<DOC> [107th Congress House Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:85482.wais] THE FEDERAL GOVERNMENT'S CONSOLIDATED FINANCIAL STATEMENTS: ARE THEY RELIABLE? ======================================================================= HEARING before the SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL MANAGEMENT AND INTERGOVERNMENTAL RELATIONS of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS SECOND SESSION __________ APRIL 9, 2002 __________ Serial No. 107-168 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.gpo.gov/congress/house http://www.house.gov/reform ______ 85-482 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 2003 ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800 Fax: (202) 512ÿ092250 Mail: Stop SSOP, Washington, DC 20402ÿ090001 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California CONSTANCE A. MORELLA, Maryland TOM LANTOS, California CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania STEPHEN HORN, California PATSY T. MINK, Hawaii JOHN L. MICA, Florida CAROLYN B. MALONEY, New York THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington, MARK E. SOUDER, Indiana DC STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland BOB BARR, Georgia DENNIS J. KUCINICH, Ohio DAN MILLER, Florida ROD R. BLAGOJEVICH, Illinois DOUG OSE, California DANNY K. DAVIS, Illinois RON LEWIS, Kentucky JOHN F. TIERNEY, Massachusetts JO ANN DAVIS, Virginia JIM TURNER, Texas TODD RUSSELL PLATTS, Pennsylvania THOMAS H. ALLEN, Maine DAVE WELDON, Florida JANICE D. SCHAKOWSKY, Illinois CHRIS CANNON, Utah WM. LACY CLAY, Missouri ADAM H. PUTNAM, Florida DIANE E. WATSON, California C.L. ``BUTCH'' OTTER, Idaho STEPHEN F. LYNCH, Massachusetts EDWARD L. SCHROCK, Virginia ------ JOHN J. DUNCAN, Jr., Tennessee BERNARD SANDERS, Vermont ------ ------ (Independent) Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director James C. Wilson, Chief Counsel Robert A. Briggs, Chief Clerk Phil Schiliro, Minority Staff Director Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations STEPHEN HORN, California, Chairman RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois DAN MILLER, Florida MAJOR R. OWENS, New York DOUG OSE, California PAUL E. KANJORSKI, Pennsylvania ADAM H. PUTNAM, Florida CAROLYN B. MALONEY, New York Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California J. Russell George, Staff Director and Chief Counsel Rosa Harris, Professional Staff Member Justin Paulhamus, Clerk David McMillen, Minority Professional Staff Member C O N T E N T S ---------- Page Hearing held on April 9, 2002.................................... 1 Statement of: Everson, Mark W., Controller, Office of Federal Financial Management, Office of Management and Budget................ 70 Hammond, Donald V., Fiscal Assistant Secretary, Department of the Treasury............................................... 62 Walker, David M., Comptroller General of the United States, U.S. General Accounting Office............................. 9 Letters, statements, etc., submitted for the record by: Everson, Mark W., Controller, Office of Federal Financial Management, Office of Management and Budget, prepared statement of............................................... 72 Hammond, Donald V., Fiscal Assistant Secretary, Department of the Treasury, prepared statement of........................ 65 Horn, Hon. Stephen, a Representative in Congress from the State of California, prepared statement of................. 3 Walker, David M., Comptroller General of the United States, U.S. General Accounting Office: Information concerning charts................................ 11 Prepared statement of........................................ 18 THE FEDERAL GOVERNMENT'S CONSOLIDATED FINANCIAL STATEMENTS: ARE THEY RELIABLE? ---------- TUESDAY, APRIL 9, 2002 House of Representatives, Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, Committee on Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 10 a.m., in room 2154, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding. Present: Representative Horn. Staff present: J. Russell George, staff director and chief counsel; Bonnie Heald, deputy staff director; Henry Wray, senior counsel; Rosa Harris, professional staff member, GAO detailee; Justin Paulhamus, clerk; Michael Sazonov, subcommittee intern; David McMillen, minority professional staff member; and Jean Gosa, minority clerk. Mr. Horn. A quorum being present, the hearing of the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations will come to order. We are here today to examine the financial management practices of the executive branch of the Federal Government. Specifically, we want to learn whether Federal departments and agencies have made any progress in accounting for the billions of taxpayer dollars they spend each year. Throughout the past decade, Congress has sought ways to make the executive branch of the government financially accountable to the Nation's taxpayers. The Chief Financial Officers Act of 1990, as amended by the Government Management Reform Act of 1994, is one of several financial reforms that received bipartisan support from Congress and the President. The law requires that 24 major departments and agencies in the executive branch of the government prepare annual, audited financial