Part 2. Financial Management

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AHRQ's Financial Performance, FY 2002

Overview of Financial Performance

AHRQ's Chief Financial Officer (CFO) is responsible for overseeing all financial management activities relating to the programs and operation of the Agency, and is accountable for ensuring that financial management legislation, such as the Chief Financial Officers (CFOs) Act of 1990, the Federal Managers Financial Integrity Act (FMFIA) of 1992, and the Government Management and Reform Act (GMRA) of 1994, are implemented.

The Division of Financial Management (DFM), a component within the Office of Management (OM), takes the lead in providing services and guidance in all aspects of Agency financial management, including budget formulation and execution, funds control, appropriation legislation, and development of automated financial management systems. AHRQ purchases its fund accounting, financial reporting, debt management, and other related fiscal services from the Program Support Center's (PSC) Division of Financial Operations (DFO) on a fee-for-service basis. Because the Department prepares audited financial statements for its largest components only, AHRQ financial statements were not audited.

To strengthen AHRQ's management systems, procedures, and financial reporting capabilities, AHRQ entered into a contract in 2002 for technical support, consultation, and analysis of certain financial management practices within the Agency. Upon completion of this contract, which is slated for spring 2003, the contractor will provide recommendations for improving AHRQ's internal financial management processes, as well as an analysis of the Agency's compliance with applicable laws, regulations, and best practices.

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Budgetary Resources

AHRQ receives its funding through an annual discretionary appropriation that includes Federal funds and miscellaneous reimbursements. The reimbursements, which are considered exchange revenue, come from other Federal agencies, usually in the form of expenditure transfers (payments made from one account to another). In FY 2002, AHRQ reimbursements totaled over $33,000,000, including $10,144,000 for bioterrorism activities and $6,545,000 for support of AHRQ's National Research Service Awards training program.

Select for FY 2002 AHRQ Reimbursable Partners (graph, 16 KB).

The Secretary of the Department of Health and Human Services is authorized to reallocate up to 1.25 percent of the funds appropriated to Department agencies in any given fiscal year. These funds are known as PHS Evaluation Funds. AHRQ's $298,730,000 FY 2002 appropriation comprised $296,145,000 in PHS Evaluation Funds and $2,585,000 in Budget Authority Funds. Because PHS Evaluation Funds are provided from the appropriations of other Department agencies, they are considered reimbursements. These funds were reflected as non-exchange revenue on AHRQ's financial statements.

Select for AHRQ Appropriations by Funding Source (graph, 12 KB).

AHRQ also receives modest funds from Freedom of Information Act (FOIA) fees. The FOIA provides individuals with the right to request records in the possession of the Federal government, and the fees collected allow an agency to recover part of the cost associated with responding to these requests.

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Mechanisms of Support

AHRQ provides financial support to public and private nonprofit entities and individuals through the award of grants, cooperative agreements, contracts, and interagency agreements (IAAs).

What determines the mechanism?
Grants and Cooperative Agreements	Used when there is a public purpose authorized by statute that must be accomplished.
Contracts	Used when the required product or service is for the direct use or benefit of the Federal government.
Interagency Agreements	Used when one Federal Agency provides to, purchases from, or exchanges goods or services with another Federal agency.

Program Announcements (PAs) are employed to invite applications for new or ongoing grant activities of a general nature, and Requests for Applications (RFAs) are used to invite grant applications for a targeted area. In FY 2002, 60 percent of AHRQ grants and cooperative agreements were in response to RFAs, and 40 percent were in response to PAs.

Grant applications are reviewed for scientific and technical merit by a peer review group, which is comprised of five subcommittees or study sections, each with a particular emphasis around which peer reviewer expertise is assembled. Funding decisions are based on the quality of the proposed project, availability of funds, and program balance among research areas.

