In fiscal year 2004, much of our work examined the effectiveness of the federal government’s day-to-day operations, such as administering benefits to the elderly and other needy populations, providing grants and loans to college students, and collecting taxes from businesses and individuals. Yet, we remained alert to emerging problems that demanded the attention of lawmakers and the public. For example, we continued to closely monitor developments affecting the Iraq war, defense transformation, homeland security, social security, health care, the U.S. Postal Service, civil service reform, and the nation’s private pension system. We also informed policymakers about long-term challenges facing the nation, such as the federal government’s financial condition and fiscal outlook, new security threats in the post-cold war world, the aging of America and its impact on our health care and retirement systems, changing economic conditions, and the increasing demands on our infrastructure—from highways to water systems. We provided congressional committees, members, and staff with up-to-date information in the form of reports, recommendations, testimonies, briefings, and expert comments on bills, laws, and other legal matters affecting the federal government. We performed this work in accordance with the GAO Strategic Plan for serving the Congress, consistent with our professional standards, and guided by our core values. See appendix I for our Strategic Plan Framework for serving the Congress and the nation. In fiscal year 2004, our work generated $44 billion in financial benefits, primarily from recommendations we made to agencies and the Congress (see fig. 1). Of this amount, about $27 billion resulted from changes to laws or regulations, $11 billion resulted from agency actions based on our recommendations to improve services to the public, and $6 billion resulted from improvements to core business processes, both governmentwide and at specific agencies, resulting from our work (see fig. 2). Our findings and recommendations produce measurable financial benefits for the federal government when the Congress or agencies act on them. The funds that are saved can then be made available to reduce government expenditures or be reallocated to other areas. The monetary effect realized can be the result of changes in business operations and activities; the structure of federal programs; or entitlements, taxes, or user fees. For example, financial benefits could result if the Congress were able to reduce its annual cost of operating a federal program or lessen the cost of a multiyear program or entitlement. Financial benefits could also result from increases in federal revenues—due to changes in laws, user fees, or sales—that our work helped to produce. Financial benefits included in our performance measures are net benefits—that is, estimates of financial benefits that have been reduced by the costs associated with taking the action that we recommended. Figure 3 lists several of our major financial benefits for fiscal year 2004 and briefly describes some of our work contributing to financial benefits. Many of the benefits that result from our work cannot be measured in dollar terms. During fiscal year 2004, we recorded a total of 1,197 other benefits (see fig. 4). We documented 74 instances where information we provided to the Congress resulted in statutory or regulatory changes, 570 instances where federal agencies improved services to the public, and 553 instances where agencies improved core business processes or governmentwide reforms were advanced (see fig. 5). These actions spanned the full spectrum of national issues, from ensuring the safety of commercial airline passengers to identifying abusive tax shelters. See figure 6 for examples of other benefits we claimed as accomplishments in fiscal year 2004. At the end of fiscal year 2004, 83 percent of the recommendations we made in fiscal year 2000 had been implemented (see fig. 7), primarily by executive branch agencies. Putting these recommendations into practice is generating tangible benefits for the American people. As figure 8 indicates, agencies need time to act on our recommendations. Therefore, we assess recommendations implemented after 4 years, the point at which experience has shown that, if a recommendation has not been implemented, it is not likely to be. During fiscal year 2004, experts from our staff testified at 217 congressional hearings (see fig. 9) covering a wide range of complex issues. For example, our senior executives testified on the financial condition of the Pension Benefit Guaranty Corporation’s single-employer program, the effects of various proposals to reform Social Security’s benefit distributions, and enhancing federal accountability through inspectors general. Nearly half of our testimonies were related to high-risk areas and programs. See figure 10 for a summary of issues we testified on, by strategic goal, in fiscal year 2004. Issued to coincide with the start of each new Congress, our high-risk update lists government programs and functions in need of special attention or transformation to ensure that the federal government functions in the most economical, efficient, and effective manner possible. Our latest report, released in January 2005, presents the status of high-risk areas identified in 2003 and lists new high-risk areas warranting attention by the Congress and the administration. In January 2003, we identified 25 high-risk areas; in July 2003, a twenty- sixth high-risk area was added to the list (see table 1). Since then, progress has been made in all areas, although the nature and significance of progress varies by area. Federal departments and agencies, as well as the Congress, have shown a continuing commitment to addressing these high- risk challenges and have taken various steps to help correct several of their root causes. GAO has determined that sufficient progress has been made to remove the high-risk designation from the following three areas: student financial aid programs, FAA financial management, and Forest Service financial management. Also, four areas related to IRS have been consolidated into two areas. This year, we designated four new high-risk