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OVERSIGHT OF FEDERAL FINANCIAL

MANAGEMENT

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

ORGANIZATION, AND PROCUREMENT

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

APRIL 14, 2010

Serial No. 111–146

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.fdsys.gov

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

MARCY KAPTUR, Ohio

ELEANOR HOLMES NORTON, District of

Columbia

PATRICK J. KENNEDY, Rhode Island

DANNY K. DAVIS, Illinois

CHRIS VAN HOLLEN, Maryland

HENRY CUELLAR, Texas

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

BILL FOSTER, Illinois

JACKIE SPEIER, California

STEVE DRIEHAUS, Ohio

JUDY CHU, California

DARRELL E. ISSA, California

DAN BURTON, Indiana

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

BRIAN P. BILBRAY, California

JIM JORDAN, Ohio

JEFF FLAKE, Arizona

JEFF FORTENBERRY, Nebraska

JASON CHAFFETZ, Utah

AARON SCHOCK, Illinois

BLAINE LUETKEMEYER, Missouri

ANH ‘‘JOSEPH’’ CAO, Louisiana

RON STROMAN, Staff Director

MICHAEL MCCARTHY, Deputy Staff Director

CARLA HULTBERG, Chief Clerk

LARRY BRADY, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, ORGANIZATION, AND PROCUREMENT

DIANE E. WATSON, California, Chairman

PAUL E. KANJORSKI, Pennsylvania

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

HENRY CUELLAR, Texas

JACKIE SPEIER, California

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

MIKE QUIGLEY, Illinois

BRIAN P. BILBRAY, California

AARON SCHOCK, Illinois

JOHN J. DUNCAN, JR., Tennessee

JEFF FLAKE, Arizona

BLAINE LUETKEMEYER, Missouri

BERT HAMMOND, Staff Director

(III)

C O N T E N T S

Page

Hearing held on April 14, 2010 .............................................................................. 1

Statement of:

Barton, John, manager of public information, Texas Legislative Budget

Board; Michael J. Hettinger, director of practice planning and marketing, Grant Thornton LLP; and Veronique de Rugy, Ph.D., senior research fellow, Mercatus Center, George Mason University ...................... 111

Barton, John .............................................................................................. 111

de Rugy, Veronique ................................................................................... 129

Hettinger, Michael J. ................................................................................ 122

Dodaro, Gene L., Acting Comptroller of the United States; Richard L.

Gregg, Acting Fiscal Assistant Secretary, U.S. Department of Treasury;

Danny Werfel, Controller, Office of Federal Financial Management,

Office of Management and Budget; James L. Millette, Deputy Assistant

Secretary for Global Financial Services, Department of State; and Mark

E. Easton, Deputy Chief Financial Officer, Department of Defense ........ 9

Dodaro, Gene L. ......................................................................................... 9

Easton, Mark E. ........................................................................................ 94

Gregg, Richard L. ...................................................................................... 54

Millette, James L. ..................................................................................... 73

Werfel, Danny ............................................................................................ 64

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

Barton, John, manager of public information, Texas Legislative Budget

Board, prepared statement of ...................................................................... 114

de Rugy, Veronique, Ph.D., senior research fellow, Mercatus Center,

George Mason University, prepared statement of ..................................... 131

Dodaro, Gene L., Acting Comptroller of the United States, prepared statement of ........................................................................................................... 12

Easton, Mark E., Deputy Chief Financial Officer, Department of Defense,

prepared statement of ................................................................................... 97

Gregg, Richard L., Acting Fiscal Assistant Secretary, U.S. Department

of Treasury, prepared statement of ............................................................. 56

Hettinger, Michael J., director of practice planning and marketing, Grant

Thornton LLP, prepared statement of ........................................................ 125

Millette, James L., Deputy Assistant Secretary for Global Financial Services, Department of State, prepared statement of ..................................... 75

Werfel, Danny, Controller, Office of Federal Financial Management, Office of Management and Budget, prepared statement of ........................... 66

(1)

OVERSIGHT OF FEDERAL FINANCIAL

MANAGEMENT

WEDNESDAY, APRIL 14, 2010

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, ORGANIZATION, AND PROCUREMENT, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room

2247, Rayburn House Office Building, Hon. Diane E. Watson

(chairwoman of the subcommittee) presiding.

Present: Representatives Watson, Cooper, Connolly, Cuellar,

Quigley, Schock, Luetkemeyer, and Issa (ex officio).

Staff present: Bert Hammond, staff director; Valerie Van Buren,

clerk; Adam Bordes and Deborah Mack, professional staff members; Adam Fromm, minority chief clerk and Member liaison; Hudson Hollister, minority counsel; and Mark Marin, minority professional staff member.

Ms. WATSON. The Subcommittee on Government Management,

Organization, and Procurement of the Committee on Oversight and

Government Reform will now come to order.

Without objection, the Chair and the ranking member will have

5 minutes for opening statements, followed by opening statements

not to exceed 3 minutes by any other Members.

Without objection, Members and witnesses may have five legislative days to submit a written statement or extraneous materials for

the record.

I will now begin the hearing with my statement.

I would like to welcome everyone to this morning’s hearing on

the Federal Government’s consolidated financial records and statements for fiscal year 2009 and the subcommittee’s review of Federal agencies’ progress to date in modernizing their management

systems and internal controls.

I welcome our distinguished witnesses and look forward to hearing all of your testimony.

The Government Management Reform Act of 1994 instructs the

Secretary of Treasury, in coordination with the Director of the Office of Management and Budget, to submit financial statements on

an annual basis to the President and to the Congress. GAO is required to audit these statements, and today’s hearing will review

the findings of the Department of Treasury and OMB, as well as

GAO’s audit.

For the 13th consecutive year, GAO was unable to render an unqualified audit opinion for fiscal year 2009 due to ongoing material

2

weaknesses that were caused by problems related to internal controls over financial reporting. The statement of social insurance,

however, was issued a clean audit opinion and the total number of

reoccurring material weaknesses held constant at 29, but the overall number of weaknesses documented increased from 32 to 38,

mostly due to irregularities in financial management and reporting.

The subcommittee would like to hear how the material weaknesses in financial reporting and other internal controls by Federal

agencies continue to affect the Federal Government’s fiscal conditions. The subcommittee is particularly interested in hearing more

from Mr. Millette of the State Department and Mr. Easton from

the Department of Defense about their agencies’ challenges in

these areas and their efforts to resolve these issues.

The subcommittee is aware of the extraordinary and unprecedented efforts the Federal Government has undertaken to shore up

the Nation’s fiscal markets in 2009, as well as the fiscal challenges

our Government faces in meeting its obligations for major social insurance programs that will appear down the road. Obviously, there

comes a time when the rubber must meet the road, and many of

us would agree, to use a mixed metaphor, that there is a shrinking

window of opportunity for implementing necessary policy changes

to meet these critical budgetary challenges.

With that in mind, I look forward to the observations of our

panel of Government witnesses on the current conditions of the Nation’s financial health, as well as any other observations you may

have on what efforts must be made to ensure the ongoing fiscal

health of our Nation.

And for our second panel, we will hear from several expert witnesses regarding Representative Henry Cuellar’s legislation, H.R.

2142, or the Government Efficiency, Effectiveness, and Performance Improvement Act of 2009. The intent of Mr. Cuellar’s legislation is to buildupon the Government Performance and Results Act

of 1993 by requiring that every Federal program be excessed at

least once every 5 years. The legislation also establishes the performance improvement council and agency improvement offices.

Once again I would like to thank our panelists for joining us

today. I look forward to their testimony.

Now I will call on our prestigious minority representative.

Mr. SCHOCK. Thank you, Madam Chair. I appreciate your convening today’s meeting on this very important matter.

Auditing the Federal Government’s financial statements is a

massive responsibility but a vitally important one. Understanding

how and how well the Federal Government manages and spends

our taxpayer dollars will lead to greater transparency for the

American people, an opportunity to see where financial management improvements can be made, and can potentially save billions

of dollars each year.

In 1996, only six agencies received a clean audit. Now we are up

to 20 out of the 24 CFO Act agencies receiving an unqualified opinion on their financial statements. There is no doubt that some improvements have been made; however, persistent problems remain.

For the 13th straight year, GAO was unable to render an opinion

on the Government’s consolidated financial statements due to perVerDate 11-MAY-2000 13:48 Jun 17, 2011 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\65550.TXT KATIE PsN: KATIE
3

sistent financial management problems at the Department of Defense, the Government’s inability to account for interagency funding activity, and other ineffective systems, processes, and internal

controls at our Federal agencies. In fact, the very agencies that are

responsible for public company reporting and tax compliance do not

have effective control over their own financial reporting.

At the Securities and Exchange Commission GAO found that

automatic accounting systems could not generate useful financial

reports, requiring extensive manual work-arounds. At the IRS,

GAO found that financial management systems failed to comply

with the law. One could fairly ask: how can these agencies require

effective financial reporting from companies and individuals in the

private sector and not practice it themselves?

The private sector, which has frequently faced the challenge of

reconciling transactions between disparate subsidiaries of a consolidated corporate parent, has developed technology solutions to similar accounting problems. The Federal Government lags far behind

the private sector in implementing and making use of these technological solutions.

GAO was able to offer an unqualified opinion on the statement

of social insurance, which includes Medicaid and Social Secretary.

However, as a recent news story on this topic stated, ‘‘While the

bookkeeping of the statement of social insurance might be reliable,

it is hardly good news.’’ The financial statements show that the

projected scheduled benefits exceed the earmarked revenues for Social Security and Medicaid by $46 trillion during the next 75 years.

According to GAO, increased spending and borrowing and decreased revenue associated with TARP and stimulus spending

added massively to the Nation’s debt, and GAO states in its report

that Federal debt held by the public as a share of GDP could exceed the historical high reach in the aftermath of World War II by

2020, 10 years sooner than projected just 2 years ago. GAO concludes that the Federal Government is on an unsustainable longterm fiscal path.

I am also concerned about the ongoing and growing problem of

improper payments. An improper payment is Government jargon

for a dispersal of taxpayer money which should never have been

made, a payment that went to the wrong company or organization

or that was made for an incorrect amount. In fiscal year 2009,

OMB reported that the Federal Government made $98 billion in

improper payments, and OMB admits that this figure doesn’t even

cover all of the at-risk outlays, and therefore doesn’t reflect the full

total of incorrect payments the Federal Government made in the

fiscal year 2009.

With that, Madam Chair, I thank you once again for holding this

hearing today and look forward to the testimony of our panelists

and the productive conversation on how we can continue to improve the financial management of our Federal Government.

With that, I yield back.

Ms. WATSON. I now yield to the distinguished Member, Mr.

Quigley.

Mr. QUIGLEY. Thank you, Madam Chairman.

I think this is my anniversary. I have been here a year now. I

was expecting a cake.

4

[Laughter.]

