Mr. Chairman and Members of the Subcommittee:

Thank you for inviting me to appear today. I appreciate the opportunity to share my views on the financial management of the U.S. Department of Education.

Secretary Riley and I are strong believers in the potential of the Department's programs to improve American education, help all children reach high standards, and open the doors to college. We emphasize strong management because we want to be sure that the federal investment in education is used as efficiently and effectively as possible.

When Secretary Riley took office in 1993, he assumed the reins of an agency whose senior leadership had long focused on external policy agendas at the expense of day-to-day management. Over the last seven years, he has led an effort to hire skilled managers and technical staff, improve data quality, and modernize accounting systems and procedures. Our management improvements have achieved savings that could fund our administrative budget many times over.

For instance, seven years ago 22.4 percent of students entering repayment defaulted on their loans by the end of the following fiscal year. We have reduced this cohort default rate every year. It is now a record-low 8.8 percent, only 40 percent of what it was at the beginning of this Administration. At the same time, collections on defaulted loans (including consolidations) have tripled from $1 billion in Fiscal Year (FY) 1993 to over $3 billion in FY 1999.

The Direct Student Loan program, proposed by President Clinton in 1993 and implemented in 1994, will save taxpayers an estimated $4 billion over the life of loans made in the last five years (compared to the federal cost if direct loans had instead been guaranteed loans). Direct loans are generally less expensive for the federal government because there are no federal subsidies for lenders and interest earned on the loans accrues to the U.S. Treasury, instead of to private lenders.

The Department created the National Student Loan Data System, the Department's first comprehensive database of student aid recipients. This new tool has improved program management and informed policy-making. For example, it has allowed us to identify prior defaulters to schools and thereby help prevent ineligible students from receiving as much as $1 billion in grants and loans.

Over the last seven years, the Department has sought to improve customer service and address longtime management weaknesses. We have only two-thirds as many employees as administered our programs in 1980, even though our budget has more than doubled. And since 1993, we have trimmed our regulations by one-third, reduced grant application paperwork, and aggressively implemented waiver authority for legal roadblocks to state reform.

In May 1998, we established the Education Publications Center, or ED Pubs, as a one-stop source for our publications and other information products. Customer service ratings for ED Pubs exceed those of premier corporations like Federal Express and Nordstrom.

We are working on a new Internet-based data collection system to better assess the results of our programs and initiatives. We recently successfully tested the concept with the Council of Chief State School Officers and the states of Nebraska and Oregon. Under the Integrated Performance and Benchmarking System (IPBS), each state will maintain a database of defined core data and performance indicators. The Department will have electronic access to these databases, minimizing the reporting burden on states and enabling speedier information collection.

The Department's Office for Civil Rights is resolving discrimination complaints more efficiently, thanks to dedicated, well-trained staff; a new, team-based staffing structure; and investments in technology. In FY 1999, OCR resolved 70 percent more complaints than it had in FY 1990 with 10 percent fewer staff. More than 80 percent of the complaints in FY 1999 were resolved within 180 days of receipt.

We successfully met the Y2K challenge, bringing all 175 of our data systems into Year 2000 compliance well within the Office of Management and Budget's government-wide deadline of March 31, 1999. We met our goal even though, in August 1998, the Subcommittee on Government Management, Information, and Technology projected that we would not complete our work until at least 2030.

And we have a history of working cooperatively with Congress, the General Accounting Office (GAO), and our Office of the Inspector General (OIG). As a result, there are fewer than half as many open audits as there were six years ago.

We have also made a sustained effort to improve the financial management of our programs. Since 1993, we have sought to improve our data quality, modernize and integrate our systems, and improve financial reporting. In 1998, we completed implementing our new financial management system, the Education Central Automated Processing System (EDCAPS). And after devoting substantial resources to supporting the audit of our FY 1997 financial statements, we received an unqualified opinion on all three statements.

However, our preparation of the FY 1998 financial statements was delayed by the requirement that we prepare two new major financial statements; our first year using new standard ledger software, i.e.FARS; continuing data quality issues; and our intensive effort to support the audit of the FY 1997 statements. As a result, we accepted our auditor's recommendation to suspend work on the FY 1998 statements and received a disclaimer of opinion on each of them.

Today, the Department's Inspector General released our auditor's opinion on our FY 1999 financial statements. Our auditor, Ernst and Young, issued four qualified opinions and one disclaimer of opinion on the Department's five financial statements. The five statements prepared specifically for our Student Financial Assistance (SFA) programs also received four qualified opinions and one disclaimer.

Obviously, our goal is to receive an unqualified audit opinion every year. However, I am heartened by our substantial progress since last year, when our auditor could not express an opinion on any of our five financial statements. Our auditor was able to express an opinion on four of our financial statements because we have strengthened our financial documentation and data integrity. As a result, I believe this audit result validates our approach to improving the Department's financial management.