areas. The first new area is establishing appropriate and effective information-sharing mechanisms to improve homeland security. Federal policy creates specific requirements for information-sharing efforts, including the development of processes and procedures for collaboration between federal, state, and local governments and the private sector. This area has received increased attention, but the federal government still faces formidable challenges sharing information among stakeholders in an appropriate and timely manner to minimize risk. The second and third new high-risk areas are, respectively, DOD’s approach to business transformation and its personnel security clearance program. GAO has reported on inefficiencies and inadequate transparency and accountability across DOD’s major business areas, resulting in billions of dollars of wasted resources. Senior leaders have shown commitment to business transformation through individual initiatives in acquisition reform, business modernization, and financial management, among others, but little tangible evidence of actual improvement has been seen to date in DOD’s business operations. DOD needs to take stronger steps to achieve and sustain business reform on a departmentwide basis. Further, delays by DOD in completing background investigations and adjudications can affect the entire government because DOD performs this function for hundreds of thousands of industry personnel from 22 federal agencies, as well as its own service members, federal civilian employees, and industry personnel. The Office of Personnel Management (OPM) is to assume DOD’s personnel security investigative function, but this change alone will not reduce the shortages of investigative personnel. The fourth high-risk area is management of interagency contracting. Interagency contracts can leverage the government’s buying power and provide a simplified and expedited method of procurement. But several factors can pose risks, including the rapid growth of dollars involved combined with the limited expertise of some agencies in using these contracts as well as recent problems related to their management. Various improvement efforts have been initiated to address interagency contracting, but improved policies and processes, and their effective implementation, are needed to ensure that interagency contracting achieves its full potential in the most effective and efficient manner. Lasting solutions to high-risk problems offer the potential to save billions of dollars, dramatically improve service to the American public, strengthen public confidence and trust in the performance and accountability of our national government, and ensure the ability of government to deliver on its promises. In fiscal year 2004, we issued 218 reports and delivered 96 testimonies related to our high-risk areas and programs, and our work involving these areas resulted in financial benefits totaling over $20 billion. This work, for example, included 13 reports and 10 testimonies examining problems with DOD’s financial management practices, such as weak internal controls over travel cards, inadequate management of payments to the Navy’s telecommunications vendors, and abuses of the federal tax system by DOD contractors, resulting in $2.7 billion in financial benefits. In addition, we documented $700 million in financial benefits based on previous work and produced 7 reports and 4 testimonies focusing on, for example, improving Social Security Administration and Department of Energy processes that result in inconsistent disability decisions and inconsistent benefit outcomes. Shortly after I was appointed in November 1998, I determined that GAO should undertake a major transformation effort to better enable it to “lead by example” and better support the Congress in the 21st century. This effort is consistent with the House Report 108-577 on the fiscal year 2005 legislative branch appropriation that focuses on improving the efficiency and effectiveness of operations at legislative branch agencies. H.Rpt. 108-577 directed GAO to work closely with the head of each legislative branch agency to identify opportunities for streamlining, cross- servicing and outsourcing, leveraging existing technology, and applying management principles identified as “best practices” in comparable public and private sector enterprises. H.R. 108-577 also directed the legislative branch agencies to be prepared to discuss recommended changes during the fiscal year 2006 appropriations hearing cycle. Our agency transformation effort has enabled GAO to become more results-oriented, partnerial, client-focused, and externally aware, and less hierarchical, process-oriented, “siloed,” and internally focused. The transformation resulted in reduced organizational layers, fewer field offices, the elimination of duplication in several areas, and improved our overall resource allocation. We began our transformation effort by using the GAO Strategic Plan as a framework to align our organization and its resources. On the basis of the strategic plan, we streamlined and realigned the agency to eliminate a management layer, consolidated 35 issue areas into 13 teams, and reduced our field offices from 16 to 11. We also eliminated the position of Regional Manager—a Senior Executive Service level position—in the individual field offices and consolidated the remaining field offices into three regions—the eastern region, the central region, and the western region, each headed by a single senior executive. Following the realignment of our mission organization and field offices, GAO’s support organizations were restructured and centralized to eliminate duplication and to provide human capital, report production and processing, information systems desk-side support, budget and financial management, and other services more efficiently to agency staff. This has resulted in a 14 percent reduction in our support staff since 1998. As shown in figure 11, these and subsequent measures improved the “shape” of the agency by decreasing the number of mid-level managers and by increasing the number of entry level and other staff with the skills and abilities to accomplish our work. During my tenure, GAO has outsourced