Mr. QUIGLEY. What is striking to me in that anniversary date is

where I came from. I was a Cook County Commissioner in Chicago,

and when I got there 11 years ago the big scandal was that our

Forest Preserve District had not done appropriate audits for 5

years, and we found out we were $19 million in debt, and we had

people on the payroll who weren’t attached to the budget. That was

seen as an extraordinary problem. I guess fast forward to today. It

is extraordinarily frightening that the decimal point moves way

over to the right, but the fact that we don’t know, we don’t have

a handle on our finances is all the more frightening, because without proper audits of the Federal Government’s finances we are essentially flying blind, and it is a big plane.

How can we begin to create efficiencies or cut waste if we don’t

have a proper accounting of where and how our funds are being

spent? We have to have an accurate lay of the land before we begin

reforming. The path out needs to know where we are in the first

place. Proper oversight of the Federal spending is especially important now. The Federal Government is taking on unprecedented

amounts of debt and liability through the stimulus, TARP, including extraordinary investments in Fannie and Freddie. Our National debt as a percentage of GDP is on track to reach levels not

seen since World War II due to entitlement growth and unchecked

spending.

We need some serious reforms to reign in Federal spending and

put our budget in a sustainable path. All I would say is that the

first part of this must be an accounting. It must be an appropriate

accounting so we know where we are and we know what changes

that we put in place will do to affect our balance sheet.

Thank you, Madam Chairman.

Ms. WATSON. Thank you.

I now yield to the distinguished Mr. Darrell Issa.

Mr. ISSA. Thank you, Madam Chair, and thank you for holding

what I hope will be the first of many hearings that begin to grapple

with the larger problem.

In reference to the larger problem, one of the people that is not

given enough credit in history for creating the modern Government

was Dwight David Eisenhower. He began the process of saying that

we were going to have to increase the efficiency in using modern

technology. Sadly, he went to his grave, and many Presidents since

him have gone to his grave without the Federal Government knowing how to use computers to actually do more than put pretty Web

sites up that tell people how well we are doing.

It is sad that we spend as much money as we spend on automation and yet cannot begin to accurately mimic what we demand the

private sector do.

I hope today that as all of you testify—and I will be going between two subcommittee hearings of this whole committee—that

you will bear in mind that if we are going to solve this problem we

first have to, as Dwight David Eisenhower used to say, take a big

problem and make it larger.

It is very clear that there is no central plan for an efficient and

effective system of exchanging information within the Federal Government. That has been pervasive, as the acting GAO would tell

5

us. It has been pervasive in our intel community. It has been a

problem at DOD at all levels. And, of course, if we can’t get it right

we cannot work with our allies around the world to exchange information to keep America safe.

So although I consider this problem a huge problem, I would

hope today that we begin to focus on the fact that unless there is

a strategic plan to solve this problem through transparency and

interoperability so that the roll-up of an organization, if today you

are part of Homeland Security and tomorrow you are part of an entirely different Cabinet position, that it should be as transparency

as simply saying this is now being redirected with a few strokes

of the keys to another department. Today it would be hopeless to

consider that. As a matter of fact, it would be a plan of probably

3 to 5 years in order to transition so that something could be done

other than manually.

I have looked at your testimonies. I look forward to repeated

followups. I would ask the Chairwoman that all Members, both

present and those seated on the committee but not present today,

have time to ask questions as followups to today’s hearing and that

they be answered in writing.

Ms. WATSON. Are you referring, Mr. Issa, to——

Mr. ISSA. To our witnesses.

Ms. WATSON. To the witnesses?

Mr. ISSA. That we be allowed to have followup, because their

statements are very good and I think we are going to probe a long

way into it, but, as is the custom of the committee, I would ask

unanimous consent that all Members have the ability and that we

get the acquiescence of the people testifying here today to take followup questions from any member of the committee.

Ms. WATSON. Mr. Issa, you know that is standard procedure, and

without objection we will do that.

Mr. ISSA. Thank you, Madam Chair.

Ms. WATSON. Thank you for reminding us.

Mr. ISSA. It was not for the Chair. It was actually for the witnesses. Some of them are not used to getting a committee that

looks at all of this and follows up with numerous questions, sometimes two and three times. Obviously, Mr. Dodaro is very familiar

with it. But I asked for that reason.

Ms. WATSON. Well, let me reassure you, Mr. Issa, that we definitely will leave the record open, and we are open for your written

testimony, as well as your written comments, as well as your response to Members’ questions.

Again, thank you, Mr. Issa.

Mr. ISSA. Thank you, Madam Chair.

Ms. WATSON. Yes.

I now yield to Mr. Cooper for an opening statement.

Mr. COOPER. Thank you, Madam Chair.

This on the surface looks like a fairly small, inconsequential

hearing. It is not. We are talking today about one of the most important issues that our entire Nation faces. As important as these

auditing issues are, that is really not what is at stake here. What

matters is the big picture, the aggregate, and I am worried that we

missed the forest for the trees.

6

A lot of folks back home don’t realize that the Federal Government is the last large entity left in America that refuses to use real

accounting, so-called accrual accounting. In a business, if you can’t

measure it, you can’t manage it. We in the Federal Government are

refusing to use the real numbers, and it has been this way for a

long, long time.

When David Walker was the Comptroller General he used to put

explicitly in his Auditor’s letter that the United States faced, back

in his day, some $50 trillion in unfunded obligations. That number

has grown. According to my staff’s aggregate look at it, it is more

like $62 trillion, and it is growing every day. It is growing by about

$3 to $6 trillion a year.

These are promises that policymakers have made to Medicare recipients and Medicaid recipients and Social Security recipients, and

we know today that we do not have enough money to make good

these promises. So here we are in a situation in which every stockholder in America gets an annual report on their favorite company.

It might be IBM. It might be some other company. But here we are

as citizens, most of us don’t even know there is an annual report

for our favorite country, and most people are not going to the

Treasury or GAO Web sites and downloading it.

Now, this year the report was shockingly late. It has been put

out in past years on December 15th, and there are probably good

reasons for a new administration to be slow getting it out. I still

haven’t seen a hard copy yet, and here we are well into 2010. But

this is fundamental information if you care about the future of

America. Moody’s, Standard and Poor’s, other rating agencies are

already talking negatively about the future outlook of the U.S.

Treasury bond, itself, what Moody’s has called the anchor to the

world’s financial system.

We cannot risk a downgrade of the Treasury bond, but that is

actually what is at stake. If you read the front page of USA Today

yesterday, you saw shocking increase in debt, and that is actually

using the conservative measure. If you look at what we are putting

on the national credit card, not just in our cash account, it is even

more frightening.

So the President, by Executive order, has appointed a fiscal responsibility commission, a bipartisan group to look into this. I am

hoping and praying that people of goodwill on both parties, not

only in Congress but across the country, will start paying more attention to these issues.

The hearing today on the financial report of the U.S. Government for 2009 is a good way to begin that debate, because these

are the only real numbers available to average citizens to use real

accounting to talk about our problems.

I am thankful that the statement of social insurance is audited.

That is robust. That is ready for a robust public discussion.

So thank you, Madam Chair, for calling this hearing. This is a

good way to begin.

Ms. WATSON. Thank you, Mr. Cooper.

I now yield to the gentleman from Virginia, Mr. Connolly.

Mr. CONNOLLY. Thank you, Madam Chairman. I thank you for

holding these hearings and thank our panelists for being here.

7

Like Mr. Cooper, I think this really is a very important subject;

however arcane for some, at least on the surface. Accounting is not

always the most sensational of topics, and yet how we account for

Federal spending, how we account for Federal budgeting actually

is really critical to the fiscal health of the country as we move forward.

While I agree with my friend on much of what he had to say

about accrual accounting and about making sure that there is

transparency in what our obligations long-term are, I think it is

important we not overstate the case. The Federal Government is

not about to declare insolvency. Investments in Federal debt continue to be robust. And if you look at the out years in terms of the

interest rate picture, it would suggest continuing confidence in the

United States as an investor’s safe haven.

That isn’t to say that all is well, but it certainly is to suggest

that the sky is not falling. We have some time. I think Mr. Cooper’s

words need to be taken to heart. We have some time to act. We

have some time to make sure our fiscal house is brought into order

once this recession is fully accounted for.

We had some good news this week. It looks like we are going to shave at least $300 billion off the projected debt—and that is good

news—largely because of improved economic activity. It looks like

the TARP program that was approved in the previous Congress

and the previous administration actually may, at the most, have a

net cost to taxpayers not of $700 billion originally appropriated, but

of about $89 billion, and that is still counting. It may yet break

even, or even turn a slight profit.

That is good news in terms of Federal spending and the taxpayer, but at the end of the day, as Mr. Cooper suggests, it is really

about political will. It is about whether both sides are willing to

suspend their respective theologies and look at the revenue picture

and look at the spending picture in as much of an unbiased way

as we can to try to make sure we are willing to put the tough decisions on the table and elect to act on some of them.

As a member of the Budget Committee, I am committed to certainly doing that as a deficit hawk, and I thank you, Madam Chairwoman, and my friend from Tennessee for constantly reminding us

of the seriousness of this issue.

I look forward to the testimony.

Ms. WATSON. Thank you so much.

I want to have members of this committee rest assured that this

is just part of a continuing group of hearings that will look at the

efficacy of the way we spend money, the way we purchase, and the

way we address our deficits. We are all keenly aware that we are

in a deficit mode that will take years to recover from, recession.

But there is a light at the end of the tunnel, even if it is a search

party with a lantern. So we are going to try to get to the bottom

and find ways to improve how we proceed.

With that said and no other Members present, we are going to

proceed on with panel one.

Glad to see you, Mr. Cuellar. Would you have an opening statement, because we are going to be discussing your bill.

Mr. CUELLAR. Not right now.

Ms. WATSON. All right. Thank you very much.

8

It is the policy of the Committee on Oversight and Government

Reform to swear in all witnesses before they testify, and I would

like to ask all of you to please stand and raise your right hands.

[Witnesses sworn.]

Ms. WATSON. Let the record reflect that the witnesses answered

in the affirmative.

I will now introduce each one of you on the panel.

First we have Gene L. Dodaro, the acting Comptroller General

of the United States and the head of the Government Accountability Office, the investigative and auditing agency for Congress. Mr.

Dodaro has held such a position as chief operating officer and the

head of Government Accountability Office’s accounting and information management division over the course of his distinguished

career with the agency.

Next, Mr. Richard L. Gregg has served at the Department of

Treasury with distinction for 36 years. He also is a Commissioner

of the Financial Management Service for 9 years, and before that

served as Commissioner of the Bureau of the Public Debt for 10

years. Mr. Gregg has also held numerous other management positions at Treasury during his long career.

Danny Werfel serves as the Controller of the Office of Federal Financial Management within the Office of Management and Budget,

referred to as OMB. He oversees OMB’s initiative to improve financial management across the Federal Government, including financial reporting and proper payments and real property management.

Mr. Werfel also develops the Federal Government’s policies regarding fiscal accountability standards, grant management, and financial systems. He previously served OMB as Deputy Controller,

Chief of the Fiscal Integrity and Analysis Branch, Budget Examiner in the Education Branch, and as Policy Analyst in the Office

of Information and Regulatory Affairs.

