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FEDERAL FINANCIAL STATEMENTS FOR FISCAL

YEAR 2007: FISCAL OUTLOOK, MANAGEMENT

WEAKNESSES AND CONSEQUENCES

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

ORGANIZATION, AND PROCUREMENT

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JUNE 5, 2008

Serial No. 110–96

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

(

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

http://www.oversight.house.gov

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

——— ———

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, ORGANIZATION, AND PROCUREMENT

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

CAROLYN B. MALONEY, New York

BRIAN P. BILBRAY, California

TODD RUSSELL PLATTS, Pennsylvania,

JOHN J. DUNCAN, JR., Tennessee

MICHAEL MCCARTHY, Staff Director

(III)

C O N T E N T S

Page

Hearing held on June 5, 2008 ................................................................................. 1

Statement of:

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

Deputy Controller, Office of Management and Budget; and J. David

Patterson, Principal Deputy Under Secretary of Defense (Comptroller),

Department of Defense, accompanied by James Short, Deputy Chief

Financial Officer, and David Fisher, Director of the Business Transformation Agency .......................................................................................... 6

Dodaro, Gene L. ......................................................................................... 6

Patterson, J. David .................................................................................... 62

Werfel, Daniel ............................................................................................ 53

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

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

Deputy Controller, Office of Management and Budget, prepared statement of ........................................................................................................... 9

Patterson, J. David, Principal Deputy Under Secretary of Defense (Comptroller), Department of Defense, prepared statement of ............................ 64

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

of New York, prepared statement of ........................................................... 3

Werfel, Daniel, Deputy Controller, Office of Management and Budget,

prepared statement of ................................................................................... 55

(1)

FEDERAL FINANCIAL STATEMENTS FOR FISCAL YEAR 2007: FISCAL OUTLOOK, MANAGEMENT WEAKNESSES AND CONSEQUENCES

THURSDAY, JUNE 5, 2008

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 2:14 p.m., in room

2154, Rayburn House Office Building, Hon. Edolphus Towns (chairman of the subcommittee) presiding.

Present: Representatives Towns, Welch, and Bilbray.

Staff present: Michael McCarthy, staff director; William Jusino,

professional staff member; Kwane Drabo, clerk; and Alex Cooper,

minority professional staff member.

Mr. TOWNS. The hearing will come to order.

Welcome to today’s oversight hearing on financial management

in the Federal Government. Today we will discuss an important

issue for Congress and for the Oversight Committee. As stewards

of taxpayer dollars, it is our duty to ensure full transparency and

accountability over the Federal Government’s operation and fiscal

condition. We must have a full understanding of the Federal Government’s finances in order to fulfill this duty. We must ensure

that taxpayer dollars are spent as efficiently as possible and that

they are protected from waste and abuse.

I am happy to say that there have been some improvements

since last year. For the first time, GAO was able to give an unqualified opinion on the 2007 Statement of Social Insurance, which

is a big step for the Federal Government. GAO also reports some

improvement to accounting and financial reporting standards,

which provide greater transparency. OMB has reported that 14 additional programs measured and reported their improper payments

in fiscal year 2007, which gives us a better understanding of this

problem. Seven out of the 24 CFO Act agencies’ auditors reported

no material weaknesses and no noncompliance issues.

Having said that, we still have a lot of work ahead of us. This

marks the 11th year that the GAO was unable to render an opinion

on the consolidated financial statement. Only 19 of the 24 CFO Act

agencies received clean audit opinions, the same number as last

year. Thirteen of the agencies did not comply with at least one of

the three requirements under the Federal Financial Management

Improvement Act. Some of these agencies just aren’t performing

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the basic accounting work that they are required by law to do. This

situation is unacceptable.

The weaknesses that prevented GAO from offering its opinions

relate to measures of financial reporting, things like reconciling accounting between agencies, recording agencies’ assets and costs of

operations and estimating loan guarantee liabilities. The Department of Defense has longstanding problems with these and other

financial management issues, and I hope that we can hear some solutions today.

We just can’t afford those problems. GAO says that the coming

years are going to be difficult as the baby boom generation starts

to retire and collect Social Security and Medicare benefits. We have

a lot to do to make sure we will meet all of our commitments in

the coming year. Weak financial management is the last thing that

we need.

So today we will hear more about these problems.

And let me conclude and ask now to give time to Congressman

Bilbray, the ranking member from California.

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

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Mr. BILBRAY. Thank you, Mr. Chairman.

Mr. Chairman, traditionally, the ranking member thanks the

Chair for holding the hearing. I’m not going to do that today. I’m

going to instead thank you for the attitude and the approach in

which you address this issue and the attitude that you’ve taken in

holding this hearing. I think that in a time when partisan bickering and brinksmanship and political advantage seems to be the role

of the day, your leadership shows on this issue that outcome really

does matter. And the fact is, this is an issue that I think historically we can look back and say the challenge, the improvements

and the problems transcend partisanship.

We’ve had a Republican—I mean, a Republican administration

executive branch with a Democratic majority in the House. Prior

to that, we had a Democrat administration with a Republican majority in the House. And the progress and the challenges have transcended those political lines.

I just want to say sincerely, I really appreciate your approach

here, because I think, rather than finding blame, we are looking for

answers. We’re recognizing the challenges. This is a foundation

that has to be laid if we’re going to have a viable financial structure for future generations. And I think that to be able to address

the challenge before us, this committee and all of Congress, including the White House with the cooperation of Congress, needs to be

able to work together and leave those partisan lines behind. Because, let’s face it, our children and our great grandchildren are not

going to ask if it was a Democrat or Republican that left us out

in the cold. They’re just going to know that America and its leaders

did it.

So, Mr. Chairman, I say sincerely, I have looked at the panel we

have and, most importantly, the way you structured this thing, and

I think that you have structured it in a way that allows all of us

to work together for our great grandchildren. And so, we’ll continue

the progress, slow and tedious and frustrating as it has been, so

that in the long run, we make sure that we have an answer that

does not serve the Democrat or the Republican party but serves the

American people. And thank you very much for your leadership.

Mr. TOWNS. Thank you. Thank you for your words. Thank you

so much. Now I’ll yield time to Congressman Welch.

Mr. WELCH. In the interest of time, I yield back to the chairman.

Mr. TOWNS. Thank you very much.

We return now to our panel. It is longstanding committee policy

that we swear in our witnesses. So please stand and raise your

hands.

[Witnesses sworn.]

Mr. TOWNS. You may be seated. Let the record reflect that they

all announced in the affirmative.

So why don’t we start with you, Mr. Dodaro.

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STATEMENTS OF GENE L. DODARO, ACTING COMPTROLLER

OF THE UNITED STATES; DANIEL WERFEL, DEPUTY CONTROLLER, OFFICE OF MANAGEMENT AND BUDGET; AND J.