AHRQ also supports small grants that facilitate the initiation of studies for preliminary short-term projects, dissertation grants undertaken as part of an academic program to earn a research doctoral degree, conference grants that complement and promote AHRQ's core research and help the Agency further its mission, and training grants that support a variety of training and career development opportunities through individual and institutional grant programs.

The Agency also awards minority supplements to ongoing grants that have at least 2 years of committed support remaining. These supplements are used to train and provide health services research experience to minorities or to support research on minority health issues.

AHRQ uses the contract and Interagency Agreement (IAA) mechanisms to carry out a wide variety of directed health services research related activities. AHRQ announces its contract opportunities by publishing Requests for Proposals (RFPs) in the Commerce Business Daily. Proposals received in response to these RFPs are peer-reviewed for scientific and technical merit by a panel of experts in accordance with the evaluation criteria specified in the RFP.

Select for FY 2002 AHRQ Obligations by Mechanism (graph, 12 KB).

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Analysis of Financial Statements

AHRQ's FY 2002 financial statements report the Agency's financial position and result of operations on an accrual basis—where transactions are recorded when they occur, regardless of when cash is received or disbursed. This method of accounting allows an accurate evaluation of operations during a given fiscal period, and takes into account future operations.

The annual financial statements include a Balance Sheet, Statement of Net Cost, Statement of Changes in Net Position, Statement of Budgetary Resources, Statement of Financing, related notes that provide a clear description of the Agency and its mission, as well as the significant accounting policies used to develop the statements, and Required Supplementary Stewardship Information.

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Consolidated Balance Sheet

The major components of the Consolidated Balance Sheet are assets, liabilities, and net position.

Assets

Assets represent Agency resources that have future economic benefits. AHRQ's assets totaled $357.6 million in FY 2002, an increase of almost 25 percent over the FY 2001 amount of $287.5 million. The funds balances with Treasury—mostly undisbursed cash balances from appropriated funds—comprised over 99 percent of the total assets and accounted for the entire increase over FY 2001. Fund balances represent dollars maintained at the Treasury Department to pay current liabilities, accounts payable, and undelivered orders. The increase in this category was driven primarily by the steady growth of the AHRQ appropriation over the past few years. AHRQ does not maintain any cash balances outside of the U.S. Treasury and does not have any revolving or trust funds. Less than 1 percent of AHRQ's assets were made up of accounts receivable, which reflects funds owed to AHRQ by other Federal agencies under reimbursable agreements, funds owed to AHRQ by the public, or purchases of equipment less accumulated depreciation.

Select for Fund Balance with Treasury (graph, 12 KB).

Liabilities

Liabilities represent funded and unfunded activities that require future budgetary resources. Relative to assets, AHRQ has few liabilities. In FY 2002, the Agency's liabilities totaled $25.8 million, an increase of 25 percent over FY 2001. The largest liability component was accounts payable at $14.9 million, accrued grant liabilities at $7.2 million, and accrued leave and payroll/benefit liabilities at $3.8 million. Accounts payable reflect funds owed primarily for contracts and other services. Accrued grant liabilities represent the difference between grant advances paid through the Payment Management System (PMS) and estimated grant accruals for expenses incurred but not yet reported by the grantees. Grant advances are liquidated upon the grantees' reporting of expenditures. Accrued leave liabilities reflect unfunded liabilities for estimated annual leave earned but not yet paid as well as worker's compensation benefits.

Select for FY 2002 Liabilities By Category (graph, 12 KB).

Net Position

AHRQ's net position, which reflects the difference between assets and liabilities and signifies the Agency's financial condition, totaled $331.8 million, an increase of $65.0 million from FY 2001. Net position is broken into two categories: unexpended appropriations—the amount of authority granted by Congress that has been obligated but not expended ($35.3 million)— and cumulative results of operations—the net results of operations since inception plus the cumulative amount of prior period adjustments ($296.5 million). The upward change in net position between FY 2001 and FY 2002 was chiefly driven by the increase in the fund balance with Treasury.

Select for Financial Condition for Five-Year Period (graph, 12 KB).