James Millette is Deputy Assistant Secretary for Global Financial Services at the Department of State. He oversees the Resource

Management Bureau, which includes integrated budget planning

and performance. He also serves as the Deputy Assistant Secretary

for Global Fiscal Services based in Charleston, South Carolina,

which has an integrated fiscal service center in Bangkok and offices in Paris and Washington, DC, right here in the District. Previously, Mr. Millette was Deputy Assistant Secretary for State Programs, Operations, and Budget, as well as Senior Policy Advisor of

the Chief Fiscal Officer.

And Mark E. Easton is the Primary Advisor to the Department

of Defense, DOD, Controller, and Chief Financial Officer, and also

serves as a senior staff member regarding all issues involving the

amended CFO Act of 1990 and related financial management reforms. Mr. Easton is responsible at the Executive level for ensuring

DOD’s budget and financial execution in support of national security objectives, particularly in relation to finance and accounting

policy, management, and controlled systems and general business

transformation program.

He also oversees DOD’s compliance with the Legislative and Executive financial management initiatives. Previously, Mr. Easton

served as a Deputy Assistant Secretary of Navy and as Director for

Financial Operations in the Office of the Assistant Secretary of the

9

Navy. In 2002 he retired as a captain in the Navy Supply Corps

after serving for 29 years.

I want to thank all of you witnesses.

I ask that each of the witnesses now give a brief statement of

your testimony, and keep your summary under 5 minutes in duration, if you can. Your complete written statement will be included

in the hearing record.

We would like now to proceed with Mr. Dodaro.

STATEMENTS OF GENE L. DODARO, ACTING COMPTROLLER

OF THE UNITED STATES; RICHARD L. GREGG, ACTING FISCAL ASSISTANT SECRETARY, U.S. DEPARTMENT OF TREASURY; DANNY WERFEL, CONTROLLER, OFFICE OF FEDERAL

FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND

BUDGET; JAMES L. MILLETTE, DEPUTY ASSISTANT SECRETARY FOR GLOBAL FINANCIAL SERVICES, DEPARTMENT

OF STATE; AND MARK E. EASTON, DEPUTY CHIEF FINANCIAL

OFFICER, DEPARTMENT OF DEFENSE

STATEMENT OF GENE L. DODARO

Mr. DODARO. Thank you very much, Madam Chairwoman, Congressman Schock, members of the subcommittee. I am very pleased

to be here today to discuss GAO’s report on the fiscal year 2009

consolidated final statements of the U.S. Government.

As has been mentioned in your opening comments, we did render

an unqualified opinion on the statement of social insurance, and

this is very important because the programs that it covers, Social

Security and Medicare, are very important to understand the financial condition of the Federal Government and the sustainability of

the commitments that have been made.

Unfortunately, as in past years, we have been unable to give an

opinion on the accrual based financial statements of the Federal

Government for a wide range of reasons, including serious financial

management problems at the Department of Defense and the inability to eliminate inter-governmental transactions among Federal

agencies.

As Congressman Issa mentioned, there are a lot of system problems that have also been noted in our audit reports. We have also,

in the report, cited, as Congressman Schock mentioned, the almost

$100 billion in improper payments that have been made, and there

are pervasive information security problems with the Federal Government systems that need attended to. We made a number of recommendations. Actions are underway.

Now, our report also—and the report of the Government’s financial statements—begins to shed some light on the affects of the recession on the Federal Government’s finances, as well as the efforts

that have been taken in order to deal with stabilizing our financial

markets and stimulating economic growth. As a result, a lot of the

transaction activity of the TARP program, of the American Recovery and Reinvestment Act are beginning to show up on the financial statements, but that story has not been told yet. There are a

lot of uncertainties yet. There is a lot of money still to be spent

under the Recovery Act, and so it will be important to follow

through those activities in the coming years.

10

Now, it also, our report, talks about the long-term fiscal path of

the Federal Government. We concluded, as has been mentioned

today, and have concluded for a while that the Federal Government

is on an unsustainable long-term fiscal path and action needs to be

taken. As this chart shows and has been alluded to in your opening

statements, under this simulation, which is based on past practices

and policy preferences, the Federal Government debt held by the

public within the next 10 years could exceed the historical high

level as a percent of gross domestic product that was set back in

World War II at 109 percent. Last year it was at 53 percent. This

year it is approaching two-thirds of the gross domestic product annual deficit. But this is total debt held by the public.

Now, what does that mean in terms of the magnitude of the challenge? The next chart shows that by 2020, if you hold revenue constant at the 40-year average of 18.1 percent, the Federal Government would have enough revenue to pay for the net interest on the

debt, Medicare, Medicaid, and Social Security, and would have to

borrow the equivalent amount of money to pay for the entire rest

of the operations of the Federal Government, including the Defense

Department and Transportation, etc., going forward.

Now, the next chart shows, as Congressman Connolly mentioned,

there is a window of opportunity to deal with this issue, but that

window is rapidly closing. The first members of the Baby Boom

generation, which are the creation of the demographic wave which

is driving a lot of these changes, have already begun to apply for

Social Security in 2008, 2 years ago. The Medicare trust fund is in

a cash deficit situation.

In this fiscal year the Social Security system actually has negative cash influx. That was not expected to happen, but because of

the recession and other things, so that the Social Security program

had been making a net contribution to help reduce the borrowing

cost of the Federal Government, that has changed temporarily. And

within the next 6 years or so, it is estimated to have negative cashflows on a consistent and growing basis.

So action is urgently needed to begin to address this issue. I recognize the economy is still fragile. We need to keep an eye on that

in the short term. But the Congress and the administration, the

President, need to focus on coming up with a plan with the same

intensity that they focused on in dealing with economic recovery

and employment situations right now in order to address this issue.

I was very pleased to see the Congress pass the pay-go provisions, which will help deal with programs going forward to make

sure they are funded for, but we have to deal with these legacy

issues and the estimated commitments.

As Congressman Cooper mentioned, I was also pleased to see the

President appoint the deficit commission. I think that is a very important step forward.

This concludes my statements.

I might note in my last chart, though, that we also, in addition

to doing long-term simulations of the Federal Government, we also

have begun doing simulations of the State and local sector. And the

State and local sector is on the same ominous path of continual

deficits that are large and growing. And this chart shows the solid

line is the Federal Government’s projections on annual deficits

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going forward. If you add the State and local sector to that, you get

the dotted line. And so right now both the Federal Government and

the State and local sector are under great fiscal stress.

I thank you for the opportunity to be here today, and I look forward to addressing your questions at the appropriate time.

[The prepared statement of Mr. Dodaro follows:]

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Ms. WATSON. Thank you so much, Mr. Dodaro.

Now we will proceed with Mr. Gregg.

STATEMENT OF RICHARD GREGG

Mr. GREGG. Chairwoman Watson and Congressman Schock,

thank you for inviting me to discuss the financial report of the U.S.

Government for fiscal year 2009 and the related audit by the Government Accountability Office. Your interest in improving financial

management is greatly appreciated.

The financial report is prepared from the audited financial statements of specifically designated Federal agencies, including Cabinet departments and many smaller independent agencies. In fiscal

year 2009, 20 of the 24 CFO Act agencies earned unqualified opinions on their financial audits. It is particularly noteworthy that the

Department of Treasury, itself, received a clean audit this year.

Given the number and the complexity of the new programs that

deal with the economic crisis, the clean opinion reflects exceptional

work by Treasury and its auditor, GAO.

The U.S. Government also achieved a third consecutive unqualified or clean audit on the statement of social insurance; however,

for fiscal year 2009 GAO was again unable to express an opinion

on the other Government-wide financial statements. The disclaimer

on those statements stems from three longstanding material weaknesses: serious financial management and control issues at the Department of Defense, the inability to adequately reconcile and account for intergovernmental activities and balances between agencies, and deficiencies in the process of preparing the consolidated

financial statements.

We nevertheless have made progress over the years in resolving

many GAO findings. Treasury and OMB’s efforts to date have resulted in the reduction of GAO findings and recommendations by

more than two-thirds, from more than 150 a few years ago to just

over 40 in fiscal year 2008.

But we have been less successful in fixing some basic structural

problems. GAO, for example, has repeatedly identified our inability

to balance the intergovernmental transactions between Government agencies, and, while it will take all agencies working together

to eliminate this as a material weakness, Treasury, working with

OMB, will assume responsibility for fixing it.

The process for preparing consolidated financial statements is

also a material weakness. This material weakness includes numerous shortfalls, but, most importantly, there is a structural deficiency whereby key accounting components had not been included

in our consolidation process. Treasury has developed an accounting

structure to resolve this issue. This new structure will need to be

tested and implemented, but within a couple years we should be

able to make significant improvements in the financial report preparation process.

The Government’s mainly accrual based net operating cost for

fiscal year 2009 increased nearly $250 billion from a year earlier

to $1.25 trillion. This increase results primarily from the substantial decline of more than $460 in Government revenues, due in

large part to the effects of the recession and tax changes associated

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with the stimulus package. The Government’s budget deficit for

2009 was $1.4 trillion.

The Government’s balance sheet shows that its liabilities exceed

its assets by more than $11 trillion, and the largest categories of

liabilities are the Government’s debt held by the public, $71⁄2 trillion, and the Federal employees’ and veterans’ post-employment liabilities are more than $5 trillion.

For fiscal year 2009 the Government’s balance sheet reflects that

many investments have been made pursuant to the economic recovery shortfalls. These include $240 billion in outstanding TARP investments, as well as investments in Fannie Mae and Freddie Mac,

two preferred stock purchase agreements valued at $65 billion, and

$185 billion of mortgage backed securities.

It is important to note that the financial report also discloses significant activity that occurred after fiscal year 2009, including an

additional $90 billion repaid from TARP recipients and a modifying

of funding commitment cap for Fannie and Freddie.

Although market stabilization and economic recovery were the

priority for fiscal year 2009, the continued issue of fiscal sustainability is not being overlooked. The report discusses the Government’s long-term fiscal challenges of funding Social Security, Medicare, and Medicaid programs, programs which will account for a

large and growing portion of total Government spending in both

the near term and the long term.

An important message conveyed in this year’s financial report is

that the longer that action to resolve these shortfalls is delayed,

the greater the challenge will be to bring these important programs

into fiscal balance.

For the third year, Treasury, with support from OMB and GAO,

has issued a companion document, the Citizen’s Guide for the Financial Report, which is an abbreviated form of the longer financial

report and is a much easier read for the American citizens.

Finally, in closing, I do appreciate the work that the committee

has done. The efforts on pulling together the financial report is a

challenging one, with very large Government agencies trying to

compile hundreds of thousands of documents and information in a

very short period of time and get it right.

I think we have made progress. We still have a long way to go,

and I certainly recognize that.

Thank you, Chairwoman Watson. I look forward to your questions.

[The prepared statement of Mr. Gregg follows:]

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Ms. WATSON. Thank you so much, Mr. Gregg. I just want to refer

all Members to the Federal Government’s financial health. I think

it would be very informative for all of us to read it thoroughly.

I would like now to proceed to Mr. Werfel. Will you continue,

please.