DAVID PATTERSON, PRINCIPAL DEPUTY UNDER SECRETARY

OF DEFENSE (COMPTROLLER), DEPARTMENT OF DEFENSE,

ACCOMPANIED BY JAMES SHORT, DEPUTY CHIEF FINANCIAL OFFICER, AND DAVID FISHER, DIRECTOR OF THE BUSINESS TRANSFORMATION AGENCY

STATEMENT OF GENE L. DODARO

Mr. DODARO. Good afternoon, Mr. Chairman, Congressman

Bilbray, Congressman Welch. It is a pleasure to be invited here to

talk about the results from GAO’s audit for the consolidated financial statements for fiscal year 2007.

As you mentioned in your opening statement, like prior years, we

are unable to provide an opinion on the accrual-based financial

statements. While there are a lot of reasons for that and problems

and weaknesses, we have identified there are three primary impediments. First, there are serious financial management problems

at the Department of Defense; second is the inability to properly

record and eliminate intergovernmental transactions between Federal agencies; and, third, there are problems with the compilation

of the financial statements by the Department of Treasury.

Now, as you mentioned, this year, although we have had a similar overall outcome on the accrual-based financial statements,

there have been some market progress.

First, we were able to provide an unqualified opinion on the

Statement of Social Insurance. This is very important, shedding

some light on the Federal Government’s long-term fiscal exposures,

as this statement displays the fact that the net present value of the

commitments for Social Security and Medicare, for example, are

$41 trillion over the next 75-year period.

Second, the administration, working with both OMB and Treasury, produced a summary financial statement, which is very short

and concise, and it puts in understandable terms the financial

statements of the Federal Government and the long-term fiscal

challenges facing the government going forward. So we think that

was a tremendous addition this past year as well.

Now, DOD and Treasury and many of the other Federal agencies

have plans under way to try to address some of these longstanding

weaknesses that have been in place, and it is very, very important

for progress to be sustained. We have a transition in administration coming up, and this administration needs to continue to work

hard on these activities as they have been up until that point in

time. And they don’t have to be picked up again by the next administration going forward so we can continue to make progress in

these areas.

Now, it is not only important for accountability, but it is important to understand the long-term fiscal position of the Federal Government. If I could direct your attention to this chart that we have

over here to highlight a couple of trends that the financial statements show.

This first chart talks about the increase in the total Federal debt

that the Federal Government owes. As it shows, in the last 4 years

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alone, the total Federal debt has climbed from about $6.5 trillion

up to $9 trillion at the end of fiscal year 2007. Now, the debt—the

shaded part at the bottom is debt held by the public, and that has

gone up as well as the white portion, which is the intergovernmental holdings. That is largely the money that the Federal Government is using from the Social Security revenues in excess of expenditures to pay for current obligations of the Federal Government.

Now, the debt—the $9 trillion—right now, the debt ceiling is set at about $9.8 trillion. So it is expected that sometime next fiscal

year, the Federal Government will hit that debt ceiling again, and

there will have to be additional action taken by the Congress. So

this is a trend. The financial statements are showing some light on

this.

But this situation, as I’m going to show in the next slide, where

the Federal Government has this excess revenue from Social Security, from payroll taxes over expenditures is going to dissipate as

the baby boom generation retires.

On this next slide, this looks in the outyears. This assumes—it

takes the time period from 2008 to 2040 over the next 32 years,

and it shows several things.

One, it assumes that we hold revenue, basically assuming that

the tax cuts will be extended through 2018; and, after 2018—the

solid line represents revenue—we assume revenue recedes at 18.3

percent, which is the average of GDP, which is about the average

over the last 40 years in the Federal Government’s experience.

On the bottom, there are four components to the Federal spending side. The bottom, the darker shaded area, is interest on the national debt. That shows going up the second component of the bar

is Social Security, the third component is Medicare, and then the

white portion at the top is all other spending for the Federal Government. This includes defense and all other discretionary spending.

What this shows is that by the year 2030, the Federal Government, assuming historic revenue collections, would only have

enough revenues to pay interest on the debt, Social Security payments and Medicare payments. It wouldn’t have enough money left

to fund any other activity in the Federal Government, and that

even becomes more acutely painful in 2040. Now, obviously, our

country will not let this happen, but it shows the magnitude of the

fiscal challenge ahead.

Simply put, the Federal Government is on an unsustainable fiscal path and that action is urgently needed to begin to address

some of these issues, both entitlement spending, the base in government and to look at the revenue side of government as well

going forward.

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So, Mr. Chairman, I commend you and the committee for continuing to focus on making improvements in Federal financial management. It is urgently important. It is tough work, as was mentioned by Congressman Bilbray, going forward every year, but it is

very important. So I commend this committee for its diligence on

this, and I’d be happy when we get to the question-and-answer period to answer any questions.

Mr. TOWNS. Thank you very much.

[The prepared statement of Mr. Dodaro follows:]

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Mr. TOWNS. Mr. Werfel.

STATEMENT OF DANIEL WERFEL

Mr. WERFEL. Thank you. Thank you, Chairman Towns, Ranking

Member Bilbray, Representative Welch and other members of the

subcommittee for having this hearing today and inviting me to

speak.

When the CFO Act of 1990 was enacted close to 18 years ago,

Congress established three fundamental objectives for Federal financial management. The first objective was transparency, making

sure that the Federal Government is informing the public on the

state of the Nation’s finances. The second objective was internal

control, making sure that Federal agencies were putting in the

right people, process and technology to track Federal taxpayer

funds and mitigate financial risks. And the third objective was decision support, making sure that the right financial information at

the right time was in the hands of agency decisionmakers to guide

both operational, programmatic and other key decisions of the Federal Government.

Through improvements in the reliability and timeliness and

readability of our financial report, we are building a foundation for

achieving the broader objectives of the CFO Act.

With respect to reliability, 80 percent of CFO Act agencies today

have clean audit opinions, and governmentwide we have seen 4

consecutive years of declines in material weaknesses, with an overall decrease of 35 percent in the last 7 years.

With respect to the timeliness of our financial report, agencies

are now reporting audited financial statements 45 days after the

end of the fiscal year and the governmentwide report comes out 30

days after that. Compare that with just not so long ago, several

years ago, when the timelines for producing these reports were

more than 3 months more than what I just described.

And with respect to the readability and the transparency of our

financial reports, through an OMB pilot program conducted in

2007, agencies are producing summary documents to help readers

digest hundreds of pages of detailed information on finance and

performance.

Attached to my testimony today—and Mr. Dodaro mentioned it

as well—is a great example of how we’re working to make government financial reports more transparent. This report, A Citizen’s

Guide to the 2007 Financial Report to the U.S. Government, provides readers with an 8-page version of the larger 182-page financial report. It is an easy-to-read overview of the U.S. Government’s

short and long-term financial outlook, and it serves as an important reference tool for data and findings of that 182-page document

I referenced earlier.