statements. These reports are to be submitted to the Office of Management and Budget by March 1st. The law also requires the Department of the Treasury to prepare annual consolidated, governmentwide financial statements and the General Accounting Office to audit and report on these financial statements by March 31st. The General Accounting Office's report on the consolidated, governmentwide statements for fiscal year 2001 was released on March 29, 2002. Based on the GAO report, agency auditors' findings and a survey of agency Inspectors General, the subcommittee is releasing its governmentwide financial management report card today. This year, the subcommittee used more rigorous criteria to determine agency grades than in the previous years when the subcommittee focused on criteria such as whether agencies could produce clean, auditable financial statements in a timely fashion. This year, similar to last year, 18 agencies were able to produce clean statements, although they often required extraordinary efforts to do so. Likewise, all 24 agencies filed their financial statements on time again this year. Nevertheless, these criteria do not guarantee that agencies are capable of producing reliable and useful financial information for day-to-day decisionmaking, including information on program costs. Although agencies have improved, they are still unable to achieve that goal. This year, the executive branch of the Federal Government has earned a grade of D for its overall financial management during fiscal year 2001. Sixteen of the 24 agencies received a lower grade than last year. Most noticeable among those agencies, three that received As on last year's report card fell miserably this year. The National Aeronautics and Space Administration's grade fell to an F. The Small Business Administration's grade fell to a D plus. And the Department of Energy received a mediocre C this year. The Department of Energy's lower grade may be attributed to the subcommittee's new criteria. However, even without the more rigorous criteria, NASA still would earned an F this year, and the Small Business Administration still would have earned a D plus. In NASA's case, new auditors took a fresh look at the agency's books and found several significant problems. Auditors at the Small Business Administration found that the agency did not have effective internal controls and did not comply with all Federal financial management laws, as it had in previous years. The failures of a few agencies continue to tarnish the overall record of the executive branch of government. For the 5th consecutive year, the Agency for International Development and two of the governments largest departments, the Department of Defense and the Department of Agriculture, still face significant financial management challenges. They again received the unacceptable grade of F. Until Federal agencies have financial systems that can generate reliable and useful information to support day-to-day management and policymaking, the Government's financial challenges will continue and the taxpayers of this Nation will rightly question the government's ever-increasing need for tax dollars. [The prepared statement of Hon. Stephen Horn follows:] [GRAPHIC] [TIFF OMITTED] T5482.001 [GRAPHIC] [TIFF OMITTED] T5482.002 [GRAPHIC] [TIFF OMITTED] T5482.003 [GRAPHIC] [TIFF OMITTED] T5482.004 [GRAPHIC] [TIFF OMITTED] T5482.005 [GRAPHIC] [TIFF OMITTED] T5482.006 Mr. Horn. I welcome today the panel of witnesses, all of whom have key roles in determining the government's financial credibility. Now, as you know, this is an investigating committee of the Government Reform full committee, and we do have to ask you to stand and present your right arm. If you have aides to back you up, place adhere and affirm to this oath. [Witnesses sworn.] The clerk will note the three primary witness have taken the oath, and in back of them are six more. So we thank you, and we thank you particularly to--we have here today a distinguished member of the government, the Honorable David M. Walker, Comptroller General of the United States, who heads the U.S. General Accounting Office. I want to thank General Walker, that we have, on this committee, have been very helpful, your staff, to come with us on our various hearings we have recently held in Nashville, Albuquerque, Phoenix, Los Angeles, San Francisco--and we have got only 50 to go. We thank the GAO for being always present to help bring things together with the two panel witnesses that we have at each of those. Thank you, Mr. Comptroller General. STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED STATES, U.S. GENERAL ACCOUNTING OFFICE Mr. Walker. Thank you, Mr. Chairman. I am pleased to be here today to discuss our report on the U.S. Government's consolidated financial statements for fiscal years 2001 and 2000. Mr. Chairman, with your permission I would ask that my full statement be included in the record, and I will move to summarize it. Mr. Horn. Without objection, it is in the record. Mr. Walker. Thank you, Mr. Chairman. As in the four previous fiscal years, GAO was unable to express an opinion on the consolidated financial statements of the U.S. Government because of certain material weaknesses in internal controls and accounting and reporting