STATEMENT OF DANNY WERFEL

Mr. WERFEL. Thank you, Chairwoman Watson, Congressman

Schock, and other members of the subcommittee for the invitation

today to discuss Federal financial management issues with you.

This November will mark the 20th anniversary of the Chief Financial Officers Act of 1990. This is an opportune time to reflect

on Federal financial management community’s progress during the

last 20 years and plot a course for where and how the community

will advance in the next 20 years.

Over these past 20 years, the Federal Government has built a

solid foundation of strong accounting practice, including disciplined

and consistent financial reporting, high functioning risk management frameworks that are driving internal control improvements in

financial reporting, and integration between transaction processing

and our accounting records. As a result, the number of clean audit

opinions at Federal agencies has risen steadily over time, while

auditor identified material weaknesses have declined.

This does not mean that our journey is complete. To the contrary, more work is necessary to strengthen this foundation, including addressing the ongoing weaknesses that prevent the Department of Defense, NASA, the Department of Homeland Security, the

State Department, and the Government, as a whole, from achieving

a clean audit opinion.

Perhaps even more critical, significant work remains in areas of

financial management that tie more directly to the American

public’s bottom line: the elimination of Government waste in areas

such as improper payments, unneeded Federal real estate, and cost

overruns in the deployment of our new financial systems. Moreover, as the public demands increases for information on where

taxpayer dollars are going and how they are being used, the Federal financial community must rise to this challenge and produce

this information more timely and reliably.

Before I turn to these priorities, I would like to spend a few moments on the important impacts that the Federal economic recovery efforts are having on the Federal financial management community today.

First, I would like to commend the Treasury Department for the

extraordinary accomplishment of achieving a clean opinion on the

first ever audit of the financial statements for the Troubled Asset

Relief Program [TARP]. The TARP program presents a unique financial reporting challenge, given the complex nature of the transactions and the volume of activity involved. For the Treasury Department to achieve a clean audit in the very first year of the program demonstrates how far the Federal Government has come in

the sophistication and adeptness of our solutions for reporting traditional accrual based financial statements.

At the same time, the American Recovery and Reinvestment Act

presented a different reporting challenge to the Federal financial

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management community, requiring more frequent and detailed information on Federal spending than has ever been traditionally

captured by our financial statements. Due to system limitations

and challenges of readily producing this information, many agencies have relied on herculean manual efforts to compile or combine

information from several disparate systems to reply with the Recovery Act reporting requirements. In other words, we are commendably meeting the significant reporting challenge of the Recovery Act, but we need to reexamine our reporting infrastructure so

that it better aligns to our efforts.

It is with this backdrop that OMB, working closely with the community, has established the following critical priorities moving forward. First, eliminating waste by reducing improper payments and/

or investments in unneeded real estate. Second, closing the efficiency and technology gap in financial operations by ending an era

of failed large-scale financial system modernizations in favor of

shorter term targeted solution that reduces risk and cost by focusing only on our most critical business needs and aligning better to

the capacity of our organizations to manage change.

And, third, promoting accountability and innovation through

open government, by improving the reliability and completeness of

Federal spend data, importantly including meeting the full mandate of the Federal Accounting and Transparency Act to capture

sub-award data on USASPENDING.GOV, and by aligning the financial reporting model so that the information we report and

audit is the most relevant to the public and agency decisionmakers,

and that the internal controls that we scrutinize and prioritize resources to strengthen are more closely tied to the most significant

financial risks we face.

My written testimony, along with the 2009 financial report, go

into additional detail on each of these priorities.

I look forward to working with this subcommittee and other

Members of Congress as we tackle these important issues.

Thank you again for inviting me to testify today. I look forward

to answering your questions.

[The prepared statement of Mr. Werfel follows:]

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Ms. WATSON. Thank you.

We will proceed with Mr. Millette.

STATEMENT OF JAMES MILLETTE

Mr. MILLETTE. Chairwoman Watson, Mr. Schock, and other distinguished Members, I am pleased to have the opportunity today

to testify on the State Department’s 2009 financial statements. Our

annual audit and agency financial report is the cornerstone of our

efforts to disclose the Department’s financial status and provide

transparency and accountability to the U.S. people. We take this

responsibility very seriously and take great pride in the improvements we have made in the Department’s financial platform over

the last decade.

The Department’s financial activities are complex and set against

a backdrop of global issues and engagements we face with nations

around the world carrying out our foreign policy. They reflect the

immense financial work that occurs behind scenes every day by the

Department’s financial officials operating at 260 locations around

the world in over 172 different countries, operating with 150 different currencies, in often very dangerous places like Haiti, Afghanistan, and Iraq.

They also reflect our position as a shared financial service provider for over 40 customer agencies overseas, and we also have

teamed with the Agency for National Development and run their

financial system, as well.

We know that strong financial management and interest controls

provide the building blocks to support the transparency of operations and accountability to effectively manage limited resources.

We have worked diligently to embrace the broadening landscape of

financial compliance and reporting requirements and proactively

incorporate them into our ongoing budgetary and financial operations on a day-to-day basis.

We are proud that the Department has received clean audit opinions for eight out of the last 10 years. Last year’s annual audit

process was extremely difficult as we engaged a new audit firm to

conduct our annual audit. Our experience told us that our worldwide operations and complexities carrying out our foreign policy

was going to be difficult for a new firm to ascertain in the tight

timeframes. Unfortunately, this proved so in the outcome, and we

believe that the outcome of the audit doesn’t really reflect the status of our finances.

Coming into the fiscal year 2009, the Department faced no previously identified material weakness in internal controls, and significant work had been done to address the 2008 significant deficiencies. In addition, I am pleased to report the Department maintains a robust system of internal controls overseen by the Department’s senior leadership and administered by the Bureau of Resource Management.

For 2009 the Secretary was able to provide an overall unqualified

statement of assurance about the Department’s internal controls in

accordance with the Federal Financial Manager’s Integrity Act, as

well as an unqualified statement of assurance for internal controls

on financial reporting. However, the Department’s new auditor

issued an unqualified opinion for our consolidated statement of net

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costs and qualified opinions for our consolidated balance sheet and

consolidated statement of net position.

The qualified opinions were based on the auditor’s inability to

satisfy themselves that property and equipment were free of material misstatements as of September 30, 2009. The new auditors

were not able to satisfy themselves as to whether 2009 combined

statement of budgetary resources was free of material

misstatement in time to meet the deadlines, even though we were

given a 30-day extension.

The new auditor identified three material weaknesses and three

significant deficiencies that are the result of their work in 2009.

The material weaknesses related to the need for the International

boundary and Water Commission’s liability statements refer to the

accounting for our property and equipment and the timeliness of

our fairness reporting. While we were extremely disappointed in

the results, we are committed to addressing the items cited by the

auditor and implementing corrective action plans to ensure we are

in a better position this year as we move down the process.

I have included information in my statement on all these material weaknesses and would be happy to answer any questions.

[The prepared statement of Mr. Millette follows:]

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Ms. WATSON. Thank you, Mr. Millette.

Let’s now proceed with Mr. Easton.

STATEMENT OF MARK EASTON

Mr. EASTON. Thank you. Chairwoman Watson, Congressman

Schock, distinguished members of the committee, thank you for the

opportunity to appear today, and thank you especially for your continued support of America’s armed forces. Having worn the uniform

for many years, I personally appreciate that support.

I have submitted a statement for the record and would like to

summarize it briefly.

I was asked to speak about the results of DOD’s financial statement audit for fiscal year 2009. As you know, the department continues to receive a disclaimer of opinion on our consolidated financial statements, but we are making progress, although major challenges remain from allowing us to achieve an unqualified opinion.

For one thing, many of our systems are old and handle information in ways never intended to meet current audit standards. This

problem makes financial auditability extremely difficult in a large

organization that is functionally decentralized. Our legacy systems

are also not well integrated, and they do not consistently collect

data at the transaction level. This leads to business processes that

tend to be non-standard, often lacking effective financial controls,

and in these cases consistent application of additional compensating controls becomes critical.

The organizations and financial entities within DOD—and there

are a few, getting larger and more complex—that have achieved

auditability have been small enough to be able to overcome those

deficiencies thus far.

The scale of our business operation adds to the problem. Every business day we obligate between $2 and $3 billion and handle

hundreds of thousands of payment transactions, often under combat conditions. Given our size and mission requirements, it would

be prohibitively costly to deploy an army of accountants to solve

our problems manually. That is specifically why our current DOD

business transformation is so critical, including the ongoing development of a business enterprise architecture and introduction of

modern systems, both of which initiatives are well underway.

In short, we need a more disciplined automated business environment to maintain necessary controls cost effectively, but meanwhile we are making progress. The auditor’s report on DOD’s financial statements includes description of several material financial reporting weaknesses, and the department is following a revised strategy to address these weaknesses and improve the quality

of the financial management information that are used each day by

the department.

My written statement contains details of our strategy and

progress and several current areas of weakness, including property

management, environmental liabilities, military health care liabilities, funds bound with Treasury reconciliation, and intergovernmental transactions, but there is much more work to do.

In retrospect, earlier efforts, while making progress, lacked a coherent strategy to engage the full enterprise. Our new strategy was

instituted a little bit less than a year ago by the department’s new

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comptroller and CFO, who saw that DOD lacked a common goal

and priorities in the audit readiness area.

As a result, he consulted with senior leaders and military departments and defense agency, our colleagues that you heard from at

OMB, GAO, as well as congressional staff members, and last August we issued a memorandum that outlined the new priorities.

These priorities focused on improving the quality, accuracy, and reliability of financial information that we use every day. This will

focus on budgetary information, specifically that we use for resource allocation decisions, and the physical accountability, existence, and completeness of our assets that our war fighters rely

upon.

So why is this going to be different? Congress has showed support for our new approach and identified that in the National Defense Authorization Act of 2010. Since then, we have taken specific

steps to implement.

First, the initiative has the appropriate priority and full senior

leadership support. It is 1 of our top 10 business priorities.

Second, we have a quarterly governance board that is chaired by

the department’s CFO. It includes a new office that has been established, our chief management officers and their representatives, as

well as our comptrollers, in addition to having personal oversight

by Deputy Secretary Lynn, our chief management officer.

Third, we have obtained resources to support our plan. Allocating

resources for this kind of initiative competes with other war-fighting priorities, but as we have seen in southwest Asia, good, strong

business practices are a force multiplier.

Fourth, we have made improvement of audit readiness among

the components, one of our high-priority performance goals in the

OMB priority, and we focus on that and measure each year.

Recognizing the importance of demonstrating measured progress,

our plan includes interim goals that we will achieve, that we intend to achieve each year. We also will provide Congress with a

semi-annual report on our financial improvement and audit readiness every May and November, and the first report will be issued

within the next month.

In addition, we expect to report to Congress on a feasible approach for achieving fully auditable statements.

For now we are focusing, as I mentioned, on the financial information that are most useful to management. That will allow us to

establish a firm foundation. That foundation is internal controls

and installation of more capable business systems that will support

our auditability, as well as the auditability of the Federal Government’s statements.