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Consolidated Statement of Net Cost

The Consolidated Statement of Net Cost represents the net cost to the Agency. Net costs recognize costs when incurred, regardless of the year the money was appropriated. The line items on this statement reflect AHRQ's budget activities (major programs), thus making it possible to relate program costs to GPRA performance measures and other programs. AHRQ's FY 2002 net cost of operations was $275.7 million, with the Agency's Research on Health Costs, Quality, and Outcomes program comprising close to 83 percent of the total.

Select for Net Costs Category (graph, 12 KB).

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Statement of Changes in Net Position

The Consolidated Statement of Changes in Net Position reports how the Agency financed its operations as well as the amount of costs covered by imputed financing— costs paid for by others. AHRQ ended FY 2002 with a consolidated net position total of $296.5 million, which reflects $572.2 million in budgetary resources available offset by $275.7 million in net cost of operations. Non-exchange revenue totaled $336.0 million, and was made up almost exclusively of PHS Evaluation Funds. The majority of the resources available resulted from funds appropriated to AHRQ.

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Statement of Budgetary Resources

The Statement of Budgetary Resources focuses on: budgetary resources available to AHRQ (appropriated and reimbursable funds), the status of those resources (obligated or unobligated), and the relationship between the budgetary resources and outlays (collections and disbursements). AHRQ's FY 2002 budgetary resources totaled $343.2 million with most of these resources coming from spending authority from offsetting collections ($331.7 million), which includes PHS Evaluation Funds and reimbursable funds received from other organizations. This statement shows that about 93 percent ($320.4 million) of the resources available in FY 2002 were obligated. AHRQ's net outlays totaled -$66.0 million: $270.8 million in disbursements less $336.8 million in collections. Because PHS Evaluation Funds are considered reimbursable funds, they are treated as collections and as such reduce disbursements. Since FY 1997, the proportion of PHS Evaluations Funds to AHRQ's total budget has steadily increased, which has resulted in a progressive decrease of AHRQ's net outlays during the same period and a negative outlay in FY 2002.

Select for AHRQ's Budgetary Resources FY 93 - FY 02 (graph, 16 KB).

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Combined Statement of Financing

The Combined Statement of Financing links proprietary and budgetary accounting information and reconciles obligations incurred with the net cost of operations. While the budgetary accounting system tracks resources and the status of those resources, the financial accounting system facilitates the translation of budgetary resources into the financial statements on an accrual basis. For FY 2002, the resources used to finance AHRQ activities totaled -$12.0 million, which represents obligations incurred and any other resources used to finance activities ($321.6 million), less spending from offsetting collections (-$333.6 million). Offsetting collections principally consist of PHS Evaluations Funds.

Select for FY 2002 Resources Used to Finance Activities (graph, 8 KB).

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Other Performance Issues

Federal Managers' Financial Integrity Act (FMFIA)

The FMFIA Act of 1982 requires that Federal agencies establish processes to develop and implement appropriate, cost-effective management controls; assess the adequacy of management controls within programs and operations; identify needed improvements; take corresponding corrective action; and submit a summary report at the end of the year. Management controls are defined as the organization, policies, and procedures used to reasonably ensure that:

• Programs achieve their intended results.
• Resources are used consistent with agency mission.
• Programs and resources are protected from waste, fraud, and mismanagement.
• Laws and regulations are followed.
• Reliable and timely information is obtained, maintained, reported, and used for decisionmaking.

In accordance with the Act, AHRQ has implemented a streamlined Management Accountability and Control Program (MACP) that uses periodic reviews, audits, and studies to provide reasonable assurance that Agency resources are protected against misappropriation, mismanagement, waste, and abuse. This program integrates efforts to meet the requirements of FMFIA with other Agency efforts to improve effectiveness and accountability.