We are very proud of the citizen’s report not only because it improves the presentation of our financial information. We are proud

because of the clarity and transparency this report gives to the

most significant fiscal challenges facing the government today and

that is, as very astutely described by Mr. Dodaro, the impending,

unprecedented and enormous fiscal imbalance the Federal Government faces due to the rising cost of entitlement programs.

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The Federal financial community plays an important role with

respect to this fiscal crisis.

First, the Federal financial community is responsible for ensuring that the data and analysis are clearly and effectively communicated to the public and to the policymakers. We believe the Citizen’s Guide is an important step in meeting this objective.

And also, as has been mentioned already, our attainment of a

clean opinion on the Statement of Social Insurance is another critical step, because it demonstrates not only that we are reporting the

information clearly but the information contained within this important report is reliable.

The Federal financial community is responsible for more than

just reporting on the Nation’s fiscal health. It plays a critical role

in developing and implementing strategies to control Federal

spending and otherwise ensure that the fiscal health of the Federal

Government remains sound. In areas such as improper payments,

billions of dollars in error are being eliminated; and real property,

billions of dollars in unneeded assets, are being removed from our

inventory. The Federal community is achieving these results by

gathering reliable financial data, just as the CFO Act originally envisioned, and using that data to make smarter decisions about the

way government funds are spent.

Despite these results, there is clearly more work to be done.

While most of our major financial reports are passing audit scrutiny, too many of them do not. To address this, we do have sound

corrective action plans in place for each financial management

weakness, and these action plans continue to have us trending toward better audit results each year. With the unprecedented challenge before us on the future fiscal health of the government, we

need to make sure that our financial readers are moving beyond

just the fundamentals of audited financial statements. We need to

make sure our financial reports contain the right information that

is most relevant to the important programmatic and business decisions that agencies make, and we also need to make sure that the

internal control requirements that we impose on Federal agencies

are sufficiently focused on financial risks, such as improper payments and charge card abuses.

As we approach the 20-year anniversary of the CFO Act, OMB

looks forward to working with Congress and GAO to evaluate financial management requirements as they exist today, to address

the issues about I have outlined and to ensure that the broad and

important objectives of the act are met.

At this time, I’m happy to answer any questions that you have.

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

[The prepared statement of Mr. Werfel follows:]

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Mr. TOWNS. Mr. Patterson, good to see you again.

STATEMENT OF J. DAVID PATTERSON

Mr. PATTERSON. Good to see you, Mr. Chairman.

Mr. Chairman, Ranking Member Bilbray and Congressman

Welch, thank you for this opportunity to appear before you to discuss the Department’s financial management improvement efforts

and to respond to your questions. We are always happy to bring to

the committee an update and to clarify any questions you might

have on specific issue areas.

With me today, I’d like to introduce Mr. James Short, Deputy

Chief Financial Officer, and Mr. David Fisher, Director of the Business Transformation Agency, who will be pleased to answer questions relating to the—would you please stand, please?

Mr. TOWNS. Thank you.

Mr. PATTERSON. And they will be pleased to answer questions

that are specific to the topics you identified in your letter of invitation.

Before we address the particular issue areas, however, I would

like to discuss just a moment two most important aspects of DOD

financial management, the size and scope of the challenge we face,

and, second, the progress that the Department has been making in

meeting that challenge over the last 7 years.

The Department of Defense is not only the largest Department

in the Federal Government, it is the largest and most complex organization in the world, with more than 600,000 facilities, 6,000 locations, 163 countries around the globe. The Department has 5.2

million inventory items, $3.6 trillion in assets and liabilities and an

operating budget this year that exceeds half a trillion dollars.

To put this in perspective, consider the Department’s annual

base budget is almost 50 percent greater than the annual revenues

of Wal-Mart, its assets three times the size of Wal-Mart, IBM and

ExxonMobil combined. In fact, the Department of Defense, if it

were a country, it would rank 17th among the world’s GDPs.

In a single year, the Department of Defense processes more than

150 million pay transactions, which is approximately 22 pay transactions every second on a 40-hour workweek—disbursed is over

$446 billion to payroll recipients, commercial vendors—manages

$22 billion in foreign military sales and maintains about 57 million

general ledger accounts.

But the Department’s sheer size and magnitude and complexity

is not in any way an excuse for not putting every available resource

and all of our energies into ensuring America’s hard-earned tax

dollars are spent wisely. Quite to the contrary. It is, however, an

explanation why achieving our financial management objectives is

not a quick and easy matter.

The second point is the substantial progress that the Department

has made over the last 7 years in bringing its financial management processes and systems into the 21st century and preparing

the Department for that clean audit. For example, in 2001, only

two DOD entities, the Department of Finance and Accounting Service and the Military Retirement Fund, were auditable. Today, we

have five defense entities whose combined assets and liabilities

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comprise 15 percent of the Department’s total assets and 50 percent of its total liabilities. They all have clean audit opinions.

Again, to give you some perspective, the combined value of those

five entities is larger than the value of the entire Department of

Health and Human Services, which is the next largest Federal

agencies with an unqualified audit opinion.

By the end of fiscal year 2009, we expect to receive clean audit

opinions on 37 percent of the Department’s total assets and 88 percent of its liabilities and that by 2010 48 percent of all DOD assets

and 89 percent of all of its liabilities will be audit ready. In addition, the U.S. Army Corps of Engineers, which accounts for $49 billion in DOD assets and liabilities, was audited for the first time

and is projected to receive a clean audit in the next fiscal year.

So we have some tremendous progress and we have made a tremendous amount of progress in these last short few years, but improved financial management is also eliminating material weaknesses, increasing efficiency and productivity and saving the taxpayers literally billions of dollars. For example, financial transformation, combined with robust metrics programs, has produced a

dramatic 80 percent improvement in the accuracy and timeliness

of information. Electronic invoicing has reduced errors and increased efficiencies, raising the number of electronic invoices processed per quarter of 64 percent in 2004 to 82 percent today.

Since 2001, 84 percent of all manager-identified internal control

weaknesses have been corrected, dropping from 116 to just 19. In

addition, increases in the rate of operations and elimination of excess capacity and increased productivity at DEFAS by 52 percent

while lowering costs to the services by $317 million has occurred

since 2001. Military and civilian pay is now more than 99 percent

accurate. At Defense Contract and Audit Agency, which audits

more than 10,000 contractors, including some of the world’s largest

companies, more than 271,900 audits have taken place since 2001,

covering $1.9 trillion. These audits have saved the taxpayers $17.6

billion.

Mr. Chairman, these are just a few examples of how the Department of Defense has transformed financial management and put

the Department on a clear path to a clean audit.

Again, we are happy to be here, and I’m very pleased to take

your questions, sir.

