Mr. Chairman and Members of the Subcommittee:

I would like to thank you for the opportunity to discuss the Department's progress towards improving financial management and instituting an improved culture of accountability. I would also like to thank you and other committee members for your continued efforts to help us to identify and address the Department's management problems.

I last testified before this Subcommittee one year ago, in April 2002. Since then we have continued to make significant progress towards overcoming our management challenges.

As you know, when Secretary Paige arrived at the Department of Education back in January 2001, he discovered that there were serious management problems. The Department had not received a clean audit opinion in years and there was not any expectation of one in the near future. Millions of dollars of grant money could not be accounted for. The Inspector General's Office and the General Accounting Office had identified hundreds of problems that needed immediate attention. Hundreds of thousands of dollars in false overtime had been charged to the Department by contractors and a theft ring inside the Department had used several more hundreds of thousands of dollars to buy and then steal electronic equipment; such as computers, cell phones, digital cameras, CD players, and even a 61-inch television. In addition, $1.9 million in Impact Aid funds intended for schools in South Dakota had been diverted to buy real estate and luxury SUV's.

Even though these and other problems occurred prior to Secretary Paige coming to the Department, he promised that one of his top priorities would be to identify and correct all of the management problems that were preventing the Department from operating at its peak performance.

I'm proud to say that the Department has kept the Secretary's promise.

Most importantly, the Department has received its first unqualified or "clean" independent audit opinion since 1997 and only the second in its history. This is a critical milestone in our effort to address concerns surrounding the Department's financial reporting, reconciliation of financial records, and control over our information systems.

I am also proud to report that the Office of Management and Budget has recognized the Department's efforts by awarding it the highest "progress" score possible (green) for each of the government-wide management improvement initiatives and program-specific initiatives identified in the President's Management Agenda. In addition, OMB has recognized our improvement in the areas of e-government and faith- and community-based organizations by awarding us an improved "status" score on each of these two initiatives. We anticipate that our plans for management reform will result in continued "status" score improvements in all areas of the President's Management Agenda.

In addition, the fraud issues that plagued the Department when the Secretary first arrived have been addressed:

• Four people have been arrested and indicted on Federal charges for stealing the money intended for schools in South Dakota;
• Nineteen other people have either pled guilty to Federal charges or were convicted after a federal trial for their involvement in the massive theft ring:
  • Thirteen of the nineteen have been sentenced to-date.
  • Verizon Federal Systems entered into a $2 million civil settlement with the Department of Education and Department of Justice on February 6, 2003 to settle federal claims on false overtime charges and improper electronic equipment purchases caused by their employees in conspiracy with Department of Education employees.
  • The former Department employee and acknowledged ring leader of this group of 19 people, along with her husband, and three others are scheduled to be sentenced this month.

These are all critical steps forward in our efforts to inject accountability into everything we do here at the Department of Education. I'm proud of the employees at the Department who have worked with dedication and diligence to ensure that the taxpayers' hard-earned dollars are spent wisely and the children in our Nation's schools are served effectively.

The Department reached this point by setting out to accomplish three short-term and six long-term goals. These goals were established for the Department by Secretary Paige shortly after he took office.

Short-Term Goals

Our short-term goals were to:

• Install new leadership in the financial and management areas of the Department;
• Assemble a task force of career Department leaders to identify and address as many short-term management improvement recommendations as possible and develop a Blueprint to address longer-term and structural issues; and
• Solicit the counsel and advice of external advisors.

New Leadership

We were able to provide new leadership in the financial and management areas of the Department, when:

• The President appointed Jack Martin as Chief Financial Officer--upon his confirmation, Jack became the Department's first CFO in over 3 years;
• The President appointed Bill Leidinger as Assistant Secretary for Management--upon his confirmation, Bill became the Department's first Assistant Secretary for Management in over 5 years; and
• Terri Shaw came on board as the Chief Operating Officer of Federal Student Aid.

Task force of Career Leaders

We assembled a task force of career Department leaders by:

• Creating a temporary Management Improvement Team to look at management issues across the Department; and
• Subsequently making the Management Improvement Team a permanent part of the Department's structure within the Office of the Deputy Secretary.

Advice of External Advisors

We solicited the counsel and advice of:

• The Council for Excellence in Government to help identify management challenges; and
• The Private Sector Council and National Academy of Public Administration to help identify solutions to management problems.

Long-Term Goals

Our long-term goals were to:

• Obtain a clean audit opinion;
• Establish effective internal controls that address credit card abuses and duplicate payments and protect the Department's assets from waste, fraud, and abuse;
• Create a culture of accountability;
• Create a structure for measuring progress;
• Modernize student aid delivery; and
• Remove the student financial assistance programs from GAO's high-risk list.