issues. Progress is being made in addressing the various impediments to an unqualified opinion on the U.S. Government's consolidated financial statements. However, many of the pervasive and generally longstanding material weaknesses that we have reported for the past 4 years have not been fully resolved. Across government, there has been a range of financial management improvement initiatives undertaken, and many are now under way, that if effectively implemented will improve the quality of the government's financial management reporting. We have a chart, Mr. Chairman, that shows for fiscal year 2001, as you noted, 18 of the 24 Chief Financial Officers Act agencies were able to attain unqualified audit opinions on their financial statements, which is the same number of agencies as last year, and up from six in fiscal 1996. Additionally, for fiscal years 2001 and 2000, the reports of the Inspectors General and the various contract auditors indicated that only three of the 24 CFO Act agencies had neither material control weaknesses, an issue involving compliance with applicable laws and regulations, nor an instance of a lack of substantial compliance with the requirements of the Federal Financial Management Improvement Act of 1996. In addition, it looks as if no agency fully met the new criteria for success in the financial management area based upon the fiscal 2001 results. Mr. Chairman, I would respectfully ask that this chart be entered into the record. Mr. Horn. It is. And it is being--going over the television. Mr. Walker. Thank you. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T5482.007 [GRAPHIC] [TIFF OMITTED] T5482.008 [GRAPHIC] [TIFF OMITTED] T5482.009 [GRAPHIC] [TIFF OMITTED] T5482.010 Mr. Walker. In summary, 18 had a clean opinion, but only three of which had a clean opinion with no material weaknesses or noncompliance issues, and none of which appear to meet the new fuller criteria as established by the JFMIP principals, which I believe are clearly appropriate. We want meaningful success in the financial management area, not superficial success. The largest impediment to an unqualified opinion on the consolidated financial statements continues to be the Department of Defense, which faces serious financial management problems that we have designated as a high-risk area since 1995. Fortunately, in September 2001, Secretary of Defense Rumsfeld announced a DOD-wide initiative intended to transform the full range of the Department's business processes, including decades-old financial systems that are not well interconnected. For the first time in history the Department's Quadrennial Defense Review, the so-called QDR, which is prepared by DOD, includes business process transformation as a key element. The Secretary has also taken action to set aside $100 million for financial modernization and has established a number of top-level committees, councils, and boards, including the Business Initiative Council and the Defense Practices Implementation Board, to develop and implement an integrated DOD-wide strategy for fundamentally transforming business practices. I am convinced, Mr. Chairman, that this Secretary and his top management team are serious, but only time will tell whether or not we will achieve the desired outcomes. Importantly, the President's Management Agenda Fiscal Year 2002 includes improved financial management performance as one of his top five governmentwide management goals. In addition, in August 2001, the principals of the Joint Financial Management Improvement Program, which include Secretary of the Treasury O'Neil, Director of OMB Daniels, Director of OPM James, and I as Comptroller General and the current chair of the group, began a series of periodic meetings that have resulted in unprecedented substantive deliberations and agreements focused on key financial management reform issues such as better defining measures for financial success. Mr. Chairman, we have already met three times in the last several months. We are scheduled to meet again next month. This group had not met more than once in the last 10 years. We have already met three times, and each meeting has been substantive, and at each meeting we achieve agreement on important issues as we expect to in this next meeting. Mr. Chairman, there are a couple of issues in the last year's financial statements and our report that I would like to bring to your attention. No. 1, for fiscal year 2001, the military post-retirement health benefits liability increased by $389 billion on a net present value basis, due primarily to a $293 billion increase attributable to provisions of the fiscal year 2001 National Defense Authorization Act, which is Public Law 106-398, that expanded certain benefits to Medicare-eligible DOD retirees, their defendants and survivors, and to a $91 billion increase associated with changes in medical cost trend assumptions. Mr. Chairman, it is my understanding that the Congress did not have accurate, timely and useful information when it considered and debated this change in law and that the amounts that the Congress was provided with regard to the estimated fiscal effects of this change were substantially less than what the actuaries are now estimating. Mr. Chairman, this serves to reinforce the need to