Mr. TOWNS. Thank you very much.

[The prepared statement of Mr. Patterson follows:]

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Mr. TOWNS. I know you know that the bells have sounded, and

that means that we have votes. So what I’m going to do is to call

for a recess until 3:30, and then we’ll come back and we’ll have

some questions for you. Because there are about five votes, and I

understand it will probably be 3:30 before we will be free. I hate

to do this, but we have to vote. So we will be back at 3:30.

So the committee is in recess.

[Recess.]

Mr. TOWNS. We’ll come to order.

Again, let me apologize for the delay, but voting is important

around here.

Let me begin with you, Mr. Dodaro. Your report emphasizes the

long-term financial problems that the Federal Government is going

to have with meeting all of its commitments as the baby boomers’

generation reaches retirement. The report says we are on an imprudent and unsustainable fiscal path and calls for leadership to

place us on a more prudent path. As you know, your predecessor,

David Walker, presented a list of proposals last year that he said

would help us get back on such a path. Does GAO continue to support those proposals?

Mr. DODARO. First of all, we continue to be very concerned about

the long-term fiscal path. I think the proposals that Mr. Walker

had advanced are very important considerations that need to be,

you know, continued to be debated and discussed. And so, you

know, basically, we think several things, Mr. Chairman.

First, there needs to be attention to reforming the entitlement

programs, in particular in the health care area—health care is the

primary driver of the long-term fiscal condition—but also Social Security reform.

We think there needs to be also, you know, additional looks at

the budget process that is in place with trying to provide more

transparency about the long-term implications of various proposals

and the government’s financial condition. We are very encouraged

by the inclusion in the fiscal report of the long-term fiscal position.

And, as Mr. Werfel pointed out, the summary report available to

all citizens talks about the unsustainable path; and these debates

need to be continued. We think there is a need for long-term sustainability reporting on the Federal Government and additional

tools that are available to alert policymakers to the long-term implications.

So, you know, by and large, the ideas that former Comptroller

General Walker advanced are still relevant and need to be continued to be discussed and hopefully addressed as we move forward.

Mr. TOWNS. What can we do to increase public awareness and

understanding of this problem?

Mr. DODARO. Well, I think the first thing was the summary annual report that has been made available this year. I think that

is very important for the public to understand.

I know one of the reasons that Mr. Walker resigned as Comptroller General was to continue the public awareness and education

campaign through the new foundation that was created that he is

heading up as chief executive. We plan at GAO to continue to make

this a prominent piece of the reports and testimonies that we have.

We have a Web site, Mr. Chairman, that we update these longVerDate 11-MAY-2000 12:29 Jan 07, 2009 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6633 C:\DOCS\45612.TXT KATIE PsN: KATIE
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term projections on a quarterly basis, and it is available to all

members of the public. So GAO will continue within the sphere of

our independent and nonpartisan status to keep raising this issue

both to the attention of the Congress but also, you know, indirectly

to the public through our reports and testimonies.

Mr. TOWNS. Right.

Mr. Werfel, what do you think could be done?

Mr. WERFEL. I agree a lot with Mr. Dodaro.

I think, first of all, the efforts of David Walker and the various

foundations that are driving a fiscal wake-up tour—I think, they

have been to 40 different cities around the Nation, really with a

powerful presentation on the fiscal imbalance that is upon us,

using graphs like what Mr. Dodaro provided, and trying in a really

digestible, user-friendly way to explain what is happening with respect to the growth and entitlement costs and how it is going to

impact citizens and the children and grandchildren of citizens. And

the Federal financial community more and more is taking seriously

the need to get this information out there in a digestible way and

make sure that folks like you on the Hill and the media and others

are paying very close attention to it.

I know the President’s budget spends many, many pages on this

issue trying to explain the level of the urgency, and this report

tries to do it in a little bit more of a simple and easy-to-digest

framework than is in both the financial report and the President’s

budget. But I think the fiscal wake-up tour is an important first

step, and I think, from our perspective, the more clarity we can

provide to the issue—that is the best first step question take.

Mr. TOWNS. At this time, I yield to the ranking member.

Mr. BILBRAY. I guess, Mr. Chairman, everybody is talking about,

you know, climate change and the issue of An Inconvenient Truth.

I guess, from the fiscal point of view, we are talking about a terrifying truth, and I wish as much attention was given to that. Maybe

we need somebody to do a movie to scare the hell out of the public

with what kind of fiscal reality we are giving our grandchildren

and our great grandchildren.

Gene, you were talking about the issue of reaching a debt limit

and having to move it again. Do we have any plan not to dig the

hole deeper so we don’t bottom out? Do we have any plan to avoid

having to ask Congress not to raise the debt limit?

Mr. DODARO. Actually, Congressman, the debt limit indication is

really a lag indicator. By the time that happens, the commitments

and the spending have already occurred, and that is why we’re trying to encourage some, you know, forward thinking about the implications going forward. And also, Congressman, by the way, there

is a movie in the making, and it is one of Mr. Walker’s projects

going forward to try to——

Mr. BILBRAY. Well, I hope I get a footnote for the title. OK?

Mr. DODARO. OK. But in terms of the debt limit, I mean, given

the commitments and the spending that is—the decisions that are

going to be made this year, I think it is pretty much, you know,

a predictable that next fiscal year it is going to happen. So, I mean,

all the debt limit does in raising a bit is to allow for past commitments that have already been made to be issued.

70

You know, one of the issues that we have, you know, raised is

that a lot of spending now, a greater proportion of Federal spending, is on mandatory spending, which is governed by law. So as

long as the eligible populations meet that criteria, the money gets

spent, and so there is less on a discretionary basis. So to the extent

to which eligible people receive those services—the Federal Government is obligated to pay it.

Mr. BILBRAY. So it is really easy for us to make all these commitments, and then take all of the credit for it but then bail out and

not have to pay the bill?

Mr. DODARO. The bills come, and they will have to be—the

money will have to be raised in order to pay the bills. And that will

come. I mean——

Mr. BILBRAY. Just as we are talking about the fact that the existing politics, economy and cultural experience is going to leave a

devastated planet to our next generation, we’re talking about, from

a fiscal point of view, even as bleak a program from the fiscal point

of view down the line. Instead of rising water, we’re having rising

debt to drown our next generations.

Mr. DODARO. Yes, and I think, Congressman, what is going to

happen in these long-range projections it is going to occur even

sooner. Around the year 2011, the amount of the payroll taxes in

excess of Social Security benefits is going to begin to dwindle. So

the amount of money that has been available in the past to support

current spending for current operations is going to dwindle. In

2017, Social Security goes negative. It is estimated to go negative—

in other words, the benefits will be more than——

Mr. BILBRAY. So—when?

Mr. DODARO. 2017. Excuse me. 2017. But the pinch will start to

occur in 2011. 2017 that will occur.