and cross-serviced many administrative support activities, which has allowed GAO to devote more of its resources to mission work. In fiscal year 2004, about two-thirds of our nonhuman capital costs were spent to obtain critical mission support services for about 165 activities from the private and public sectors through outsourcing. Outsourcing contracts include a wide range of mission support activities, including information technology systems development, maintenance, and support; printing and dissemination of GAO products; operation and maintenance of the GAO Headquarters building; information, personnel, and industrial security activities; records management; operational support; and audit service support. GAO also meets many of its requirements through cross-servicing arrangements with other federal agencies. For example, GAO uses the Department of Agriculture’s National Finance Center to process its personnel/payroll transactions. Also, GAO uses the legislative branch’s long-distance telephone contract, which has resulted in continual reductions in long- distance rates. GAO also uses a wide range of contracting arrangements available in the executive branch for procuring major information technology (IT) services. GAO also uses the Library of Congress’ Federal Library and Information Network to procure all of its commercial online databases. Currently, as shown in figure 12, over 50 percent of our staff resources in the support area are contractors, allowing us to devote more of our staff resources to our mission work. We recently surveyed managers of agency mission support operations and identified additional activities that potentially could be filled through alternative sourcing strategies. In fiscal years 2005 and 2006, we will assess the feasibility of alternative sourcing for these activities using an acquisition sourcing maturity model and cost- benefit analyses. Utilizing IT effectively is critical to our productivity, success, and viability. We have applied IT best management practices to take advantage of a wide range of available technologies such as Web-based applications and Web-enabled information access, as well as modern, mobile computing devices such as notebook computers to facilitate our ability to carry out our work for the Congress more effectively. We make wide use of third- party reviews of our practices and have scored well in measurement efforts such as total cost of ownership, customer service, and application development. In fiscal year 2002, an independent study of GAO’s IT processes and related costs revealed that, “GAO is delivering superb IT application support and development services to the business units at 29 percent less than the cost it would take the Government peer group to deliver.” In confirmation of these findings, in fiscal year 2003, GAO was one of only three federal agencies to receive the CIO Magazine 100 Award for excellence in effectively managing IT resources to obtain the most value for every IT dollar. We were named to the CIO Magazine’s “CIO 100” for our excellence in managing IT resources in both 2003 and 2004. Because one of our strategic goals is to maximize our value by serving as a model agency for the federal government, we adopt best practices that we have suggested for other agencies, and we hold ourselves to the spirit of many laws that are applicable only to the executive branch. For example, we adhere to the best practices for results-oriented management outlined in the Government Performance and Results Act (GPRA). We have strengthened our financial management by centralizing authority in a Chief Financial Officer with functional responsibilities for financial management, long-range planning, accountability reporting, and the preparation of audited financial statements, as directed in the Chief Financial Officers Act (CFO Act). Also, for the eighteenth consecutive year, independent auditors gave GAO’s financial statements an unqualified opinion with no material weaknesses and no major compliance problems. In the human capital area, we are clearly leading by example in modernizing our policies and procedures. For example, we have adopted a range of strategic workforce policies and practices as a result of a comprehensive workforce planning effort. Among other things, this effort has resulted in greatly upgrading our workforce capacity in both IT and health care policy. We also have updated our performance management and compensation systems and our training to maximize staff effectiveness and to fully develop the potential of our staff within both current and expected resource levels. We are requesting budget authority of $493.5 million for fiscal year 2006. This budget request will allow us to continue to maximize productivity, operate more effectively and efficiently, and maintain the progress we have made in technology and other areas. However, it does not allow us sufficient funding to support a staffing level of 3,269—the staffing level that we requested in previous years. In preparing this request, we conducted a baseline review of our operating requirements and reduced them as much as we felt would be prudent. However, with about 80 percent of our budget composed of human capital costs, we needed to constrain hiring to keep our fiscal year 2006 budget request modest. We plan to use recently enacted human capital flexibility from the GAO Human Capital Reform Act of 2004 as a framework to consider such cost savings options as conducting one or more voluntary early retirement programs and we also plan to review our total compensation policies and approaches. There are increasingly greater demands on GAO’s resources. Since fiscal year 2000, we have experienced a 30 percent increase in the number of bid protest filings. We expect this workload to increase over the coming months because of a recent change in the law that expands the number of parties who are eligible to file protests. In addition, the number of congressional mandates for GAO studies, such as our reviews of executive branch and legislative branch operations, has increased more than 15 percent since fiscal year 2000. While we have reduced our planned staffing level for fiscal years 2005 and 2006, we believe