make sure that the Congress has timely, accurate and useful information, not just for accounting purposes but also for budgetary considerations, because there are many things that we may be able to afford today but we may not be able to sustain tomorrow. I point to the board and the second chart, which you are familiar with, Mr. Chairman. This chart is based upon the GAO's long-range budget simulation which shows that, due primarily to known demographic trends and rising healthcare costs, we face serious budget challenges in the years ahead. As a result, it is critically important that we have timely, accurate and useful information not just for accounting purposes but for informed decisionmaking with regard to legislation and other resource allocation decisions. Once again, the U.S. Government's consolidated financial statements reported an update of the key indicators of the financial status of Social Security and Medicare trust-fund reports from the trustees' reports. The trustees issued their reports the same week as the consolidated financial statements. Without this update, the government would have provided two different reports on the sustainability of those important programs which could cause confusion and reduce confidence in the credibility of the U.S. Government's consolidated financial statements. This updated information will not be available when the U.S. Government consolidated financial statements are issued on an accelerated basis beginning for fiscal year 2004. The JFMIP principals are considering ways to ensure that the reports issued by Social Security and Medicare trustees, these agencies financial statements and the U.S. Government's consolidated financial statements present timely and consistent information. I would argue, Mr. Chairman, that the information on these programs arguably is among the most if not the most important from the standpoint of taxpayers. They care deeply about this. In our view, the Congress may need to enact legislation that will require earlier reporting and issuance of the trustees' reports in order to allow for timely social insurance information to be included in agencies' and the U.S. Government's consolidated financial statements. This is very important, Mr. Chairman. In closing, our report on the U.S. Government's consolidated financial statements highlights the need to continue addressing the government's serious financial management weaknesses. The requirement for timely, accurate and useful financial and performance management information is greater than ever as the Congress and the administration prepare to meet today's and tomorrow's fiscal challenges. The cooperative effort spearheaded by the JFMIP principals have been most encouraging in developing the short- and long- term strategies and plans necessary to address the many problems that I have discussed. In addition, GAO has probably never had a better working relationship with OMB and Cabinet-level and other key officials on a range of good government issues that are of critical importance and are inherently nonpartisan in nature. While these and other factors provide an enhanced likelihood for success, in the end it is results that count. Finally, I want to reiterate the value of sustained congressional interest in these issues as demonstrated by this hearing and your commitment over a number of years. I also want to note that such congressional interest is critically important to sustaining progress in this area, and it is key that the appropriations, budget, authorizing and oversight committees hold agency top leadership accountable for resolving these problems and that they support related improvement efforts. Because many of these improvement efforts will take years, continued congressinal interest is important and necessary. Thank you, Mr. Chairman. Mr. Horn. Thank you very much. [The prepared statement of Mr. Walker follows:] [GRAPHIC] [TIFF OMITTED] T5482.011 [GRAPHIC] [TIFF OMITTED] T5482.012 [GRAPHIC] [TIFF OMITTED] T5482.013 [GRAPHIC] [TIFF OMITTED] T5482.014 [GRAPHIC] [TIFF OMITTED] T5482.015 [GRAPHIC] [TIFF OMITTED] T5482.016 [GRAPHIC] [TIFF OMITTED] T5482.017 [GRAPHIC] [TIFF OMITTED] T5482.018 [GRAPHIC] [TIFF OMITTED] T5482.019 [GRAPHIC] [TIFF OMITTED] T5482.020 [GRAPHIC] [TIFF OMITTED] T5482.021 [GRAPHIC] [TIFF OMITTED] T5482.022 [GRAPHIC] [TIFF OMITTED] T5482.023 [GRAPHIC] [TIFF OMITTED] T5482.024 [GRAPHIC] [TIFF OMITTED] T5482.025 [GRAPHIC] [TIFF OMITTED] T5482.026 [GRAPHIC] [TIFF OMITTED] T5482.027 [GRAPHIC] [TIFF OMITTED] T5482.028 [GRAPHIC] [TIFF OMITTED] T5482.029 [GRAPHIC] [TIFF OMITTED] T5482.030 [GRAPHIC] [TIFF OMITTED] T5482.031 [GRAPHIC] [TIFF OMITTED] T5482.032 [GRAPHIC] [TIFF OMITTED] T5482.033 [GRAPHIC] [TIFF OMITTED] T5482.034 [GRAPHIC] [TIFF OMITTED] T5482.035 [GRAPHIC] [TIFF OMITTED] T5482.036 [GRAPHIC] [TIFF OMITTED] T5482.037 [GRAPHIC] [TIFF OMITTED] T5482.038 [GRAPHIC] [TIFF OMITTED] T5482.039 [GRAPHIC] [TIFF OMITTED] T5482.040 [GRAPHIC] [TIFF OMITTED] T5482.041 [GRAPHIC] [TIFF OMITTED] T5482.042 [GRAPHIC] [TIFF OMITTED] T5482.043 [GRAPHIC] [TIFF OMITTED] T5482.044 [GRAPHIC] [TIFF OMITTED] T5482.045 [GRAPHIC] [TIFF OMITTED] T5482.046 [GRAPHIC] [TIFF OMITTED] T5482.047 [GRAPHIC] [TIFF OMITTED] T5482.048 [GRAPHIC] [TIFF OMITTED] T5482.049 [GRAPHIC] [TIFF