Now the Medicare Part A program, the hospital portion, if this

fiscal year is in the negative cash position——

Mr. BILBRAY. 2017 our Social Security polar cap melts.

Mr. DODARO. We’ll have to start—the government will have to

start redeeming the Treasury securities that it has placed as IOUs

in order to sustain the program, which means that there will have

to be additional borrowings from the public, there will have to be

additional spending offsets or revenue enhancements. Something

will have to start occurring.

Mr. BILBRAY. I appreciate that.

Daniel, let’s talk assets. I guess the biggest problem is Democrats

always, in theory, want to talk about revenue enhancers and Republicans all want to talk about fiscal constraints and reduced expenditures. But let’s say something we may be able to find common

ground on. That is, the assets that the Federal Government owns

that may not be managed appropriately.

I was pointing out to the chairman during the vote that one of

the greatest losses to the Federal family with the savings and loan

was not the savings and loan but the way the assets were liquidated. They were practically given away. Frankly, I think that—

I’m astonished that the media did not study how much the assets

were lost.

Has anybody even proposed that when we leave our, like, real estate, that we stop giving it away, we stop deeding it over to the

71

local government, we stop deeding it over to the States, we stop

transferring from one Department to the other, but look at the fact

that this is an asset that may be able to not only generate a sales

revenue but then generate more tax revenue and more income for

the Federal Government in the long run? Have we talked at all—

be willing to talk about——

In Florida—I guess it was in California. It is a good example.

Fair market value of that must have been trillions of dollars when

you look at it. Has anybody talked about that?

Mr. WERFEL. Actually, Congressman, yes.

First, I’d like to start by pointing out that the law that governs

the disposal of Federal real estate is the Real Property Services Reform Act of 1949. So, in the year 2008 we’re still operating under

a law that was developed in 1949, and the results of that are that

we have a very slow and bureaucratic process.

You mentioned some of the concerns that we have, is that before

we can dispose of real estate, we have to have it out there in the

Federal Register, being looked at by State and local government,

being looked at for different law enforcement interests, interests of

the homeless, and that process takes more than a year sometimes

to get rid of an asset and the process itself disincentives agencies

from going through the disposal.

Also, what we also pointed out is that once agencies do make it

through that long process and they sell the asset, the proceeds go

to Treasury, and the agencies don’t get to use those proceeds in a

way to improve their mission-critical assets. And what we have

done at OMB is try to approach this from a right-sizing perspective

where we know that there is not a lot of funds and resources available in the budget each year to invest in our infrastructure, to improve the condition of our mission-critical assets and, at the same

time, we also know that we have assets that we don’t need.

So what we think what is appropriate is to sell those assets that

we don’t need or get rid of them and to use those proceeds to invest

in our infrastructure and improve the mission-critical assets that

we have. And it is for that reason that we have a proposal, a proposed pilot program that would allow agencies to retain 20 percent

of the proceeds of sale, but, as importantly, it would allow agencies

to take properties direct to market.

Because if we know that we have an asset—and this often is the

case—let’s say we have a 100,000 square foot warehouse and it is

waterfront and we really don’t know that there is any—it is not the

highest and best use of that asset to be a warehouse, and we think

the best interest of the taxpayer from the Federal perspective is to

sell that asset to a developer and use that money to help defray

the deficit or other funding needs.

I will also point out that the House has introduced a bill that

would—very recently that has made it through and I think is out

of markup—that would allow agencies to retain 100 percent of

their proceeds but doesn’t provide for any expedited disposal. So

you still have to go through the 1-year process.

Mr. BILBRAY. Well, I think it is something that this committee

ought to be looking at.

Mr. Chairman, we actually in San Diego County right downtown

had a military headquarters, and they realized that the footprint

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was worth so much that they went out and worked with the local

government to, basically, redevelop it with—an overwhelming majority of it was a revenue-generating visitor seating facility with

the headquarters still in there. But rather than just sitting on the

footprint, they’re now utilizing that.

And I think that kind of approach is one of the things we need

to talk about. I think we need to talk about the fact that the revenue sources across the board are not going to hold up.

I think income tax is a hundred years old. My family has been

in income tax. My wife owns a business. I just think that there is

going to come a time when this crisis is going to force us to look

at the fact that there is not a broad enough basis income tax to

support the structure anymore. We have to be brave enough to say

the emperor has no clothes. The income tax system is 100 years

old. We need to look at change in the structure, but I would appreciate allowing the time over, Mr. Chairman.

Mr. TOWNS. Thank you very much, and thank you for your comments as well.

Mr. Patterson, welcome.

Congress responded to GAO’s findings of fraud, waste and abuse

at DOD by enacting legislation directed at improving the management of DOD’s Purchase Card Program. In its most recent work,

GAO notes that DOD has improved its internal controls over its

purchase card activities. However, GAO still found instances of a

lack of accountability over fiscal assets and improper purchase

cards used at the Department of Defense. What is being done about

that?

Mr. PATTERSON. Actually, we are kind of proud of the fact that

DOD was not singled out as one of the agencies who had egregious

purchase card violations. But, having said that, our Defense Finance and Accounting Service is very, very fastidious about how

they manage and how they determine whether fraud, waste and

abuse has taken place. As soon as we find it, we turn that over to

the Department’s IG and their investigative service, and we are

very, very serious about the oversight that we provide for that particular card. And we took it as a wake-up call, as we do always

when the GAO finds areas where improvement needs to be done,

and our director of Defense Finance and Accounting Service has

taken that on as a personal challenge.

Mr. TOWNS. Thank you. Thank you.

Because though we talked about that before and we are happy

to see there has been some movement, but still, based on what we

understand, there is still a long way to go.

Mr. PATTERSON. I would say there is improvement to be made at

the Department, yes, sir.

Mr. TOWNS. Mr. Werfel, certain Federal agencies are unable to

adequately account for and reconcile intergovernmental activity

and balances. GAO has stated that this failure is one of the three

major impediments that continue to prevent GAO from rendering

an opinion on the U.S. Government’s consolidated financial statements. What is OMB doing to address the longstanding problems

of Federal agencies not adequately accounting for and reconciling

intergovernmental activities and balance between them? And when

can we reasonably expect to see some significant progress?

73

Mr. WERFEL. This is—thank you for this question. This is one of

the issues that OMB—one of the first steps we took was to understand that this is a governmentwide issue. It is not specific to a

given agency. So what we did was took it to the CFO Council. The

CFO Council was created by the CFO Act to solve governmentwide

financial management problems, and we asked the CFO Council to

make this one of their No. 1 priorities.

The CFO Council has convened a team, a committee just dedicated to this issue, and they developed a corrective action plan that

has four components to it that are producing results today.