MACP activities undertaken in FY 2002 include a review of the Agency's FTE allocation and utilization process, development of an Agency information systems security manual, establishment of an Information Technology Capital Planning and Investment Control Policy and Information Technology Investment Review Board charter, development of electronic dissemination program policy, and travel and IMPAC card audits. Based on an evaluation of these activities, AHRQ did not identify any high-risk areas, critical weaknesses, or non-conformances. The Agency does not have any financial systems as defined by FMFIA.

The Agency remains committed to developing more efficient and effective ways to perform our mission while maintaining and protecting the integrity of the resources that have been entrusted to us. AHRQ has and will continue to use this activity as an opportunity to ensure that our financial and internal management systems and controls adequately support the accomplishment of our mission.

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Information Technology

Congress has enacted several laws regarding investment in Information Technology. One of these acts is known as the Clinger-Cohen Act, passed to ensure that the Federal government investment in information technology is made and used wisely. These laws were designed to increase competition, eliminate burdensome regulations, and help the Federal government benefit from efficient private-sector techniques. Beyond the Clinger-Cohen act, Congress has passed numerous other IT-related laws, including the Government Paperwork Elimination Act (GPEA) of 1998, and the Government Information Security Reform Act (GISRA). Under GPEA, individuals who are required to submit information to the government or maintain information must be given the option to do so electronically when practicable. Section 508 of this Act also mandated that individuals with disabilities have access to the Federal government's electronic and information technology. The Government Information Security Reform Act (GISRA), requires Federal government agencies to develop and implement comprehensive information security programs.

AHRQ's FY 2002 accomplishments toward meeting the requirements set forth in the above laws follow.

AHRQ also supports and participates in the Department's effort to develop a Unified Financial Management System. This system, which will replace five existing accounting systems currently in use in the DHHS, will integrate the Department's financial management structure and provide a more timely and coordinated view of critical financial management information.

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President's Management Agenda

In August 2001, the President launched a Management Reform Agenda that focuses on improving the management and performance of Federal government through the following five management initiatives:

1. Strategic Management of Human Capital
2. Competitive Sourcing
3. Improved Financial Performance
4. Expanded Electronic Government
5. Budget and Performance Integration

OMB rates how well the Departments are executing the five government-wide management initiatives. To indicate the level of success in each element, the ratings follow a "stop light" approach—red for unsatisfactory, yellow for mixed results, and green for success. The Department rates each DHHS agency on their progress relative to the specific performance criteria. AHRQ's progress ratings as of July 2002 follow.

PMA Element	Progress Rating
Human Capital	Red
Competitive Sourcing	Red
Financial Management	Yellow
E-Government	Yellow
Budget and Performance Integration	Yellow

AHRQ initiated many activities in FY 2002 to address the five President's Management Agenda initiatives and plans to continue and expand upon these efforts in the coming years. A brief discussion of the PMA activities undertaken in FY 2002 follows.

Strategic Management of Human Capital

The majority of AHRQ's workforce falls within the 51-60 age group, which will translate into a significant number of retirements in the not-too-distant future. To address this situation, AHRQ's human capital initiative focuses on identifying gaps in workload and workforce to help build the workforce of the future, restructuring the existing workforce to achieve efficiencies, and placing greater emphasis on performance and accountability.