OMITTED] T5482.050 [GRAPHIC] [TIFF OMITTED] T5482.051 [GRAPHIC] [TIFF OMITTED] T5482.052 [GRAPHIC] [TIFF OMITTED] T5482.053 [GRAPHIC] [TIFF OMITTED] T5482.054 Mr. Horn. Our next regular witness has been here many times, and we are delighted to have him today. That is Donald V. Hammond, the Fiscal Assistant Secretary of the Department of the Treasury. Mr. Hammond. STATEMENT OF DONALD V. HAMMOND, FISCAL ASSISTANT SECRETARY, DEPARTMENT OF THE TREASURY Mr. Hammond. Thank you, Mr. Chairman. I am pleased to have the opportunity to appear again before you to discuss the financial report of the U.S. Government. While we continue to make progress, the government still has a considerable distance to go before the quality of our financial reporting will be equal to what taxpayers truly deserve. Mr. Chairman, your tireless pursuit of sound government financial management has been an important element of our continued improvement. And, on a personal note, I greatly appreciate your commitment to this important, though sometimes dry subject. Treasury shares your commitment to improving the state of Federal financial management and in particular reporting financial information that is timely, reliable and, most importantly, useful. The Fiscal Year 2001 Financial Report was issued on March 29th, on time for the 5th consecutive year. The report showed a financial loss of $515 billion, compared with the budget's $127 billion surplus. The primary components of the difference between the budget and accrual numbers are increases in the liability for military healthcare and the liability for veterans disability. As a result, for the first time, the liability for Federal employee--military and civilian--pension and other post-retirement benefits exceeds the Federal debt held by the public. I highlight those items because they provide outstanding examples of the type of unique information contained in the financial report and point out the importance of disclosing these results. The financial report presents a complete and integrated picture of the government's assets, liabilities, cash-flows and costs. The report also discloses the government's extensive stewardship responsibilities and commitments. Only the accrual- based financial report presents this governmentwide consolidated financial information in context to the public, providing a more transparent picture of the government's financial operations and position. One of the five governmentwide initiatives in the President's management agenda addresses improved financial performance. One component of this agenda item is the acceleration of the timing of agency and governmentwide financial reporting. In support of this endeavor, the Chief Financial Officer's Council has created a financial statement acceleration committee which I happen to chair. Accelerated reporting will finally allow adequate time to have the financial statements considered in the budget process and time for decisionmakers to fully consider financial performance in the management of their programs. Reflecting Treasury's commitment to improving the financial statements, the following changes were made this year to enhance the usefulness and better disclose the government's activities to the Congress and the public. This year the report presented comparative financial statements displaying current and prior year information. In addition, we have added two new financial statements. The Reconciliation of Net Operating Revenue to the Budget Surplus explains the differences between the accrual-based loss and the budget surplus; and the Disposition of the Budget Surplus explains the excess cash collected over cash payments made was used. Finally, we have begun reporting costs by agency rather than function, which is much more understandable by the public and more useful to the readers of the statements. The General Accounting Office has again given a disclaimer of opinion on the statements but also acknowledges that progress is being made. Across the agencies, specific progress was noted. For example, the Department of Agriculture and certain other key agencies made significant improvements with regard to their lending programs. However, the serious financial management and systems problems at the Department of Defense remain a huge obstacle in overcoming the impediments to reaching an opinion on the governmentwide report, though Defense has evidenced a serious commitment to improving their financial condition. With respect to the material weaknesses that are unique to the financial report, Treasury is actively working with OMB and the agencies to remove them as impediments to achieving an opinion on the financial report. One such weakness relates to the preparation of the consolidated financial statements themselves and the need to establish consistency between the agency financial statements and the compiled information used for the governmentwide statements. We are developing and implementing a new system and procedures to prepare the consolidated financial statements that should resolve this finding. In addition, a thorough review of the standard general ledger, or SGL, is in process that will verify that it contains all of the accounts necessary to facilitate the reconciliation of net position. Another area of recurring