The first thing we did was we made standard business rules and

published them so that every agency that approaches a transaction

with another agency is operating on the same set of rules and regulations, because when there are different rules and regulations for

how you transact with one another, that is where some of the problems occur.

The second thing we did was we created a watch list, a high-risk

list, if you will, where we identified trading partners with imbalances and said, agency Y and agency X you’re off by $1 billion or

$100 million. Please come together, meet with OMB and figure out

a path toward reconciling this imbalance.

We are in the process of creating a dispute resolution committee,

a jury of their peers, so to speak, so that agencies that have disagreements about whether they recorded the right payable or the

other agency recorded the right receivable, those can be resolved

quickly.

And also and perhaps the largest potential impact is to improve

the information technology solution by which agencies transact

with one another. Right now, the system that we have is outdated

and doesn’t have the necessary business rules built into it to make

sure that agencies aren’t transacting with each other in a way that

inaccuracies are occurring.

The one result I’d like to point out—and it is also in my testimony—is when we started this watch list at the beginning of fiscal

year 2007, we identified $24 billion in intergovernmental imbalances between agencies, and since that time we have eliminated

more than half of it, so over $12 billion. We still have a long way

to go. I know these are big numbers, but that is an important first

step in this endeavor.

Mr. TOWNS. Right.

Before I yield back to my ranking member, GAO has called for

DOD to have a chief management officer to oversee the day-to-day

business, transformation efforts within the Department. The National Defense Authorization Act of Fiscal Year 2008 designated

the Deputy Secretary of Defense as the CMO. The act also established the position of Deputy CMO and designated that a CMO be

established within the military department. Mr. Dodaro, is this

still GAO’s position?

Mr. DODARO. Mr. Chairman, we still think there needs to be a

full-time Chief Management Officer at certain organizations. DOD

is one of them. The Department of Homeland Security is another

one, and we think that it’s a full-time job given the magnitude of

the business systems and business processes challenges over at

DOD.

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We’re coming up, we as a Nation, as a government, to another

Presidential transition period of time. This will be on its second

major Presidential transition since many of these management reforms were put into place, so it’s very important for these initiatives to be sustained and the next administration to build on

progress that has occurred. We’ve been pleased at how the current

administration has built on the previous administration.

And one of the things that will be going to GAO, since it is cited

as a source under the Presidential Transition Act that agencies are

encouraged to go to to learn about their new responsibilities—one

of the roles that we plan to play is try to encourage progress that

needs to be continued. But these problems at DOD and DHS are

such that they’re not going to be solved within a period of the normal span of any one individual, and they need full-time attention.

So it’s still our position that you need a full-time Chief Management Officer, and that management officer ought to have a tenure

that spans across administrations to make the progress that’s

needed.

Mr. TOWNS. Right. Take the politics out of it.

Mr. Patterson, what do you think about that? You knew I was

going to ask you, didn’t you?

Mr. PATTERSON. I was anticipating it actually. As you know, Deputy Secretary England has taken this on as a personal responsibility in that he has taken it on as is directed in the legislation as

the chief management officer for the Department. We have an interim process whereby we’ll have a process improvement officer

that goes through all of our processes that are looking at each one

individually, combining them as necessary so that we will have a

combined integrated report to the Congress.

The Deputy Secretary, as you know, sits as the co-chair for the

Defense Business Systems Management Committee in which we

look at all of the systems that are proposed. We evaluate them, and

I sit on that committee as well, to determine which ones have

merit, which will further the goals of the Department to have a

network or information systems that do, in fact, achieve a good financial basis. With the next administration, because the deputy

chief management officer is to be a PAS, we’ll leave that to the

next administration to fill that position.

Mr. TOWNS. Thank you very much, and I yield to the ranking

member, Congressman Bilbray from California.

Mr. BILBRAY. David, I’ll say this, because the chairman and I are

friends, and I think I can be frank about it. Are you guys really

comprehending that in 6 months you could be totally under siege

as a Department?

Mr. PATTERSON. Could you repeat that?

Mr. BILBRAY. Are you guys comprehending that in 6 months you

could be totally under siege from a new administration? Are you

ready to answer and take on those challenges, first of all, from one

way is the internal operation, but also the massive amounts of reduction of assets? Are you guys even thinking about that at this

time in the game?

Mr. PATTERSON. Absolutely. In fact, when I address my colleagues, and when I address the—or have the opportunity to talk

to groups of colleagues, I remind them that if you think that what

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you experience now in terms of cash-flow is going to continue

through the next administration, you best be thinking again, and

you better be starting to think seriously about how you’re going to

pare back your expectations in terms of doing your work.

And so, yes, the answer is we fully understand that the level of

support that Congress has provided in the past is not something

that we should depend upon in the future.

Mr. BILBRAY. I think you’re going to be under huge challenges no

matter who gets the White House, no matter who controls Congress. I mean, the best-case scenario is not good for the Defense

Department. And the question I’ve got when you get into this, and

I’ll say this to everybody—let’s flip around and try to go in the positive here, what are you doing about improper payment recovery at

this time?

Mr. PATTERSON. Our improper payment statistics show that the

Improper Payment Act requires that we have no more than $10

million or 2.5 percent, and our percentage has consistently been 0.2

percent. We think that’s a good start, but because of the magnitude

of our budget, we don’t think that’s the way in which we should

take on this challenge in perpetuity. And we continually attempt

and have it as a management action to improve that.

Mr. BILBRAY. Anybody have any comments specifically about the

improper payment recovery strategies?

Daniel.

Mr. WERFEL. Yes, I would like to.

Improper payments—implementing effectively the Improper Payments Information Act of 2002 is probably one of the most largest

priorities in financial management from OMB’s perspective. And

looking at where we started in 2004, we really didn’t have any public reporting, any sense of the extent of the problem. And where we

are today, we are much better equipped to honestly look at the

problem, understand it and start to derive effective solutions, and

we’ve already started.

When we first reported in fiscal year 2004, we had $45 billion in

improper payments. For those programs that were reported at this

time, we’ve shaved $7.9 billion in improper payments off those dollars. The trend has been—and then in fiscal year 2005, we reported

more programs, and in fiscal year 2006 more, and in fiscal year

2007 more. And the trend has been—is once we get those programs

out there and have an error rate associated with them and improper payment amount, the agencies are demonstrating an ability

to drive those error rates down in subsequent years.

The key challenge that we have is getting those measurements

out. We’re at the point now where for all those high-risk dollars

that we’ve identified, we’re reporting an error measurement on 85

percent of them, and our plans are to have 100 percent reporting

by next year. So we’re going to be at a point where we have a full

vetting, a full picture of this problem.

And what’s encouraging is progress so far. If you look at the

trends each year, once reported, these numbers are going down, not

up. Now, there are exceptions to that rule, and for those exceptions

the budget has a suite of different legislative proposals out there

to try to help us tackle these problems and issues for the agencies

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that are not making the type of progress we would like them to

make in terms of driving their improper payment.

