waste, fraud, and abuse identified within the jurisdiction of 

the Committee on Ways and Means. The Committee strongly believes that it has an important responsibility to ensure that all government services are provided efficiently, accurately, and honestly. 

Too often, revenues collected from taxpayers are misused and poorly handled. We have a responsibility to all Americans to work to 

minimize this waste, fraud and abuse. 

The Committee has made significant progress during the 108th 

Congress both to identify and eliminate waste, fraud, and abuse. 

This includes holding six hearings and favorably reporting legislation. 

Hearings 

The Committee held a hearing on July 17th to investigate the 

issue of waste, fraud, and abuse in programs under the Committee’s jurisdiction. At that hearing, we received testimony from 

seven witnesses including the U.S. General Accounting Office 

(GAO) Comptroller General, witnesses from the U.S. Department of 

Justice, Social Security Administration (SSA), and Internal Revenue Service (IRS), as well as three outside experts. 

In addition, various Subcommittees have held hearings during 

this Congress to examine specific instances of waste, fraud, and 

abuse. On February 27th, the Subcommittee on Social Security 

held a hearing on H.R. 743, the ‘‘Social Security Protection Act of 

2003,’’ a bill introduced by Chairman Shaw to protect individuals 

from benefit misuse by representative payees and to eliminate various instances of waste, fraud, and abuse in Social Security programs. On July 10th, the Subcommittee on Social Security held a 

hearing on the use and misuse of Social Security numbers and examined how criminals commit identity theft and perpetrate fraud 

by misappropriating Social Security numbers. 

On June 19th, the Subcommittee on Human Resources and the 

Subcommittee on Oversight held a joint hearing on Unemployment 

Compensation (UC) fraud and abuse issues, specifically focusing on 

underpayment of State unemployment taxes through a process 

known as ‘‘SUTA dumping.’’ In addition, in response to a request 

from Subcommittee on Human Resources Chairman Herger, a July 

2003 GAO report detailed ongoing Supplemental Security Income 

420

(SSI) residency violations and possible measures to address this 

problem. Between 1997 and 2001, SSA detected overpayments of 

$118 million attributable to residency violations. 

The Subcommittee on Health held a hearing on February 13th 

on Medicare Regulatory and Contracting Reform. Regulatory reform reduces waste, fraud, and abuse by providing regulatory relief 

to healthcare providers and modernizing Medicare’s contracting 

processes. On March 4th, the Subcommittee on Health held a hearing on the recommendations from the Medicare Payment Advisory 

Commission, many of which are cost-saving proposals. 

Legislative Action 

This year, the Committee has taken legislative action on a number of measures to protect taxpayer money. 

On February 13th, the House passed H.R. 4, the ‘‘Personal Responsibility, Work, and Family Promotion Act of 2003.’’ This welfare reform bill protects against waste, fraud, and abuse by making 

better use of data and other resources. A provision allowing all 

States access to the National Directory of New Hires database for 

purposes of more effectively providing unemployment benefits 

would save $70 million over 10 years. Another provision increasing 

the share of SSI eligibility determinations subject to reevaluation 

would save an additional $1.4 billion over 10 years. 

On March 13th, the Committee reported H.R. 743, the ‘‘Social Security Protection Act of 2003.’’ This bill, passed by the House on 

April 2nd, reduces waste, fraud, and abuse by denying Social Security benefits to fugitive felons and parole violators and expanding 

the SSA’s ability to punish and deter perpetrators of fraud through 

new civil monetary penalties. In addition, the bill would close the 

loophole that allows some government workers to avoid the Government Pension Offset among other provisions. The Congressional 

Budget Office estimates that H.R. 743 would save $655 million 

over 10 years. 

On April 2nd, the Committee reported H.R. 810, the ‘‘Medicare 

Regulatory and Contracting Reform Act of 2003.’’ This bill would 

reduce waste, fraud, and abuse by streamlining the regulatory bureaucracy in the Centers for Medicare and Medicaid Services 

(CMS) to create a more collaborative working relationship between 

providers, beneficiaries, and CMS. 

Finally, on June 27th the House passed H.R. 1, the ‘‘Medicare 

Prescription Drug and Modernization Act of 2003’’ which would reduce waste, fraud, and abuse by $31 billion over the next 10 years. 

This legislation reforms the Medicare secondary payor system to 

halt improper billing practices, fixes the Medicare payment system 

for outpatient prescription drugs, and subjects payment for durable 

medical equipment and off-the-shelf orthotics to competitive bidding. 

Identified Waste, Fraud, and Abuse 

Through our hearings, the Committee has identified the following examples of waste, fraud, and abuse in programs under our 

jurisdiction.

Social Security: In addition to enacting H.R. 743, the ‘‘Social Security Protection Act of 2003,’’ as described above, the Committee 

421

also believes that Congress could reduce waste, fraud, and abuse 

in the Disability Insurance (DI) program and the SSI program by 

fully funding Continuing Disability Reviews (CDRs) and SSI nondisability redeterminations through the discretionary appropriations process. These reviews allow the SSA to cease benefits for individuals who no longer meet eligibility criteria. The SSA estimates 

that the DI trust funds save up to $9 for each $1 invested in a CDR 

and that $7 in general revenue savings results from every $1 invested in SSI redeterminations. Finally, the Committee will continue to pursue legislation to curtail the misuse of Social Security 

numbers. 

Human Resources: As described above, enacting H.R. 4, the ‘‘Personal Responsibility, Work, and Family Promotion Act of 2003’’, 

would reduce waste, fraud, and abuse by $1.4 billion over the next 

10 years. The Committee also is concerned about continuing waste, 

fraud, and abuse in the SSI and UC programs. The SSA Inspector 

General testified on July 17th that overpayments in the SSI program totaled an estimated $2 billion in fiscal year 2002 alone. 

Similarly, written testimony submitted by the Inspector General of 

the U.S. Department of Labor highlighted an estimated $3.4 billion 

in unemployment benefit overpayments in fiscal year 2002 as an 

area of concern. 

Tax Policy: The Committee is concerned about tax noncompliance 

problems involving individual and corporate taxpayers. At the 

Committee’s July 17th hearing, numerous examples of noncompliance were discussed. The Committee examined the IRS’s efforts to 

improve its identification of specific taxpayer groups considered 

‘‘high risk’’ as well as the IRS’s plans to develop audit strategies 

to better target known and likely abuses in our tax system. Also 

at the hearing, the Committee discussed the benefits of tax simplification. The Committee and its Subcommittee on Oversight will 

continue to monitor IRS’s efforts in this regard and develop legislation to address tax noncompliance as necessary. 

Medicare: As described above, enacting H.R. 1, the ‘‘Medicare 

Prescription Drug and Modernization Act of 2003’’, as passed by 

the House, would reduce waste, fraud, and abuse by over $31 billion during the next 10 years. 

The Committee on Ways and Means will continue to pursue opportunities to identify and reduce waste, fraud, and abuse and 

work to improve the efficiency and fairness of the tax code and all 

programs under the Committee’s jurisdiction. 

Best regards, 

BILL THOMAS, 

Chairman.

Æ