As we look ahead and implement this approach, we believe it is

important to also buildupon the existing strengths within Defense

financial management. Our Defense financial managers are providing DOD’s war fighters the resources and financial services needed

to meet their national security objectives, and we are doing this

around the world, including Iraq and Afghanistan.

We also have effective financial processes in many areas. Our

payment processes produce timely and accurate payments in a very

high percentage of cases. Interest payments have been dramatically

reduced. Our process with which we distribute and account for

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funds has been externally validated. And so we have progress that

we can buildupon.

My point is that we are doing much in our business well, but further improvements are necessary, and a revised focus on our business processes is using a financial auditor’s lens.

In conclusion, our ongoing efforts to improve the quality of financial information will build on current strengths, producing changes

that will ultimately result in a favorable opinion. We need to make

improvements in the Department of Defense financial management

while continuing to provide strong budget and financial information to our war fighters.

As the Deputy Chief Financial Officer, I am personally committed to this initiative. We are striving to support our national security mission by addressing these material weaknesses. Most importantly, we need to reinforce your confidence in our stewardship

over public funds.

Thank you for inviting me today and for your support for our efforts. I welcome your questions.

[The prepared statement of Mr. Easton follows:]

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Ms. WATSON. I would like to thank each one of the witnesses in

this first panel.

We are now going to move to the question period and proceed

under the 5-minute rule. I am going to start the questioning, and

my first question, comment and then question, will be to Mr.

Dodaro, and then we will move to the other witnesses, as well.

GAO has frequently cited the Federal Government’s ineffective

process for preparing the consolidated financial statements as a

major impediment that precludes the issuance of an audit opinion.

Which agencies have been relatively more successful in dealing

with this challenge? I heard several of the witnesses refer to Treasury Department, but what have the agencies done differently, and

could their experiences be used to better address this problem in

other agencies? And when do you anticipate that this material

weakness will be resolved and no longer cited in the U.S. Government reports?

Mr. DODARO. The issue of the preparation of the consolidated financial statements has really three dimensions to it. One, you need

to have good information at the individual agencies. As we have

heard this morning, the Department of Defense, Homeland Security, NASA, and State have not been able to get unqualified opinions, some for many years, so that is one issue. You have to have

the foundation in the individual agencies.

Second is that the individual agency’s financial statements need

to be consistent with Treasury’s accumulated financial reporting

that it has in place, and so far there have been some difficulties

reconciling the audited financial statements of individual deposition and agencies with Treasury’s records.

Ms. WATSON. Are there firewalls between these agencies? Are

they not sharing? What do you find?

Mr. DODARO. There is sharing of information, but part of the

problem is that there are different systems——

Ms. WATSON. Tracking.

Mr. DODARO [continuing]. That keep the records. This is particularly problematic in the agencies resolving differences in these

intergovernmental transactions, themselves, and there are tens of

billions, if not more, transactions that take place, and for a decade

or more now different things have been tried in order to get the

agencies to reach agreement among themselves. OMB and Treasury have tried to facilitate those type of reconciliations, and some

progress has been made, but not enough in that area.

Now, some of the new ideas that OMB and Treasury are beginning in this new innovation office that they are creating to have

more central accounting systems with standardized definitions and

having data from the vendors offers a lot of promise to use modern

technology to solve this issue. And unless there are better technical

applications or the technology, as Congressman Issa mentioned—

I mean, this problem is so pervasive, and you have so many different systems it is hard to do that reconciliation.

So I am hopeful that the concepts underpinning some of these

new initiatives that OMB and Treasury are just starting—I know

they know the issues very well. The solutions have eluded them to

date, but I am hopeful with new applications and technology that

they can be solved.

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We have had a decade of experience now trying to solve this with

the agencies working among themselves and that hasn’t proven to

be fruitful.

Ms. WATSON. Well, we know technology is really progressing,

keeping up with it——

Mr. DODARO. Right.

Ms. WATSON [continuing]. And being that it paid for it is one of

the stumbling blocks.

In testimony before this committee last summer, you expressed

concern about the January 9, 2009, revision of OMB Circular No.

A–27. Do you remember that? Financial management systems?

And noting that the revised circular sustainability reduces the

scope and the rigor of compliance testing for agency and financial

management systems?

Mr. DODARO. Yes. My understanding is that there will be further

refinements to that circular coming out shortly, and we are going

to take a look at that. And once we make that assessment, we

would be happy to provide our assessment to the subcommittee.

Ms. WATSON. That would be great.

How might the closing of the financial systems integration office

further affect agency compliance with fiscal year 2010 financial reporting requirements? Were you aware?

Mr. DODARO. Yes. Yes, I was aware that action was going to take

place. We closely coordinate with OMB and Treasury to the joint

financial management improvement program. I believe that the

concerns underpinning that and the fact that there have been a lot

of expenditures made to improvement systems, they haven’t always

made the necessary improvements.

And I believe that this needs to be monitored carefully going forward. I think that, again, the concepts that OMB and Treasury are

moving to I think are worthy concepts, but a lot will rely on the

implementation of the programs. And there will have to be careful

attention to make sure that the standards that were in place before

are adhered to.

But I think the fundamental premise that technology was moving faster than the agencies could keep up with was a correct interpretation of the situation, and I do think that their new efforts can

be effective, but a lot will depend on the implementation and the

details.

Ms. WATSON. Thank you so much.

We are now going to proceed on with the minority member, Mr.

Schock.

Mr. SCHOCK. Thank you, Madam Chairman. And thank you to

our panelists for your remarks.

Obviously, you are the messengers, but as our constituents want

to hold us accountable back home, we have to look to you to be accountable for the oversight.

There is so much content in this, and I hope this is, as Mr. Issa

said, the first of many hearings on this issue, because one of the

numbers that is glaring to me is this $98 billion figure. I am reminded of a year ago when the President brought together his Cabinet and said, we are going to begin by tackling the budget deficit,

by asking my Cabinet members to bring forward $100 million in

voluntary savings for next year over this year.

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Now, I don’t know where we are with getting those recommended $100 million in potential savings, but I know one thing: $100 million is a pittance compared to $100 billion. And with all the talk

this year with the health care reform bill and cutting out fraud,

waste, and abuse, it would seem to me one of the biggest abuses

in these discoveries is the fact that we potentially paid $98 billion

of taxpayer money to people who shouldn’t have received the

money.

I would feel a little better if we were moving in the right direction, but it is almost a 30 percent increase over the last year’s estimate of unnecessary payments.

So I guess my question is, to Mr. Dodaro and Mr. Werfel, if you

feel comfortable piping in, is: what are we doing and what do we

need to do to ensure that, No. 1, we are moving in the right direction and hopefully some day we are not spending nearly $100 billion of taxpayer money to folks who shouldn’t receive this. Clearly,

this wouldn’t be acceptable in the private sector, and I think tribe

just perpetuates the notion that many of our taxpayers and constituents back home have that the Federal Government doesn’t do

a very good job of managing their tax dollars.

Mr. DODARO. Thank you, Congressman Schock. You are right.

This situation is not acceptable and there needs to be action taken

to address it. One of the things I would point out is that one of the

success stories coming out of the CFO Act and the emphasis on financial statements has been the identification and quantification of

improper payments. Prior to that, there was really no quantification of it.

Now, we are moving in the right direction. What needs to be

done is, No. 1, not all programs that should be reporting improper

payments are reporting improper payments yet. Part D in the

Medicare program, for example, is not yet quantifying improper

payments, and there is a number of other areas.

No. 2, there needs to be consistent methodologies used over a period of time so that you can have comparable information. Right

now, one of the big reasons for the increase has been a change in

the methodology used under the Medicare program and the improper payments.

Third, there needs to be key accountability, targets, and metrics

expressed for each of these individual programs, because some of

them have a long history of data, theirs have just one data point.

I might point out—and I am sure Mr. Werfel elaborated on it—is

that OMB has just put out guidance implementing an executive

order to name accountable officials for each of the areas where

there are improper payments, to put a dashboard in place and

metrix, and to report targets for reducing improper payments.

I am very encouraged by those, and I believe those will provide

the foundation for further evaluations or progress.

Mr. SCHOCK. Let me followup to that. I am aware of the Executive order, but from my perspective this doesn’t seem to be a problem of not having the appropriate number of experts. In other

words, I don’t have reason to suggest that the people who are working on this in pastures who have attempted to reduce the number

organization improper payments were not capable of doing so. And

I am asking for your opinion on this.

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Mr. DODARO. Right.

Mr. SCHOCK. I might suggest that perhaps it is the data in the

systems that we are using to be able to hold these different agencies internally, themselves, accountable for how they are paying

out, whether it is their POs or their accounting systems. And so my

question would be: do you think it would be appropriate for Congress to mandate a universal accounting system and collection of

data so that across the systems, across these different departments

they would all be using a similar mechanism, which would not only

allow them to be held accountable but, more importantly, would

allow folks like yourself, Mr. Werfel, and all the respective parties

to appropriately audit them and better hold them accountable.

Mr. DODARO. The systems issues are definitely integral to solving

the problem, but each of the programs are a little bit different, so

I think Congress should begin examining each of the individual

programs and make sure they have the appropriate systems in

place. Now, part of the dilemma in solving this problem is the $98 billion is an estimate, so it is not an accumulation of a lot of specific

improper payments that then you could go pursue, and there is a

lot of reasons. In some cases they are paying people who aren’t eligible for the program. In other cases there are duplicate payments

or overpayments. There are a lot of reasons and there are a lot of

different reasons for the different programs.

But you are right: better systems are the key, but they need to

be tailored to the specific types of programs.

Ms. WATSON. Thank you. Your time is up.

Mr. Connolly.

Mr. CONNOLLY. Thank you, Madam Chairwoman.

Before you start my time, Mr. Dodaro, I noticed you may have

some back problems, and if you would be more comfortable answering my questions standing up, please feel free to do so.

Mr. DODARO. I appreciate your consideration.

Mr. CONNOLLY. I am a fellow back sufferer.

Thank you, Madam Chairwoman.

I am so glad my friend and colleague from Illinois brought up the

issue of overpayments. Don’t I recall a GAO report last fall that

cited $61 billion in overpayments to Medicare?

Mr. DODARO. I believe the number last year for Medicare and

Medicaid was close to the 40-some billion. Let me just check. OK,

it was over 50.

Mr. CONNOLLY. Over 50?

Mr. DODARO. Right.

Mr. CONNOLLY. And don’t I recall that the health care reform bill

we passed recently in part is financed by trying to get our arms

around some of those overpayments, a substantial portion of those

overpayments; is that not true?

Mr. DODARO. I believe there are efforts. I am not as—I am not

completely sure on that answer. I know there is a lot of effort to

try to reduce some of the waste in those programs.

Mr. CONNOLLY. Right. I just find it ironic that some on the other

side of the aisle expressed enormous skepticism about our ability

to finance health care by getting our arms around overpayments.

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ments are substantial, and if we can get our arms around those

overpayments—and I believe the health care reform bill, by the

way, enhances enforcement to try to get at these overpayments—

as a matter of fact, we can reduce Medicare and Medicaid expenditures without eating into benefits.

In theory would that not be true, Mr. Dodaro?