material weakness relates to intergovernmental activity and balances. The government currently lacks clearly articulated business rules to ensure that agencies record transactions with each other consistently and correctly. The problem is a data problem. OMB has initiatives under way to address the data quality problem, and business rules are currently being developed that will standardize the recording of agency transactions with each other. Treasury is also implementing a methodology that will effectively eliminate intergovernmental activity. However, until the underlying data is accurate, there will continue to be potential problems with the presentation of the government's activity. The Treasury Department continues to develop a governmentwide accounting system that will greatly improve the agencies' access to data, reduce redundant data reporting, eliminate reconciliations between the cash amounts shown on agency and Treasury books and provide a daily accounts statement. The redesigned system will be Internet-based and will be implemented in a modular, phased approach over the next several years. Treasury's Financial Management Service also continues to improve the SGL based reporting systems. The SGL and the full implementation of it is a critical part of Treasury's goal to make financial data more accessible, more available, more accurate and more useful for management decisionmaking. We will continue to work closely with OMB and the program agencies to raise the bar in financial management. We will consider new ideas such as audit committees and the use of pro forma financial statements with budget submissions. These changes will require the commitment and support of management throughout the Federal Government. Success will be achieved when we reliably and accurately report on the distinctly different financial activities of the many agencies of the government as if they were one entity and do so in a timeframe and a manner that is truly useful. We look forward to working together with all affected parties to reach that end. I know I speak on behalf of the career staff at the Treasury Department that we believe that this is a truly important issue for the Financial Management Service, the Office of Accounting Policy, my office, and most particularly for the Secretary of the Treasury. Thank you, Mr. Chairman. That concludes my remarks. Mr. Horn. Thank you, Mr. Secretary. [The prepared statement of Mr. Hammond follows:] [GRAPHIC] [TIFF OMITTED] T5482.055 [GRAPHIC] [TIFF OMITTED] T5482.056 [GRAPHIC] [TIFF OMITTED] T5482.057 [GRAPHIC] [TIFF OMITTED] T5482.058 [GRAPHIC] [TIFF OMITTED] T5482.059 Mr. Horn. We now have our final presenter who has hit the ground running in the current administration and was here during the Reagan administration, Mark W. Everson, the Controller, Office of Federal Financial Management, Office of Management and Budget. STATEMENT OF MARK W. EVERSON, CONTROLLER, OFFICE OF FEDERAL FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET Mr. Everson. Thank you, Mr. Chairman. I don't really--you have my statement, which I would ask that you put in the record. I don't have too much to add to what my colleagues have said. Because, as General Walker indicated, we have an unusual degree of agreement and a very shared sense of priorities amongst the various players here--GAO, Treasury and OMB--And those are the three big players. But I will summarize a couple of the points I have in my statement because they were touched upon in each case, but I would like to give some emphasis to them. As to the consolidated statements themselves, clearly it is not acceptable to be sitting here almost 7 months after the end of the fiscal year and to be engaging in such a hearing. That is not your fault. That is our fault. We are going to move forward aggressively to accelerate, as both my colleagues have indicated, the delivery dates for financial statements. The statements themselves, there was no opinion this year, as has been indicated by the Comptroller General. The two big issues are DOD and the intergovernmental eliminations that Secretary Hammond mentioned. We are working on both of those. I am pleased to say that the Department of Defense is right on the cusp of releasing a contract that will over the next year establish the enterprise architecture in the financial area. This is a very significant first step in what the Comptroller General indicated is a very deliberate attack of this longstanding problem. The other issue, the intergovernmental eliminations, Secretary Hammond has touched on them. We haven't talked about the statements of the individual CFO Act agencies. This chart over here depicts what happened. As you indicated, with the statements that came through at the end of February, there was no change in the number of clean opinions. They stood at 18. But we would characterize, if you look beyond those numbers, that there was modest but important improvement. That is because two big departments came into the clean category, Justice and Transportation. You will remember that for years GAO has had the FAA as a real problem area. There was progress in three other departments: Education, still a qualified opinion, but they got a lot better. And, most significantly, a lot of the credit