Clean Opinion

In an effort to improve the financial management situation at the Department, we:

• Implemented a new financial management system in FY 2002 that meets Federal accounting standards;
• Improved reconciliation, financial management analysis, and reporting capabilities;
• Instituted preparation of financial statements on a quarterly basis;
• Improved communication between Federal Student Aid, the Office of the Chief Financial Officer, and Budget Service; and
• Improved communication with our auditors on matters related to credit reform and our subsidy estimating procedures.

All of these efforts led to the receipt of the Department's first clean audit opinion in 5 years. We are now setting new goals for ourselves--we will:

• Address the one remaining material weakness, which is associated with reconciliation of our financial records, that was identified in the FY 2002 financial statement audit report.;
• Issue our FY 2003 financial statements by November 15, 2003--meeting the new accelerated schedule requirements one year early; and
• Obtain a clean opinion from our financial statement auditors for FY 2003.

Internal Controls

We have taken numerous steps to improve our internal controls, including:

• Issuing a revised set of policies and procedures for purchase cards--OMB has referred to these new policies and procedures as "best practices" for other agencies to consider;
• Issuing a revised set of policies and procedures for travel cards that includes a more specific outline of penalties associated with misuse;
• Eliminating the use of third party drafts;
• Establishing specific annual targets for the reduction and/or elimination of erroneous payments;
• Creating a new inventory system to track physical property; and
• Requiring all employees to take on-line internal control training and information technology security training and requiring all managers to attend a full day training session that addressed internal controls within the Department.

Culture of Accountability

We are creating a culture of accountability at the Department by:

• Establishing a Culture of Accountability team that worked with staff throughout the organization to develop a report that addressed concerns surrounding a variety of issues important to our staff including leadership and management issues, communication, work processes, skills gaps, and performance evaluations;
• Providing training to our managers on how to develop performance standards; and
• Tying 100% of our performance agreements to our Strategic Plan Goals and Objectives.

Measuring Progress

We have institutionalized a process whereby we can continue to measure our progress and address areas of concerns by:

• Creating the Blueprint for Management Excellence, which identifies the management challenges at the Department, embraces key features of the government-wide initiatives set forth in the President's Management agenda, and tracks our progress towards addressing the identified challenges--of the original action items in the Blueprint approximately 85% have been completed and/or closed, with the remainder being tracked for completion;
• Creating the Executive Management Team (EMT) that works to align ongoing management improvement efforts with the Department's Strategic Plan, maintain the focus on management excellence and accountability for results, and measure progress in implementing the Blueprint for Management Excellence; and
• Meeting weekly with the EMT, which consists of myself, the Assistant Secretary for Management, the Chief Financial Officer, the General Counsel, the Chief Information Officer, the Director for Budget Service, and the Chief Operating Officer of Federal Student Aid. Other Assistant Secretaries participate in the EMT meetings on a monthly basis to address management issues that affect the achievement of programmatic goals. The Inspector General serves in an advisory capacity.

Modernizing Student Aid Delivery

We have made significant progress in modernizing student aid delivery. We have:

• Met our system modernization and integration goals for FY 2002 by improving, combining, or retiring 5 systems in our efforts to improve the accuracy and integrity of student aid information;
• Exceeded our default recovery target set for FY 2002 and as a result, collected $966.6 million in defaulted loans held and collected by the Department (and an additional $1.6 billion on defaulted loans held and collected by the guaranty agencies); and
• Jointly proposed, with OMB and the Department of the Treasury, legislation that will reduce erroneous payments to students whose income has been improperly reported on their eligibility applications by allowing the IRS to match the income reported on Federal student aid applications with income tax returns.

Removal of Student Financial Assistance Programs from GAO's High-Risk List

The student financial assistance programs currently remain on GAO's high-risk list--something that appears to be an issue of timing rather than the progress that has been made by the Department. In August 2001, Secretary Paige met with Comptroller General Walker to identify the specific issues that needed to be addressed prior to removing the student aid programs from the high-risk list. We believe that by the end of last year, we had addressed each of the issues identified by GAO with the exception of the receipt of a clean audit opinion. GAO issued its most recent high-risk list in January 2003, just days before ED was able to announce that it had achieved a clean opinion for FY 2002.

Overarching Responsibilities

By achieving each of these short- and long-term goals we can focus on our overarching responsibilities for:

• Restoring the confidence of Congress and the public in the Department; and
• Making sure that no money that ought to be spent on improving the education of American children is wasted.

The number one priority for the Department of Education is educating children and closing the achievement gap so no child is left behind.

I believe you will find that our efforts over the last two years demonstrate our commitment to making the Department of Education a model agency of program and management excellence. One of our objectives in our Strategic Plan is to earn the President's Quality Award--I hope to be able to tell you a year from now that we have accomplished that goal as well.

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

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