Mr. DODARO. There is definitely action that can be taken to

eliminate waste and fraud in the health care area. I think that is

well demonstrated.

Mr. CONNOLLY. Thank you.

Let me ask a question, maybe to both you and Mr. Gregg. Would

it be fair to say that one of the chief, if not the chief, contributing

factor to deficits, growing deficits in the out years, is, in fact,

health care costs to the Federal budget?

Mr. DODARO. Definitely. Rising health care costs and changing

demographics, but the health care cost, rising health care costs, are

the primary driver. I will ask Mr. Gregg.

Mr. GREGG. I think it is a series of things, Congressman, everything from Medicare, Medicaid, Social Security, Defense, and on

down the list. For fiscal year 2009, also unemployment was exceptionally high. And we also had, like, $460 billion of revenues that

had been there the previous year but didn’t show up because of the

economy. So it is a long list of things. Certainly health care is one

of the big drivers.

Mr. CONNOLLY. You saw the CBO report that said that in the

first 10 years the health care reform bill we passed in Congress

would reduce the total debt by about $138 billion, but in the second

10 years would reduce it by at least $1.2 trillion. Any reason to

doubt those numbers?

Mr. GREGG. I am not an expert in that, but CBO is well respected, so I think they have a lot of credibility.

Mr. CONNOLLY. Just interested. Have either of you ever seen any

legislation passed by Congress before that has ever been projected

to reduce the deficit by $1.2 trillion, combined $1.3 trillion plus

over 20 years?

Mr. GREGG. I can’t say that I have.

Mr. DODARO. I can’t think of anything offhand.

Mr. CONNOLLY. I can’t either. Thank you.

Mr. Dodaro, if you look at declining, where we were as a percentage of GDP in terms of debt immediately after World War II, and

you look at the next 30- or even 40-year time period, would it be

fair to say that actually we brought down the debt as a percentage

of GDP, primarily through a combination of economic growth and

other control measures, not so much by cutting spending?

Mr. DODARO. If my memory serves me right in terms of historical

purposes, there was considerable economic growth, which was a

contributing factor, but I do think there were fiscal discipline or approaches that were put in place, as well, to help control and contain and make appropriate decisions from a fiscal prudence standpoint.

Mr. CONNOLLY. But I mean if you looked at Federal spending

patterns, for example, in the 1960’s, big spurt in growth.

Mr. DODARO. There was a big spurt in growth, but there were

also small surpluses and——

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Mr. CONNOLLY. But we weren’t slashing Federal spending, is my

point, in that 40-year time period under either Republican or

Democratic administrations.

Mr. DODARO. No, but there was control in making sure that the

Federal Government spending decisions would be close to anticipated revenue collection during that period of time. Otherwise, you

wouldn’t have had that pattern of growth. That is all I am saying.

Economic growth is important and will be important going forward

to address this problem, but economic growth alone, in our opinion,

won’t solve it by itself.

Mr. CONNOLLY. I would agree with you, of course, but I am only

getting at the historic record would suggest we did not bring down

the debt as a percentage of GDP by massive spending cuts. That

is not what the record shows.

Mr. DODARO. Well, there is a lot of reasons for it. I agree with

that.

Mr. CONNOLLY. Thank you. I believe my time is up. I call on Mr.

Cuellar from Texas.

Mr. CUELLAR. Thank you very much. I will save my questions for

the next set of panelists, but I do want to thank all of you for being

here. I think the issues that you all have brought up are so important for all of us and I do want to thank all of you, but I want to

reserve my questions for the next panel.

Ms. WATSON. I have just a few more questions I would like to

address for the panel, and so we will do a second round. If there

is anything else that you would like to chime in on, please let me

know.

Since improper payments have been mentioned several times,

OMB recently issued guidance for the implementation of Executive

Order 13520, reducing improper payments. What impact do you

think these additional tools would likely have on efforts not only

to reduce but to prevent future improper payments? GAO has recommended that OMB take actions to ensure that smaller programs

with higher risks are covered by the Single Audit Act, so any one

of you that would like to?

Mr. WERFEL. Ms. Chairwoman, I will address that question.

There has been a good discussion so far on improper payments.

I would like to, before I get to your direct question, just respond

to some of the earlier comments that were made.

First of all, one of the important—let’s start with the premise

that $98 billion in improper payments is completely unacceptable

and clear action needs to be taken. One of the things that has

caused that number to go up over time has been basically an increase in outlays, increase in unemployment outlays, so even if you

have, for example, in the unemployment program a constant error

rate of 10 percent, as the numbers go up in terms of the outlays

the improper payment total goes up, and we have seen that both

in the health care realm and unemployment insurance and other

ways.

Another reason why the number goes up is because we are measuring more programs and we are getting better at detecting where

our errors are and uncovering them, so the $98 billion is not good

news, but within that construct there are some positive elements,

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in particular our ability to find and root out these errors more effectively.

We respect to the Executive order, what we have done under the

Executive order is take the collective 8 years of experience managing the improper payments problem, since the Improper Payments

Information Act was first brought to law in 2002, and tried to define what we believe to be the most effective targeted solutions that

are going to move the dial.

Mr. Dodaro mentioned assigning a senior accountable official in

each organization for improper payments, and we have already

seen that has engaged a higher level in senior leadership attention

to the issue.

We have also looked a lot at incentives, and the Executive order

tackles this issue of incentives in terms of one of the major payers

in improper payments are State governments. Many of these programs, for example Medicaid and others, are administered through

State governments, and it is important that the State government

officials, who are playing such a critical role in implementing these

programs, feel accountable and incentivized to try to measure and

do more on their error. So one of the things the Executive order

does, it establishes a working group, an intergovernmental working

group, to define and identify different incentives that can be put in

place to drive States to do more to drive errors down.

We are also looking at incentives for contractors to report improper payments that are paid to them earlier in the process so

they are part of the solution as we work to prevent these errors.

And, Ms. Chairwoman, you mentioned the single audit process.

One of the things that the Executive order does is it recognizes

that the single audit, which is the main driver which Federal funds

are evaluated, the appropriateness of how they are spent is done

through the single audit at the State and local level.

And if you look at the single audit today—and we have started

to examine it very closely—a lot of the questions that are scrutinized during the single audit process don’t relate to the bottom line

of whether the money was paid out correctly and for the right purposes. There are a lot of what could be arguably termed extraneous

questions during the single audit process about other compliance

elements which aren’t essential to the bottom line question of

whether the money is being paid out correctly.

So what we are looking to do is looking at ways of shifting the

footprint or the focus of the single audit so that we are pounding

away at the question of whether these moneys were spent correctly

and in the right amount for the right purpose, rather than some

of the other what I would argue are less central compliance issues,

because in any audit—and I am sure Mr. Dodaro would concur

with this—there is limited resources, so you have to use a risk

management approach in terms of where you scrutinize.

We believe at OMB that the single audit is a place where we can

really shift our emphasis to improper payments in a way that is

going to improve our results in this area.

Ms. WATSON. We have many, many more questions that we

would like to ask, but being aware of the time we are going to

move to the second panel.

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I want to thank each and every one of you for your testimony.

Other questions we can send to you in writing, and we would hope

to get a response that we will share with the committee and with

the full committee.

Thank you so very much.

It is the policy in Government and Reform to swear in all the

witnesses before you testify, and I would like to ask all of you to

please stand and raise your right hands.

[Witnesses sworn.]

Ms. WATSON. Let the record reflect that the witnesses answered

in the affirmative.

I will now take a moment to introduce our distinguished witnesses.

Mr. John Barton is the manager of the public information and

report production for the Texas Legislative Board, where he has

worked since 1984. He oversees the preparation of budget evaluation and performance related publications and analysis for the

Texas Legislature. You have a counterpart in California by the

name of John Barton. You might know him. His brother was here

in the House.

Mr. Michael J. Hettinger is director of practice planning and

marketing for the Grant Thornton LLPD’s global public sector and

practice. Mr. Hettinger oversees firm-wide strategic business planning and Federal marketing activities. Previously, Mr. Hettinger

served as staff director of the House Committee on Oversight and

Government Reform’s Subcommittee on Government Management,

Finance, and Accountability, where he developed and helped to

pass the Department of Homeland Security Financial Accountability Act. He also worked as a senior lobbyist at Patton Boggs LLP,

and as chief of staff to former Representative Tom Davis of Virginia.

Veronique de Rugy earned her doctorate in economics at the University of Paris and the Patheon Sarbonne in the areas of public

choice and public finance. She currently serves as the senior research fellow at the Mercatus Center at George Mason University,

where she also previously served as a post-doctoral fellow and visiting scholar.

I welcome all of you and thank you for your patience. I ask that

each one of the witnesses now give a brief summary of your testimony and keep the summary, if you can, under 5 minutes in duration, because your complete written statement will be included in

the hearing record.

Mr. Barton, you may proceed.

STATEMENTS OF JOHN BARTON, MANAGER OF PUBLIC INFORMATION, TEXAS LEGISLATIVE BUDGET BOARD; MICHAEL J.

HETTINGER, DIRECTOR OF PRACTICE PLANNING AND MARKETING, GRANT THORNTON LLP; AND VERONIQUE DE RUGY,

PH.D., SENIOR RESEARCH FELLOW, MERCATUS CENTER,

GEORGE MASON UNIVERSITY

STATEMENT OF JOHN BARTON

Mr. BARTON. Chairwoman Watson, Mr. Cuellar, good morning.

My name is John Barton and I am the public information officer

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and manager of report production for the Texas Legislative Budget

Board. I have been on the staff of this nonpartisan, highly respected legislative agency for the past 25 years. During this time,

we have developed and implemented numerous good government

accountability initiatives. Please see Exhibit A.

I am privileged to serve as a resource witness on H.R. 2142. This

morning I would like to touch upon three of the good government

accountability initiatives that were developed and implemented

during the 1990’s, namely Statewide strategic planning, performance budgeting, and performance monitoring. These initiatives are

the foundation of our fiscal accountability system, a system that

Representative Cuellar, as sponsor of H.R. 2142, championed in

Texas throughout the 1990’s.

In 1991, Texas faced a massive budget deficit. To engender support for a tax bill and a response to a growing sense of frustration

on the part of the legislature and the public as to what are we getting for our money, three inter-dependent initiatives were subsequently enacted: strategic planning, performance budgeting, and

performance monitoring. Please see Exhibit B.

The strategic planning process requires State agencies to identify

the goals and strategies and performance measures that constitute

the basis for the biennial request for appropriations. The strategic

planning process is a long-term iterative and future oriented process of assessment, goal setting, and decisionmaking. An agency’s

strategic plan is used as a starting point for developing the agency’s budget structure, i.e., goals, strategies, measurements, measure definitions, and items of appropriation. Please see Exhibit C.

The development of performance budgets occurred during the legislative appropriations process. Performance measures, definitions,

and targets were established for each item of appropriation, and

each agency develops a budget structure that includes its performance measures and definitions and targets. Please see Exhibit D for

an example.