I am also pleased that the Department and our auditors were able to complete our work and release the audit on schedule - rather than nine months late, as occurred last year. We completed our work on time despite the need to prepare five additional financial statements for our Student Financial Assistance programs and a five-week delay in beginning the process.

Another sign of progress is our effort to implement our auditor's recommendations. As Inspector General Lorraine Lewis noted in her prepared testimony today, as of last December the Department had implemented only 28 of the 115 recommendations (including duplicates) made in the previous four audits. I have made the resolution of these recommendations a priority. We have now completed action on 40 additional actions and have asked for the OIG's concurrence that they are complete. The FY 1999 audit included an additional 24 recommendations - mostly related to prior recommendations to correct previously identified weaknesses - and we will address them as expeditiously as possible.

Our goal continues to be to receive an unqualified audit opinion every year, as we did in FY 1997. Nonetheless, I am pleased that we are showing progress. Over the past 12 months, we have strengthened our financial management systems in five important ways.

First, we have improved our reconciliation process. Prompt and accurate reconciliation helps us detect and resolve potential errors.

Our new reconciliation software, Recon Plus from the CheckFree Corporation, automates the process by which our general ledger is reconciled with other Department systems - including those supporting the student loan programs and grant payments - and with the U.S. Department of the Treasury. Recon Plus permits automated reconciliation, rather than requiring the manual comparison of records with a spreadsheet, and thereby allows us to compare records more efficiently and in greater detail. We were greatly encouraged that, in an October test, Recon Plus automatically reconciled over 70 percent of transactions with Treasury. We hope to increase this match rate to 90 percent by this spring.

We are now reconciling our accounting records with Treasury cash balances monthly. Last year, we reconciled our records with Treasury quarterly and in previous years only annually. We are also increasing the frequency with which we reconcile our central accounting system with subsidiary records, such as those for the direct and guaranteed student loan systems.

Second, we have automated our processes to make them more efficient and effective. With assistance from PricewaterhouseCoopers, we developed and implemented software to automatically close our general ledger at the end of each fiscal year. This new process enables us to close our records more accurately and much faster.

We developed and implemented new software to automatically generate our financial statements. Last year, our staff relied heavily on spreadsheets to prepare our financial statements.

Also this year, we established an automated tool to track manual adjustments to our financial records. It is an accepted practice to correct errors identified by an audit, such as classifying a transaction on the wrong line. By automatically recording all such transactions in one place, we can better coordinate them and prevent errors.

Third, we have strengthened the documentation of and support for our financial data. We developed three subsidiary ledgers to support the general ledger. The three new ledgers reconcile our grant expenditures, match grant award available balances to undelivered orders, and align our contracts payment system with accounts payable. Previously, the Department's core financial management systems received only a summary of this data. These new subsidiary ledgers will track the additional detail needed to support and validate financial data.

In addition, we have upgraded the personal computers used by the Department's accounting staff, enabling them to run more powerful reporting software. As a result, they can produce financial reports that are both faster and more thorough.

Fourth, we improved our processes to ensure the quality of our financial data. For example, the Department has established software routines, called standard accounting entries (SAEs), to make regular adjustments to our financial records. Unfortunately, in some cases these SAEs introduced errors. This year, we corrected impacted accounts and fixed our SAEs. In addition, we established procedures to run future SAEs at a transaction level, rather than an appropriation level, and to coordinate them across all five financial statements.

Standard government practice requires our financial statements to distinguish between goods and services purchased from federal agencies and other organizations to facilitate the production of the overall financial statements of the U.S. Government. Unfortunately, in the past Departmental records have sometimes misidentified the status of our vendors. This year, we examined each transaction to ensure that our financial records properly reflect the appropriate classification of our vendors.

We have also implemented formal procedures for Department staff to manually adjust our financial records. These procedures, which include a supervisory review, should substantially reduce the misclassification of data. Moreover, we should require fewer adjustments due to a stronger reconciliation process and the new requirement that adjustments be processed at a transaction level, rather than an appropriation level.

And finally, we are pursuing a new general ledger system. We are thoroughly reviewing and testing the capabilities of possible systems to meet our requirements. Our new general ledger system will be in place in 2001.

Our current general ledger system failed to meet our full performance expectations. We plan to implement a new accounting system that will be capable of producing an automated closing of the Department's books at the end of each fiscal year promptly and efficiently. More importantly, we expect the new system to allow us to produce and support timely and accurate financial statements as envisioned by the Federal Financial Management Improvement Act of 1996.

Secretary Riley and I recognize the importance of financial management. Unfortunately, there is no shortcut to establishing a sound, comprehensive financial management system. We will continue to work hard. I believe the FY 2000 audit will demonstrate our continued progress.

I would be happy to answer any questions you may have.

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