Mr. BILBRAY. Let’s talk about sweeteners on this incentive. What

percentage of recovery back into the Department would you recommend? Are we talking 10 percent? What do you think would be

the best way to encourage them to participate more robustly? Is

that a subtle enough approach?

Mr. WERFEL. We have not to date considered kind of a retention

of improper payments as a mechanism or an incentive. The approach that we’ve taken to date—although it’s an interesting idea

that I think is worth further discussion. The approach we have

taken to date is more of the transparency breeds accountability,

and accountability breeds result. So the fact that these numbers

are out there, the fact that for the Medicare program in particular—when we first reported Medicare under the Improper Payments Information Act, it had $20 billion in error, and now that

number is down to under $10 billion. So the number being out

there has motivated the Department to take all the necessary steps

and to mobilize resources to get the problem done.

With respect to payment incentives, that’s something that I

would like to take back to OMB and consider more before I give

you a fuller answer.

Mr. DODARO. Congressman, I think this attention to improper

payments is one of the real success stories for the Chief Financial

Officer Act initiatives. When we first started this back in the early

1990’s, nobody knew what the improper payments were from any

of these Federal programs. And as Mr. Werfel has talked about, it’s

focused attention on it going forward. The number, however, is, I

believe, going to continue to go up for a while while more programs

come under reporting. It went up from $41 billion last year to $55

billion this year, in part because this is the first time the Medicaid

program has reported improper payments, and that was only for a

6-month period of time.

Mr. BILBRAY. We really have a culture shock there.

Mr. DODARO. I agree with you. But I think what will happen is

the fiscal pressures are going to put enormous scrutiny and transparency over bringing these improper payment numbers down, and

hopefully can get embedded into the appropriation process so that

it gets a lot of oversight on the part of the Congress. But this reporting is really a good tool, and it’s very, very necessary going forward.

Mr. BILBRAY. Dan, let me say this, because I come from 20 years

in local government. Given some kind of appearance of incentive

really has made the difference. I mean, we actually have in San

Diego, a county of over 3 million, larger than 20 States of the

Union, we also has a program that gives cash payments to employees who have come in and saved the county funds. We have actually given departments segments.

The Federal Government right now gives major incentives to law

enforcement for drug busts. They get to keep assets. It is just—I

know in a perfect world we don’t want to do that, but it’s human

nature. We’ve built the most prosperous free society in the history

of the world based on profit incentives—or at least some kind of

benefit for good behavior—and I would like to see some way to be

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able to tap into that, if nothing else, as a gesture of thank you very

much for doing your job not just well, but efficiently. And so I hope

that we take a look at that. And go ahead. I’ll allow you to respond.

Mr. WERFEL. While you were talking, I realized that something

that has worked very well that can be built upon is, at the same

time the Improper Payments Information Act was passed, the Recovery Audit Act was passed. And what that is about—it is about

recovering improper payments made to vendors, and that statute

in particular sets up a framework where agencies can hire contractors who get paid to go and find the errors, and they get paid based

on how many errors they find. And that program has been so successful in recovering error across government that Medicare programs started using recovering auditing to collect errors from hospitals and other areas. And again, because that contractor is out

there looking for errors that were made to their fellow contractors,

but they’re incentivized because they get more money the more errors they find, that has proven to be one of the more effective lessons learned. So I think we can look at that and see what kind of

impact you could have broader on the government as a whole in

programs like food stamps and public housing, some of our big-ticket improper payments.

Mr. BILBRAY. I’m sure the chairman has seen that contracting

out and using the private sector—maybe we could give the in-house

operation some incentive to be able to get a little more efficient. I

appreciate that, and I appreciate it, Mr. Chairman.

Mr. TOWNS. Thank you very much. Thank you.

Mr. BILBRAY. By the way, the percentage I would be interested

in. If you thought at any time, would you contact my office if you

see some kind of place that you think we should be shooting for?

We’re looking on legislation right now, and that is an interesting

point.

Mr. WERFEL. I will do that. Thank you.

Mr. BILBRAY. Thank you, Mr. Chairman.

Mr. TOWNS. Let me just run over a couple other things, and then

we’ll call it a day.

Mr. Patterson, DOD has acknowledged recently that its business

system environment is comprised of approximately 3,000 separate

business systems. The Department spends over $15 billion annually to operate and maintain and modernize these business systems

and associated information technology. Fifteen billion dollars is a

lot of money. Even for DOD, that’s a lot of money. How many modernization efforts has the Defense Business System Management

Committee evaluated and decided that there were not a good investment, how many?

Mr. PATTERSON. We have a vetting process that has an intermediate review board that looks at all of the systems that are proposed. I can’t tell you how many that we have rejected, but I can

tell you that very few come to the Defense Business Systems Management Committee.

And for a more detailed look at the process, with your concurrence, I would like Dave Fisher, who actually is the Director of the

agency that deals with this issue, to answer your question more,

in a more detailed fashion.

Mr. TOWNS. I would be delighted to.

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Would you take a seat at the table, please?

Mr. FISHER. As Mr. Patterson alluded to, what we have found

and what was helpful going back to the 2005 NDAA, which stood

up or required the Department to stand up the DBSMC as well as

investment review boards across the functional areas within the

Department, what we found is that, as Mr. Patterson alluded to,

this vetting process has done some self-editing, if you will, of the

proposals that would come forward. There were some systems that

came forward through these investment review boards that were

turned down or were pushed back for further analysis to make sure

that they were not causing problems with a broader portfolio, either duplicative or overlapping. That kind of visibility started to

come forward at the Office of the Secretary level when these investment review boards came into play.

Well, I think most of the systems that eventually find their way

to the DBSMC do get approval. Many fewer systems are coming

forward because of this same vetting process. It’s got to go through

the component initially. So the military departments have put in

their own process, then it comes through the Office of the Secretary

of Defense process for investment management, then it comes to

the DBSMC. And what we’ve seen is, the volume of systems that

have come forward to the top where final approval is required has

gone down, we think, because this more rigor now has been put in

place.

Mr. TOWNS. It is our understanding that some of the Department’s business-system modernization efforts, such as the Army

Logistics Modernization Program, the Navy Enterprise Resource

Planning Initiative and the Defense Integrated Military Human

Resources System, have not been implemented in accordance with

their plan, schedule and estimated budget. What does DOD—let

me put it this way: Why does DOD continually have difficulty implementing these business systems on time within the budget? I

mean, what is the problem?

Mr. PATTERSON. Having come from the corporate world, I can

give you a point of view, and I would like to use the Logistics Modernization Program as an example. When I first joined the comptroller office, I had a review of the various programs that we were

looking at. LMP was the first program that popped up in one of the

meetings. I was told that this program needed an additional $320

million. I asked how much had already been spent, and I thought

it was somewhat excessive. And I said, well, tell me how is it working, and they said, oh, well, we have a pilot program. I said, really,

and how long have you had this pilot program? For about 3 years.