Once the State budget is enacted, performance monitoring involves each agency reporting to the Legislative Budget Board electronically every quarter on their success in achieving agency-specific performance targets. To ensure the integrity of the performance information that is being reported, measure certification audits are conducted by the State auditor’s office on an ongoing basis.

Assessments of how well agencies are able to achieve their performance targets provide essential information for the next

iteration of the biennial appropriations and strategic planning process.

After more than 15 years of daily use, we have learned many important lessons about our fiscal accountability system. For example, our system enables legislators and citizens alike to, one, understand what we are getting for our money, two, assess agency and

program performance, and, three, improve and ensure greater governmental accountability and transparency. That said, the system

cannot and should not be used to abdicate the hard policy budget

and political decisions that we as public servants have an obligation to make in the best interest of the public and the taxpayer.

I should note that Texas’ fiscal accountability system is the foremost system of its type in the United States. During the past 15

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years, 28 delegations of foreign government officials representing

38 countries have traveled to Austin to learn how Texas has integrated strategic planning, performance budgeting, and performance

monitoring into a seamless system that promotes Statewide accountability, effectiveness, and efficiency, and, most importantly,

extols the many virtues of budget transparency.

I would be delighted to respond to any questions. Thank you very

much.

[The prepared statement of Mr. Barton follows:]

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Ms. WATSON. Thank you, Mr. Barton.

Mr. Hettinger, you may proceed, please.

STATEMENT OF MICHAEL HETTINGER

Mr. HETTINGER. Thank you very much. Madam Chair, members

of the subcommittee, Mr. Cuellar, thank you very much for the opportunity to testify today. I have a longer written statement which

I submitted to the committee, and I would like to have that included in the record, but I will try to summarize those remarks

here this morning.

As was previously mentioned, from 2003 to 2006 I served as staff

director of this subcommittee, then known as the Subcommittee on

Government Management, Finance, and Accountability, then under

the leadership of Todd Platts of Pennsylvania. As a result, I know

first-hand that the work of this subcommittee is extremely important to the efficient and effective operation of the Federal Government.

Also, as was previously mentioned, I am currently a director with

Grant Thornton’s global public sector practice, but I am here today

as a witness based on my experience in the U.S. Congress, specifically my time on this subcommittee, and my testimony does not

necessarily reflect the views of Grant Thornton.

My testimony today is really focused on two areas of specific interest to the subcommittee: Government performance and budgeting, generally, and, second, H.R. 2142, Mr. Cuellar’s legislation,

known as the Government Efficiency, Effectiveness, and Performance Improvement Act of 2009.

Linking budgets to performance with the expectation of achieving

better results is extremely important and something I know this

subcommittee has spent a great deal of time focused on. When Congress passed the Government Performance and Results Act

[GPRA], in 1993, I believe it envisioned a comprehensive integration of agency annual performance plans with the annual budget

process, a worthwhile goal. GPRA also sought a more open, accountable, and transparent Government. As we sit here today, 17

years after GPRA’s enactment, I believe we continue to strive to

achieve that vision.

GPRA did provide a sound baseline for linking budget and performance. Agency strategic plans as required under GPRA force

agencies to think strategically about the implementation of their

budgets and how those budget expenditures achieve results. I believe we have seen significant improvement as a result of GPRA.

Building on GPRA and prior management improvement efforts,

such as President Clinton’s reinventing Government, the Bush administration implemented the President’s management agenda to

drive agencies to better performance and results. The PMA also implemented a management tool known as the Program Assessment

Rating Tool [PART]. PART, as I am sure the committee members

know, over the 8 years of the Bush administration reviewed the

performance of all programs 20 percent a year over a 5-year period,

utilizing a simple questionnaire, and then making that information

available to the general public via RESULTS.GOV. This effort,

while well intentioned, was not without controversy, both at the

agency level and here in Congress, in large part due to the fact

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that the effort was driven by OMB, as opposed to the Congress or

the individual agencies. In addition, many stakeholders felt the reviews were being used for political purposes.

This brings me to my discussion of Representative Cuellar’s legislation, H.R. 2142, the Government Efficiency, Effectiveness, and

Performance Improvement Act of 2009. This legislation is very

similar to legislation that Representative Platts and I developed in

2004 known as the Program Assessment and Results Act [PAR], reported out of this committee in the 108th Congress. Like Representative Cuellar’s bill, this legislation sought to ensure the periodic review of Government programs to measure their efficiency

and effectiveness.

In addition to the basic requirement of this legislation that all

Federal programs be reviewed at least once every 5 years, H.R.

2142 includes a number of other key provisions that I believe are

essential should this bill move forward. These include, first, providing for advanced publication of the list of programs to be reviewed.

Second, requiring the development of a process to receive stakeholder comment. Third, requiring the reporting of the results of the

program assessments through the annual budget process. And last,

requiring the development of an improvement plan to address

weaknesses identified through these reviews.

The bill also designates the agency performance improvement officer as the key official responsible for program assessment and review, a position, I would add, that did not exist when Representative Platts’ legislation was introduced.

I wanted to share with the committee today some of the important lessons I learned through the effort to move Representative

Platts’ legislation through this committee. First and foremost, let

me say I believe the concept of reviewing Federal programs for effectiveness on a regular basis is a good idea. It is only through this

type of effort that we are able to determine if the programs are

achieving the results we desire.

As you consider H.R. 2142, I encourage you to look to the following issues that were raised by various stakeholders during consideration of Representative Platt’s legislation.

First, congressional intent must be an overriding consideration

when determining the effectiveness of a program. In the vast majority of cases, there is a legislative underpinning to a Federal program, and, while that program may have changed or evolved over

time, the intent of Congress when that legislation was passed or

the express congressional content as the program evolved must be

a strong factor in determining its effectiveness. I encourage the

committee when looking at this legislation to work with their counterparts on the Appropriations Committee, as well as the Authorization Committees of jurisdiction and obtain their input on the

bill.

Second, reviews must be empirical, fact-based, and made without

political judgment.

Third, the metrics used to assess the effectiveness must match

the intent of the program, i.e., there must be agreement in advance

on what outcome the program was intended to achieve, and it must

be judged against that intended outcome.

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Fourth, some results are subjective and therefore it is more difficult to assess the effectiveness of certain programs than others.

Fifth, any effort to review program effectiveness must be driven

at the agency level rather than dictated from OMB. OMB should,

however, play an active advisory role in the process.

Last, common sense must prevail.

I applaud the committee for its ongoing efforts to improve the

transparency, efficiency, and effectiveness of the Federal Government. The more transparent our Government is, the more I believe

the citizens of this country will be able to trust that their hardearned tax dollars are being used in a way that achieves results.

I also applaud Representative Cuellar for his ongoing efforts to

enhance the legislative debate that Chairman Platts started 5

years ago regarding the need to review the effectiveness of Government programs on a recurring basis.

Thank you again for the opportunity to appear before the subcommittee today. I would be happy to answer any questions.

[The prepared statement of Mr. Hettinger follows:]

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Ms. WATSON. Thank you.

Now Ms. de Rugy.

STATEMENT OF VERONIQUE DE RUGY

Ms. DE RUGY. Good morning, Chairwoman Watson and members

of this subcommittee. It is an honor to appear before you today to

discuss the financial situation of the U.S. Government.

My name is Veronique de Rugy. I am a senior research fellow at

the Mercatus Center at George Mason University, a research based

organization where I study budget and tax issues. It is in this capacity that I have studied and reported on America’s fiscal situation for a number of years.

As GAO has noticed, America’s financial situation is

unsustainable. In 2009, the Federal Government ran a $1.4 trillion

deficit. That reports 10 percent of GDP, a level unseen since the

second World War. More worrisome, the CBO projects that without

policy changes, we will be running annual average deficit of $1 trillion during the next 10 years.

Also, as our Nation’s two most expensive programs, Medicare

and Social Security, continue to grow, the trust fund of these programs will run larger cash-flow deficits. Over the next 75 years,

the Government has promised benefits for these two programs in

excess of anticipated payroll tax revenues equal to $7.7 trillion and

$38 trillion respectively. The Treasury Department estimates that

tax would have to rise by about one-third to pay all the promises

that have been made for these two programs, alone, and OMB estimates that in the absence of massive cuts in Social Security, Medicare, and other programs, or an equivalent massive tax increase,

the national debt will rise to 77 percent of GDP in 2020, 100 percent in GDP in 2030, and more than twice GDP in 2050.

You have heard from other witnesses about the Federal Government’s financial situation, so I will shift gears and focus the rest

of my remarks on two points: first, deficits and debt matters; second, the accounting practices and methods used by the Federal

Government underestimate the gravity of our situation.

First, some commentator on both sides of the aisles continue to

insist this deficit and debt do not matter much. It is important to

understand why they are mistaken. My written testimony details

six reasons why deficit and debt matter, but I will focus on three

here.

First, debt is expensive, and the more that we borrow, the higher

the cost of borrowing. This year, alone, the Federal Government

will pay $700 billion in interest. That is the equivalent of the

money we spent on two wards and the entire budget of the Defense

Department.

Second, large and unsustained deficit and debt cripple economic

growth. Americans simply do not save enough to both lend the Government everything it needs to finance persistent deficit and continue to invest in the growth of the private sector. This means that

every dollar that the Government borrows makes it harder for the

private sector to borrow an extra dollar it needs to invest in the

economy. This hinders economic growth.

Third, a growing debt sends signals to investors that we are becoming risky borrowers. Over the last 2 years, the United States

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had become increasingly reliant on short-term debt, which makes

sense in time of very low interest rates; however, in the long run,

our lenders might reassess the credit risks that the Government

represents and start applying rates to reflect that risk, or simply

might be less willing to lend us money. When that time comes, access to capital will become harder for everyone. It will be more expensive to buy a house, to fund a business, or to save for the future.

To conclude on this point, running deficits can certainly be appropriate at times of particular stress, such as wars and recession,

but in the long run persistent large deficits and growing debt undermine our Nation’s prosperity.

My final point deals with the way that the Federal Government

accounts for its financial. One of the most compelling examples of

this misrepresentation is seen as how the Federal Government accounts for IOUs in the Social Security trust fund. This is on top

of everything GAO has mentioned today.

While the Department of Treasury’s financial statement of the

United States depicts the financial situation of the country much

more accurately than the budget of the United States, as it uses

accrual accounting rather than cash-flow, it is still deceptive because it leaves out some important elements that hide our true

level of debt.

For instance, it does accurately represent some of the Govern- ment’s unfunded liability, but it also leaves out over $4.4 trillion

in intra-governmental debt, $21⁄2 trillion of which is due to Social

Security. This is a breach of trust because it fails to inform taxpayers that the same people who already contributed to the trust

fund will have to contribute once again once the Government starts

repaying its debts to Social Security.

The complex and confusing ways in which the Federal Government goes about accounting for its assets and liability does not

allow policymakers and agency decisionmakers to make informed

decisions about the Nation’s true fiscal position. This needs to

change.

I thank you again for the opportunity to testify on this important

topic, and I look forward to answering your questions.

[The prepared statement of Ms. de Rugy follows:]

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Ms. WATSON. Thank you so much. I really appropriate the witnesses’ input.