that the staffing level we requested in previous years is a more optimal staffing level for GAO and would allow us to successfully meet the future needs of the Congress and provide the return on investment that the Congress and the American people expect. We will be seeking your commitment and support to provide the funding needed to rebuild our staffing levels over the next few fiscal years, especially as we approach a point where we may be able to express an opinion on the federal government’s consolidated financial statements. Given current and projected deficits and the demands associated with managing a growing national debt, as well as challenges facing the Congress to restructure federal programs, reevaluate the role of government, and ensure accountability of federal agencies, a strong GAO will result in substantially greater benefits to the Congress and the American people. Table 2 summarizes the changes we are requesting in our fiscal year 2006 budget. Our budget request supports three broad program areas: Human Capital, Mission Operations, and Mission Support. In our Human Capital program, to ensure our ability to attract, retain, and reward high-quality staff and compete with other employers, we provide competitive salaries and benefits, student loan repayments, and transit subsidy benefits. We have undertaken reviews of our classification and compensation systems to consider ways to make them more market-based and performance-oriented and to take into consideration market data for comparable positions in organizations with which we compete for talent. Our rewards and recognition program recognizes significant contributions by GAO staff to the agency’s accomplishments. As a knowledge-based, world-class, professional services organization in an environment of increasingly complex work and accelerating change, we maintain a strong commitment to staff training and development. We promote a workforce that continually improves its skills and knowledge. We plan to allocate funds to our Mission Operations program to conduct travel and contract for expert advice and assistance. Travel is critical to accomplishing our mission. Our work covers a wide range of subjects of congressional interest, plays a key role in congressional decision making, and can have profound implications and ramifications for national policy decisions. Our analyses and recommendations are based on original research, rather than reliance on third-party source materials. In addition, GAO is subject to professional standards and core values that uniquely position the agency to support the Congress in discharging its oversight and other responsibilities under the Constitution. We use contracts to obtain expert advice and or assistance not readily available within GAO, or when expertise is needed within compressed time frames for a particular project, audit, or engagement. Examples of contract services include obtaining consultant services, conducting broad- based studies in support of audit efforts, gathering key data on specific areas of audit interest, and obtaining technical assistance and expertise in highly specialized areas. Mission Support programs provide the critical infrastructure we need to conduct our work. Mission support activities include the following programs: Information Technology: Our IT plan provides a road map for ensuring that IT activities are fully aligned with and enable achievement of our strategic and business goals. The plan focuses on improved client service, IT reliability, and security; it promotes effectiveness, efficiency and cost benefit concepts. In fiscal years 2005 and 2006, we plan to continue to modernize outdated management information systems to eliminate redundant tasks, automate repetitive tasks, and increase staff productivity. We also will continue to modernize or develop systems focusing on how analysts do their work. For example, we enhanced the Weapons Systems Database that we created to provide the Congress information to support budget deliberations. Building Management: The Building Management program provides operating funds for the GAO Headquarters building and field office locations, safety and security programs, and asset management. We periodically assess building management components to ensure program economy, efficiency and effectiveness. We are currently 8 percent below the General Services Administration’s (GSA) median costs for facilities management. We continue to look for cost-reducing efficiencies in our utility usage. Our electrical costs are currently 25 percent below GSA’s median cost. With the pending completion of our perimeter security enhancements and an automated agency wide access control system, all major security enhancements will have been completed. Knowledge Services: As a knowledge-based organization, it is essential for GAO to gather, analyze, disseminate, and archive information. Our Knowledge Services program provides the information assets and services needed to support these efforts. In recent years, we have expanded our use of electronic media for publications and dissemination; enhanced our external Web site, resulting in increased public access to GAO products; and closed our internal print plant and increased the use of external contractors to print GAO products, increasing the efficiency and cost- effectiveness of our printing operation. Due to recent budget constraints, we have curtailed some efforts related to archiving paper records. We currently are implementing an electronic records management system that will facilitate knowledge transfer, as well as document retrieval and archival requirements. Human Capital Operations: In addition, funds will be allocated to Human Capital Operations and support services to cover outplacement assistance, employee health and counseling, position management and classification, administrative support, and transcription and translation services. We appreciate your consideration of our budget request for fiscal year 2006 to support the Congress. GAO is uniquely positioned to help provide the Congress the timely, objective information it needs to discharge its constitutional responsibilities, especially in connection with oversight matters. GAO’s work covers virtually every area in which the federal government is or may become involved anywhere in the world. In the years ahead, GAO’s support will prove even more critical because of the pressures created by our nation’s large and growing long-term fiscal imbalance. This concludes my statement. I would be pleased to answer any questions the Members of the Committee may have. This section contains credit and copyright information for images and graphics in this product, as appropriate, when that information was not listed adjacent to the image or graphic. Page 6: PhotoDisc (money); Eyewire (monitor and medical symbol). Page 9: BrandXPictures (flag); PhotoDisc (calculator and Social Security card). Page 11: BrandXPictures (flag); Digital Vision (teacher); Dynamic Graphics (health care). Page 12: BrandXPictures (flag); Dynamic Graphics (1040 Form); DOD (soldiers). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. 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Summary: We are grateful to the Congress for providing us with the support and resources that have helped us in our quest to be a world-class professional services organization. We are proud of the work we accomplish as we continue to provide our congressional clients with professional, objective, fact-based, non-partisan, non-ideological, fair, balanced, and reliable information in a timely manner regarding how well government programs and policies are working and, when needed, recommendations to make government work better. We believe that investing in GAO produces a sound return and results in substantial benefits to the Congress and the American people. In the years ahead, our support to the Congress will likely prove even more critical because of the pressures created by our nation's current and projected budget deficit and long-term fiscal imbalance. These fiscal pressures will require the Congress to make tough choices regarding what the government should do, how it will do its work, who will help carry out its work in the future, and how government will be financed in the future. We summarized the larger challenges facing the federal government in our recently issued 21st Century Challenges report. In this report, we emphasize the critical need to bring the federal government's programs and policies into line with 21st century realities. Continuing on our current unsustainable fiscal path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. We, therefore, must fundamentally reexamine major spending and tax policies and priorities in an effort to recapture our fiscal flexibility and ensure that our programs and priorities respond to emerging security, social, economic, and environmental changes and challenges in the years ahead. We believe that GAO can be of invaluable assistance in helping the Congress address these challenges. This testimony focuses on our (1) performance and results with the funding you provided us in fiscal year 2004, (2) streamlining and management improvement efforts under way, and (3) budget request for fiscal year 2006 to support the Congress and serve the American people. In summary the funding we received in fiscal year 2004 allowed us to audit and evaluate a number of major topics of concern to the nation and, in some cases, the world. We also continued to raise concerns about the nation's long-term fiscal imbalance, summarized key health care statistics and published a proposed framework for related reforms, and provided staff support for the 9/11 Commission. In fiscal year 2004, we exceeded or equaled our all-time record for six of our seven key performance indicators while continuing to improve our client and employee feedback results. We are especially pleased to report that we documented $44 billion in financial benefits--a return of $95 for every dollar spent, or $13.7 million per employee. In fiscal year 2004, we also recorded 1,197 other benefits that could not be measured in dollar terms including benefits that helped to change laws, to improve services to the public and to promote sound agency and governmentwide management. Also, experts from our staff testified at 217 congressional hearings covering a wide range of important public policy issues during fiscal year 2004. Shortly after David Walker was appointed Comptroller General, he determined that our agency would undertake a transformation effort. Our transformation effort has enabled us to eliminate a management layer, streamline our organization, reduce our overall footprint, and centralize many of our support functions. Currently, over 50 percent of our support staff are contractors, allowing us to devote more of our staff resources to our mission work. We recently surveyed managers of agency support operations and identified additional activities that potentially could be filled through alternative sourcing strategies. In fiscal years 2005 and 2006, we will further assess the feasibility of using alternative sourcing for these activities. I would be pleased to brief you at a later date on our preliminary analyses. In developing our fiscal year 2006 budget, we have taken into consideration the overall federal budget constraints and the committee's desire to lead by example. Accordingly, we are requesting $493.5 million which represents a modest increase of 4 percent over fiscal year 2005. This increase is primarily for mandatory pay costs and price level changes. This budget request will allow us to continue to maximize productivity, operate more effectively and efficiently, and maintain the progress we have made in technology and other areas, but it does not allow us sufficient funding to support a staffing level of 3,269--the staffing level that we requested in previous years. Even as we are tempering our budget request, it needs to be acknowledged that there are increasing demands on GAO's resources. While we have reduced our planned staffing level for fiscal years 2005 and 2006 in order to keep our request modest, we believe that the staffing level we requested in previous years is a more optimal staffing level for GAO and would allow us to better meet the needs of the Congress and provide the return on investment that both the Congress and the American people expect.