accounting was cleaned up at Agriculture, so that the principal problem at Agriculture now is in the Forest Service. And USAID for the first time had--certain of their statements actually were prepared and were auditable, which had not been the case in the past. On the other hand, as you are aware, both NASA and FEMA deteriorated. The administration has solid plans to make sure we recover that lost ground in both of those cases. The other points that I would just make briefly are-- pertain to this area of accounting standards and trying to achieve greater transparency. The Comptroller General mentioned this issue, the debt being eclipsed, as did Secretary Hammond, by the benefits and retiree payables. I have got a chart that--if you look over there--this just shows the growth in that. The debt has been stable these last 5 or 6 years. There has actually been some modest decrease in it. But look at the growth of the employee and veteran benefits and pensions payable. It has gone up from one half trillion dollars in just 6 years to now it is $3.3 trillion. That is dramatic growth indeed. The point that was taken about the linkage of financial information to the budget process, that is a key ingredient of the administration's initiatives both to improve financial performance but also to improve budget and performance integration. As I mentioned last time, we have got a pending proposal--it is a modest proposal before the Congress--to actually have the accounting for retiree costs be consistent. This is something that we took to the JFMIP. The JFMIP supports the need for this, because it is better accounting. That is to say, all of the retiree costs get shown against the individual programs, rather than some which are currently shown centrally against OPM's budget. This has been called for as a good step by, as I say, the JFMIP, by the AGA, which is the government accountants group, and also the AICPA. So I would draw that to your attention. We are serious about this area. We are reconstituting the FASAB to have a private sector majority, six to three. That has generated some heat, principally because I guess there was concern about the reduction in the role of CBO. I would point out, though, that we have the same relative proportion in the government, the three members. GAO has a seat, Treasury has a seat, and OMB has a seat. So in terms of the government participation, there is really no change. What we are doing here is providing for a more independent and hopefully better accounting. Those are the high points that I would make. But, as I said, I don't quibble with a word that was articulated by either of the other two panelists. Mr. Horn. We thank you. [The prepared statement of Mr. Everson follows:] [GRAPHIC] [TIFF OMITTED] T5482.060 [GRAPHIC] [TIFF OMITTED] T5482.061 [GRAPHIC] [TIFF OMITTED] T5482.062 [GRAPHIC] [TIFF OMITTED] T5482.063 [GRAPHIC] [TIFF OMITTED] T5482.064 Mr. Horn. Let me ask the first question here. If the three of you were to be available to the President on other assignments and the three Cabinet officers have been stuck with malaria, the lepers and everything else, and they can't get back to their agency for a couple of years, and the President says, I want you three to go over to those offices, what would be--given what you are testifying on--what would you say to your staff in the--that you are now a Cabinet officer and you were really very concerned about the fiscal situation. What would you tell them? And how would you face that? We will start with you, Mr. Everson, because you know what the executive branch is like. Mr. Everson. Yes, thank you. Mr. Horn. So do you other two. So what would you say and what would you have them do? Mr. Everson. I think that the division that has been articulated by the JFMIP, it is thanks largely to the leadership that GAO has demonstrated over the years, is that financial information has to be useful to support day-to-day operating decisions. What I am struck by, returning to government, is the total split between staff functions in government and operating functions in government. In industry, there are two things that happen. First, the staff functions generally tend to hang together, if you will, where the CFO and the CIO and the procurement officer and the H.R. officer all work together and frequently they battle it out with the operators. What is the problem you have here and gets back to this issue is you--one of the questions I have about--there are many benefits to the CFO Act, but we seem to have moved forward with a real splitting of those functions now. I am not sure that they are cooperating the way they should be. So the first thing I would try to do is get my staff functions to be aligned and to work together. Because you are not going to fix your financial issues until you get all of the staff functions to work together. Then the second step is to get the operating people, the program managers to work with the staff functions. It is a two- step process, if you will. Mr. Horn. Mr. Hammond, you have been around here a long time. Mr. Hammond. Building on what Mr. Everson said, I think the important thing from my standpoint would be to identify within the organization that there be only one source of financial information on program data. I