Since, Mr. Cuellar, we are really looking at your bill and seeing

if it addresses some of the points that were made by our witnesses,

I am going to turn the questioning over to you. We only have 5

minutes left for the duration of this committee, and I will yield to

you to use those 5 minutes.

Let me just say to the witnesses, too, you need to take into consideration the United States. You need to take into consideration

how we make changes and move forward. And you need to take

into consideration and suggest to us how we serve.

It was mentioned that our Nation’s prosperity, how do we continue to prosper under the current global conditions that are existing today? Do we raise taxes? Do we cut the safety net? What do

we do? So we need your guidance. We need your input. That is the

reason why we are holding these hearings.

I now yield to Mr. Cuellar.

Mr. CUELLAR. Thank you, Madam Chair. Thank you, again, for

allowing this bill to be considered today.

I want to thank all the witnesses for being here. I thank you

very much.

If I can just give a quick background, when we talk about results-oriented Government, it is, I think, an idea that both Democrats and Republicans can work on. If I can just give you my personal experience, back in Texas we started in 1991 with Governor

Ann Richards, then in 1994 Governor Bush at that time—then, of

course, President Bush—came in. One of the concerns I had was

you have a shift from a Democrat to a Republican. Are they going

to change things? Actually, Governor Bush at that time went on

and built on this idea of performance-based budgeting.

In between that in 1993, I guess around that time, under Al

Gore, where this got started on this, there was a gentleman by the

name of John Sharp and a team of Texans that came up here and

basically talked, gave advice and suggestions to the Clinton administration, a lot of it based on what we had done in Texas. Of course,

then the present law that we have built on that.

Then, of course, as the witness, Mr. Hettinger, came in when

then Governor Bush and then President Bush came in, he then

started building up on what was done by President Clinton.

So it is an idea that serves both. It doesn’t matter if you are a

Democrat or a Republican on this particular issue.

Ms. WATSON. Let me just interrupt you here. We were left with

a sizable surplus after the Clinton administration, so that is something that he picked up I think during that time. And now in the

last 8 years we have been down like this. I would hope that in

these hearings we would try to put our thing—and I understand

what you are trying to do, and I quizzed my staff this morning as

to what was the real intent. As we look at performance based, we

are looking at the efficacy of our policies, what works and what

doesn’t, so that we can dig ourselves out. It will be, I think, decades before we dig ourselves out and reduce the deficit.

Mr. CUELLAR. Right. Exactly.

Ms. WATSON. We have to find the right thing.

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Mr. CUELLAR. Another piece of legislation that got passed already, pay-go, pay-go was in place, pay-go got expired in 2003. Two

wars got started. Part D Medicare came in and put in a credit card,

and then we saw what happened to the surplus on that. That is

the pay-go part of it. Today I am talking about results-oriented

Government, which basically means if you put one dollar in you

want to know what you get for that dollar. This is the effort of this.

As you know, under the Blue Dove Coalition, this is one of the

15 measures that coalition is pushing. In fact, some of the Members over here a while ago are all cosponsors of this legislation.

The effort of this is just basically we want to know if we put in

one dollar what are we getting for this dollar. I know that when

I served on the Budget Committee we asked some of the agencies

do we really know what we are getting out of this, and the experts

came in and told us at that time no we don’t, we really don’t know

what we are doing in a lot of the efforts that we are doing.

Basically, if I can just show you what we are trying to do, if we

can move the performance based budgeting, basically what gets

measured gets done. If we don’t know how we are spending our dollars, then we certainly have a problem with that.

Moving on, let me give you a bill pattern. I think this is very important. As an example, in Texas in the 1970’s, early 1970’s, we basically had line items. This is a line item. Basically, you can see

even in the budget you had seasonal help. It was just line items.

We are spending this money here on this and this.

Then we moved into the next one into the 1980’s and you go

more into program spending. If you look at our budget right now,

Madam Chair, we basically in the U.S. Congress have a program

type of spending, combined with a line item also on that.

If you look into the 1990’s—and I think Mr. Barton in your testimony you had something that went a little bit more into—I think

it is a little bit more up there than what I have here, but then you

go into measures. If you put in $1,000, what do you get for the

$1,000. This is what we are trying to get the Federal Government,

because I think our Federal Government’s budget is so stuck in the

almost 1970’s, 1980’s type of budgeting part of it.

My question, Madam Chair and Mr. Barton, if you can address

this, in the early 1990’s Texas was also in a deficit, very severe

type of situation, so we had come in. We are facing the same type

of situation, and I think we are in the perfect time, Madam Chair,

to say we are concerned about spending, we are concerned about

how we are spending the money. Are we getting the best bang for

the dollar? What do we need to do? And I will ask Mr. Barton and

Mr. Hettinger, because, as you know, both of you under Mr. Platt

had similar legislation. We added some changes, of course, but I

want to see if you all can address in a deficit type of situation how

can this bill help.

Mr. BARTON. In 1991 we had a $6 billion budget deficit. The

leadership wanted to pass a $3 billion tax bill, and directed the

Legislative Budget Board and the Texas performance review to

come up with $3 billion in cost savings. That review process took

5 months, involved 120 staff from not only State government but

the private sector, and we were able to produce $3 billion in savings.

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One of the fundamental questions we asked ourselves is whether

or not various State programs were worthwhile. We talk a lot

about efficiency and effectiveness, but we often don’t talk about

whether or not the program is worthwhile to begin with. That was

one of the questions we asked ourselves in 1991.

Subsequent to 1991, we incorporated these review processes on

an ongoing basis. In Texas we have a sunset commission that reviews every agency top to bottom once every 12 years.

Mr. CUELLAR. That was in 1991. That was under Democratic

Governor Ann Richards, Democratically controlled State Senate

and House Members on that, before Bush comes in in 1995—or

1991, I am sorry. Go ahead.

Mr. BARTON. Yes. So we have a once every 12 year sunset review

process that reauthorizes State agencies and looks at whether or

not programs are worthwhile, agencies are worthwhile, as well as

whether or not they are efficient and effective.

We also have an ongoing biennial review of various State programs. The Legislative Budget Board produces on a biennial basis

between 70 and 100 separate reports on any number of the State’s

2,000 programs that receive State appropriations.

And then, in addition, we do have a process that involves the

State auditor’s office, looking at the financial accountability aspects

of agency expenditures.

All told, I think we have a fairly robust system of fiscal accountability that allows us to not again only look at the efficiency and

effectiveness of programs, but the question as to whether or not

they are worthwhile and the extent to which we can use cost/benefit analysis in the appropriations process.

Mr. HETTINGER. Just to add a little bit to those comments and

maybe spin it back to the idea of how this actually helps us to

manage the deficit, I think from my perspective this is one piece.

Program assessment and review is one piece of a larger financial

picture. If you look at what has been done traditionally with the

program assessments and the recommendations that have come as

a part of the budget as a result of those program assessments, I

would venture a guess to say that 75 to 80 percent of the recommended cuts, based on whether they be PART reviews or other

program assessments, Congress has chosen to fund. So that is an

issue that you need to look at.

I had in my broader statement a discussion of sort of my thinking around what I call two budget processes, one being the process

of agencies working with OMB on the development of their budget,

and then the second piece of that being the agency work with their

appropriators to actually put funding behind those programs. They

are really two separate pieces, and when you are talking about program assessments, at least as they have traditionally been done,

those are done in the first part, which is the agency working with

OMB. That is why I think it is important as you look at this legislation that you get the buy-in from the appropriators.

I will say, if we could have gotten buy-in 4 or 5 years ago from

the appropriators, we probably would have been able to enact that

legislation that Chairman Platts had introduced, but we didn’t get

that buy-in, and so I think that is a really important piece that you

need to look at going forward. We can talk here or I can share

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some stories with you offline. I mean, we met with the appropriators, we talked a lot about this.

One of the issues, and I didn’t address this in my testimony and

I am not sure how it is addressed in your legislation, but the PART

system as President Bush implemented it has a score. It says effective, ineffective, results not demonstrated, etc., but it also gives it

a score, a numeric score, 75, 80, 100, whatever it may be, or in

some cases a 25. And if you look at it from the perspective of the

Appropriations Committee, if I fund a program that got a 25 and

that is a transparent process, you actually put yourself in a somewhat awkward situation because you are essentially asking them

to fund what has been termed an ineffective program.

Again, the score is an issue that I think folks need to look at.

I will stop with that, but I do think, as I said, it is one piece.

It can certainly help the deficit reduction, but Congress needs to

play a part in that, too.

Ms. DE RUGY. Can I add something. The Mercatus Center has

done a lot of work on performance based management and transparency, and there is actually a very large economic literature on

the topic. Really the main conclusion is that unless there is accountability and a bill or this type of performance based budgeting

has real teeth in actually holding people accountable and effectively

cutting spending, it is just not working. It is like with transparency, transparency is certainly a necessary piece of the process,

but it really isn’t sufficient. You need to have both things together.

So it is a first very good step in that direction, but it won’t be

performing effectively, especially I mean like the difference I think

between State budgeting and Federal budgeting is that in theory

the State governments are not allowed to run deficits, so they are

put in a situation where they have to do something. I will grant

you that a lot of the things they do is use gimmicks to actually

make it look as if their budget is balanced, and in that sense I actually think that their performance based budgeting can help. But

the Federal Government doesn’t have this obligation, and, as you

have used the term putting it on the credit card, you are absolutely

correct.

As the Chairwoman noted, while there has been, for about 17 or

20 years, a lot of talk about transparency, a lot of talk about looking at performance of programs, yet we have managed to go from

a situation of surplus to a situation of deficit, and gigantic deficit.

I think in order for any bill to include the full process, it needs

to have the transparency aspect, but also the accountability that

goes with it. That is key.

Mr. CUELLAR. Thank you.

Ms. WATSON. We are out of time.

Let me just say this: I feel that your bill will help us in terms

of what works in terms of program. When you get Executive orders,

we went into a war and spent $15 billion a month. That is going

to affect the bottom line. The appropriators have nothing to do with

that, and I am hearing the witnesses saying this ought to be an

issue that the appropriators listen to, so we have to unscramble

some rotten eggs.

I do thank you for the point you are raising, because we are

going to have to look at each sector of government. We are the FedVerDate 11-MAY-2000 13:48 Jun 17, 2011 Jkt 000000 PO 00000 Frm 00156 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\65550.TXT KATIE PsN: KATIE
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eral Government. What happens in the States? And then what happens in local government? And so this whole apparatus needs looking at, but you give us a way to start looking to see what does

work. I hope we can build on what you are putting out there. We

certainly are going to have a series of these hearings so that we

can look at new directions for operating a country like ours.

We are not isolated. We are impacted with what is happening

with the rest of the world. China, with 1.3 billion people, is looming

to become a nation in just a matter of a decade or so that is going

to be handling the finances for the entire globe, it appears. So we

have many different issues to look at with this, and I do thank you

for coming and for sharing with us. We will call you back again.

With that, we are going to adjourn this committee meeting.

Thank you so much.

[Whereupon, at 12:10 p.m., the subcommittee was adjourned.]

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