• Strategic Workforce Planning. AHRQ's strategic workforce planning focuses on ensuring that the appropriate workforce (size and skills) is in place to accomplish mission requirements and recognizes that the key to the successful accomplishment of our mission is our employees. To that end, AHRQ assessed future workload analyses and gaps in work activities; developed competency models to assist in recruiting, selection, development, and performance assessment activities; and developed a multi-year strategy that outlines goals and action plans that focus on how the Agency conducts its work and how well the existing structures, technology, and systems support this work. Progress to date based on the above actions includes:
  • The successful transfer of AHRQ's human resources operations and EEO programs to the Department's Program Support Center.
  • The development of recruitment and retention strategies, including the creation of an Agency brochure to be used at national meetings, job fairs, and other venues, as well as partnering with PSC to upload employment opportunities on the HHS careers Web site.
  • Completion of the initial phase of the reengineering of the Agency's grant process.
• Workforce Restructuring. AHRQ is employing a three-phase approach to achieve desired Department-wide workforce restructuring through administrative consolidation, management delayering to achieve economies of scale and reduce the levels of hierarchy, and redirection of human capital toward mission-related activities. Based on this approach, AHRQ reduced the number of supervisors/managers by 20 percent through FY 2002. As a result, the supervisor-to-staff ratio increased from 1:8.6 in FY 2000 to 1:12.1 in FY 2002. Additional organizational streamlining, including functional realignments and eliminating other supervisory positions, is also in the planning stages.
• Accountability. AHRQ established performance contracts for the Agency Director and all senior management officials that report directly to the Director. The Agency will use its documented performance management procedures to ensure that the performance-based contract process cascades to the general workforce beginning with the calendar year 2003 performance cycle.

Competitive Sourcing

The Federal Activities Inventory Reform (FAIR) Act directs Federal agencies to issue each year an inventory of all commercial activities performed by Federal employees, e.g., those activities that are not inherently governmental. The maintenance, periodic review, and preparation of the Agency's FAIR Act Inventory are done centrally in AHRQ's Office of Management. This ensures that the guidance provided in OMB Circular A-76 and related policy and guidance is applied consistently across all Agency activities.

AHRQ submitted its 2002 FAIR Act Inventory to the Assistant Secretary for Administration and Management (ASAM) well within the prescribed timeframe. The inventory is complete and accounts for all FTEs. Adjustments were subsequently made to the inventory to apportion more accurately personnel between commercial and inherently governmental positions in accordance with the common departmental definitions established by ASAM. The AHRQ Inventory was published in the Federal Register on October 17, 2002, at 65FR64150-51. No challenges were received.

AHRQ did not list any FTE for study or conversion in FY 2002, nor were any proposed initially for FY 2003. However, AHRQ is currently working with ASAM to identify competitive sourcing candidates from the revised inventory and with the Program Support Center to identify resources to assist AHRQ in developing a FY 2003 Competition Schedule that is consistent with Department-wide workforce restructuring goals. The AHRQ staff person responsible for coordinating Agency FAIR Act/Competitive Sourcing activities has participated in HHS-sponsored training and continues to develop subject matter expertise to manage more effectively the Agency's responsibilities in this area.

It should be noted that AHRQ already contracts out a significant portion of its support services including information technology; public affairs, writing and editing; publication distribution (clearinghouse); library services; human resource management support; fund accounting and other fiscal services; research review, and meeting and conference support.

Improved Financial Performance

Federal managers are experiencing growing pressures from their executive leaders, Congress, the public, and their customers to achieve more under the programs they manage. AHRQ continues to strive to provide sound financial information by concentrating on how our financial data can be more easily accessible and of use to our program managers and customers.

• Internal Control Improvements. In addition to our continued FMFIA efforts, the Agency recognizes that the best approach to enhance financial accountability and promote improved processes is to subject an organization to an independent review of its financial management practices. With that in mind, AHRQ entered into a contract for technical support, consultation, and analysis of certain financial management practices within the Agency, including identifying accountability standards applicable to an agency participating in the Department's top-down audit approach.
• Unified Financial Management System (UFMS). The Agency continues to support the development and implementation of the Department's Unified Financial Management System (UFMS). AHRQ has members on the Steering Committee and the Planning and Development Committee, and participates in the Global Business Process Design Workshops and related meetings. The goal of the UFMS is to make consolidated financial reporting much less complex by combining data through a centralized, HHS-wide consolidated financial reporting capability. UFMS will also take full advantage of modern accounting system features such as enhanced internal controls, data standardization, improved user security, and flexible query and reporting capabilities.