And again my question: How is this working? What kind of a contract is this? It’s an IDIQ contract, I see. And what’s the not-toexceed? Oh, that’s $1.2 billion. And I said, so you got an IDIQ contract, $1.2 billion, you don’t have a program, and you want $320

million more? No. You’ll get $20 million, you’ll tell me next year

how you’re going to fix this program, and then we’ll go from there.

Amazingly enough the contractor figured out how they were

going to fix the program, and LMP is back on track and will have

a—in fact, is turning out a product as we speak in a way that they

had envisioned some time ago. What it takes is putting discipline

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and structure into the process and not allowing contractors to run

the program.

Mr. DODARO. Mr. Chairman, I would want to echo the concerns

that Mr. Patterson is mentioning. We look at systems across government. I’ve spent a lot of time looking at DOD. We’ve put DOD

on our high-risk list in several respects, both in financial management and the business systems area, as well as a weapon systems.

I just signed out a report not that long ago that talked about the

huge cost overruns and managing in the weapons system area.

But with regard to the business systems, part of the problem is

lack of definitive requirements up front as to exactly what you

want to achieve, incremental improvements where you demonstrate

some success before you make large investments in the process. So

you need a disciplined management system going forward, and part

of the problem over at DOD as well is that you have just large components with large investments, and it’s difficult for the Office of

the Secretary to provide the oversight over the components.

It was mentioned earlier, some of the systems aren’t coming up

for review, but there needs to be an oversight process within the

Department to make sure the components have discipline processes

in place as well.

So those are some of the fundamental reasons. It all starts with

a good definition of requirements and somebody questioning that

before the investment is made, particularly long-term investments.

It needs to be more incremental.

Mr. TOWNS. Thank you very much.

Do you have any further questions?

Mr. BILBRAY. Just one. The fact is when we work with DOD—

I worked on environmental issues in California, and there was a

thing called technology-forcing regulation, and basically the military works with technology-forcing contracting. It’s just cutting

edge. You’re literally contracting for things that nobody can do

now, but they may be able to do, and you push that edge. That’s

how we ended up with a P–51. When the contract was going out,

nobody in the system even conceived of a fighter that could fly that

far and protect our B–17.

So let’s talk about the successes. But inherent in that is some

real challenges. Let’s talk about a program the American people

love, it looks very successful, the Predator, and the way the Predator came on line. Is there anything we learned there with the program that looks like it was a huge, huge success, which challenges

why originally it wasn’t accepted, why there was so much obstruction? And you don’t have to do it now, but I really would be interested. That is sort of one, so if we see how—where it works, maybe

we can use that to learn of what the things that don’t work and

make sure that we don’t throw the baby out with the bath water,

because I think right now the system, if it wasn’t for, I hate to say,

an earmark, we would never have the Predator. And I think everybody now agrees that thank God we had it.

But I would like to learn from that mistake of the system not initially going forward, but developing it. And I know there is still an

ongoing issue with the Predator, but I would like to know the background on that so we can sort of learn from successes and failures

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on that aspect. It’s something high enough profile that the public

could relate to it, too.

Mr. PATTERSON. Sir, we’ll get you a detailed paper on the history

and what we see as the Predator’s future, and you’re exactly right;

it was a very successful program. It did not start out that way,

however. It had considerable resistance, and if you’ll recall it, the

Predator as an ISR platform went from an ISR platform to a platform that shot Hellfires in about 90 days because we had to do it.

Mr. BILBRAY. I’m still suspicious. Mr. Hunter is a very close

friend of mine, and he pushed that Predator. I was very suspicious

when the next generation came out and it was called the Hunter.

Thank you very much, Mr. Chairman.

Mr. TOWNS. Let me just say quickly, if DOD—Mr. Dodaro, if

DOD does achieve a clean audit opinion on its financial statement,

does that automatically justify removing DOD financial management from GAO’s high-risk list?

Mr. DODARO. Not in and of itself, Mr. Chairman, for a couple of

reasons. One, we would want to make sure that could be sustained

over a period of time; No. 2, that there’s not material weaknesses

that would basically still be problematic that would be solved.

I mean, that’s a first step toward it, and if DOD got to that step,

we would be very pleased to see that happen. But as we’ve taken

on this issue in other departments and agencies, the opinion needs

to be sustained over a period of time, and there needs to be not underlying material weaknesses that still make it at risk.

So the answer would be it would be: a good first step, but in and

of itself it’s not enough.

Mr. TOWNS. Mr. Patterson, what do you say to that, other than

you would take yourself off the list?

Mr. PATTERSON. No, sir. Actually, as appealing as that suggestion might be, we are working with the GAO. My question would

be, what are the standards necessary to achieve in order to reduce

the risk as GAO sees it? We’re working with the GAO to come to

those kinds of conclusions. But I think it’s important to note that

although there is a relationship between material weaknesses and

clean audits, you can, in fact, have a clean audit and still have

some material weaknesses that you are working on. And so we

have really a dual-track approach to this, and we’re working with

the GAO.

In fact, when we had our audit readiness meeting to look at the

Marine Corps as the first military department or the first service

to start down a path of a clean audit, we had OMB, IG and the

GAO in attendance so that we would have a very clear understanding of a way forward. We have adopted an audit readiness approach to this, which has replaced the previous way of looking at

this where we had repetitive audits that were very expensive and

basically told you what you already knew. And now we look at

these entities in terms of, are they ready for an audit, and we have

a clear and structured process to do that. And again I say that

we’re working with the GAO and IG and OMB, and it has been a

very productive relationship.

Mr. TOWNS. Let me thank you for coming, and let me just say

to you that we’re going to stay on this because we really feel there’s

a lot of waste, fraud and abuse. We really feel that, and I think

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that some of it might even have to do with the structure that you

might have to review at some point in time to make some changes

in order to be able to get to where we need to go.

So thank you very, very much, but we’re here to help. As my colleague indicated earlier, we want to assist you. We’re just not raising these questions just to sort of like create problems, but we

want to see in terms of what we might be able to do on this side

to assist you. Because we feel that there’s a lot of resources there,

and for some reason we’re having problems getting a handle on it.

Mr. BILBRAY. And I think that’s fair to say that when we say a

lot of waste, fraud and abuse, by sheer volume a small percentage

still is one big hunk, and so as a little operation may make some

big mistakes and it may not add up. You are so large that any

small mistake is a huge hit, and so there is a lot and always will

be the challenge to try to reduce that down.

Thank you very much, Mr. Chairman.

Mr. TOWNS. All right. Thank you. The committee is adjourned.

[Whereupon, at 4:37 p.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]

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