Expanded Electronic-Government

The President's Management Agenda calls for an emphasis by Federal agencies on Electronic Government (e-Government), using the resources and opportunities of a Web-enabled environment to bring government closer to the people, enable it to be more responsive to public concerns, and improve the accessibility of government-generated information and services. In 2002, AHRQ began development of an integrated e-Government program with the goal of increasing gains in business performance. These activities centered on establishing the foundation for e-Government implementation and focused primarily on developing a comprehensive body of information technology policy.

The four cornerstones of this initiative and our progress to date follow.

Initiative Cornerstones	Progress To Date
Customer Relationship Management: Knowing who our customers are, what they want, and how to best meet their needs.	Completed an assessment of AHRQ's major categories of customers. Carried out business process assessments of key business lines.
Organization Capability: Building sound procedures into the everyday workings of the organization that enable well-thought-out business decisions to insure that IT investments are made that truly support the mission of the Agency.	Established information technology project accountability and capital planning governance. Established an internal IT investment review board to insure that IT investments are in harmony with the Agency's mission. Started to integrate the iterative processes of capital planning into the normal business operations of the Agency – select, review, develop and evaluate.
Security/Privacy: Gaining customer trust so they know that information is used only for its intended purpose and that the information is secure, stable, and not vulnerable to intrusion.	Established security and privacy governance. Completed the second cycle of the National Institute of Standards and Technology self-assessments. Completed risk assessments of seven of AHRQ's mission-critical systems.
Enterprise Architecture: Developing a robust Enterprise Architecture starts with closely examining the Agency's strategic plan and ends by ensuring that every IT investment directly supports some facet of the strategic plan and underlying Agency performance objectives. This approach assures that business operations and IT investments are fashioned as a comprehensive partnership.	Established Enterprise Architecture planning function within the CIO's office. Implemented the Enterprise Architecture Management System, a software application (also in use at OMB) for building a comprehensive Enterprise Architecture (EA) – as explained above – EA is the detailed view of how the IT investments are supporting the strategic goals and performance of the Agency.

Budget and Performance Integration

This initiative builds on the Government Performance and Results Act of 1993 (GPRA), which requires Federal agencies to develop strategic plans describing their overall goals and objectives, annual performance plans containing quantifiable measures of their progress, and performance reports describing their success in meeting those standards and measures. AHRQ's strategic plan guides the overall management of the Agency. Each Office and Center has individual strategic and operations plans, and the operations plans identify critical success factors that illustrate how each O/C contributes to AHRQ achieving its strategic and annual performance plan goals. At the end of each year, the Office and Center Directors and their staffs review their accomplishments in relation to the annual operations plans. The results of the reviews contribute significantly to the performance reports, which are influential in revising the operations plans and in turn, the Agency strategic plan.

• Management Structure. AHRQ's commitment to budget and performance integration is reflected not only in how programs are evaluated but also in the organizational structure of the Agency. AHRQ is pursuing reorganizing its management structure by aligning budget formulation, execution and financial management with planning, program development and evaluation.
• Interface of Automated Systems. AHRQ is exploring the interconnection of appropriate areas of AHRQ's planning and budget automated systems, with the ultimate goal being the targeted integration of the existing Agency planning database and budget database systems.
• Performance Assessments. In accordance with PART, OMB's Program Assessment Rating Tool for the formal evaluation of Federal programs, we completed comprehensive program assessments of two key Agency programs in FY 2002: Data Collection and Dissemination, which includes the Medical Expenditure Panel Survey (MEPS), the Healthcare Cost and Utilization Project (HCUP), and the Consumer Assessment of Health Plans Study (CAHPS); and the grant component of AHRQ's Translation of Research into Practice (TRIP) program.

AHRQ's review of these programs provides the basis for the Agency to move forward in more closely linking high quality outcomes with associated program costs. Over the next few years, AHRQ will continue to work towards integrating financial management of our programs with their performance, with the definitive goal being to use the performance data to better inform budget decisions for AHRQ programs.

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