think one of the things that I found in my experience is when you talk to program managers within an agency they come up with financial information that is totally distinct from the financial information that may be found in any central system or central reporting. If you can put in place a methodology and a discipline to look to only one source of data, and that being the agency's own central data, I think that goes lockstep with what Mark was saying, that you integrated then the staff functions into the program people. Today the amount of time and effort that is spent in program operations, developing and tracking their own financial information and measuring it their own ways and slicing it in their own fashion is huge; and it results in them looking at the staff functions and, quite frankly, saying they are not value added to me. That is not the right outcome. The right outcome is for the staff functions to provide the data that the program needs, for that not only to be value added but for them to be a critical part of the discussion. Mr. Horn. What is the role of your Assistant Secretary for Administration in Treasury? Does he have any--he or she--is he the fiscal financial officer? Mr. Hammond. He has actually got somewhat of a unique role, as I understand it, across agencies, in that Assistant Secretary position is not only the Chief Financial Officer for Treasury but it is also the Chief Operating Officer, essentially, for the agency. He sits on the President's Management Council. So he has a unique perspective on--his involvement not only deals with finance, but it deals with the fundamental operations and systems reforms throughout the department, and the CIO reports to that position as well. So I think it--in Treasury, you have a very strong integration of those staff functions, bringing them together at an operating level. You still, however, because of the decentralized nature of the bureau operations, have program information which, you know, is not under, you know, the same type of review, I guess I would say. Mr. Walker. Can I take a shot? Mr. Horn. Go ahead. Mr. Walker. I would characterize your question as why should we care about this? And the response that I would give to that is that accounting is how you keep score and how you keep score counts. Second, if you don't have timely, accurate and useful financial, budget and management information available, you will never maximize the economy, the efficiency and the effectiveness of government and you will never adequately ensure the accountability of government to the taxpayers. Third, if you can't do that, then you are not going to attain and maintain the public's respect for and confidence in their government. And, last, given our long-range fiscal challenges which are being pushed by known demographic trends and in rising healthcare costs, we have to make some tough choices. You need to have that timely, accurate, useful information in order to be able to make tough choices about where you ought to allocate resources, what is working, what is not working, who should be rewarded, who should be held accountable, etc. Mr. Horn. One of the things that has bothered me for 5 years on this thing was the Treasury; the Administrative Secretary there was putting all of these things to his particular bailiwick. Now, when Congress put together saying, you know, they have got to face up to CFOs, we meant a full-time CFO, not just pushed into the administrative thing. I think part of Treasury's problems has been, over the years, with the Internal Revenue group, et al, which had a real mess on its hands, and I don't know the degree to which--we are going to have the Commissioner in here in a couple of weeks, as we do every year. Then when Congress said, you know, most of those people down there really don't know what they are talking about when you get to a Chief Information Officer--so that is thrown in there, and it seems to me you need to get a few first-rate people to hold one of those positions. The Deputy Secretary in Treasury and the under secretaries of many other departments, it just seems to me that they don't fully use their opportunities for talent to come into the administration and to provide some leadership there. And you say, Mr. Hammond, that you don't agree with that. That is fine. Let's hear it. Mr. Hammond. Well, it is certainly a little bit out of my area of expertise with regard to the Treasury's overall operations. But I would speak to the fact that over the past 4 or 5 years the role of the Assistant Secretary for Management at Treasury has been very carefully refined, trying to balance the needs for management of a very large decentralized organization and bringing in some very, very top-notch people. We have been fortunate to have people such as Nancy Killefer as well as the incumbent, Ed Kingman, hold that position. I think they bring a vast amount of private sector experience and have made a lot of changes in the way that office interacts with its--you know, its appropriate functions within the department. I know that from my other hat, I sit on top of the Financial Management Service in the Bureau of the Public Debt, two operating bureaus at Treasury that I deal with, the Assistant Secretary for Management on a range of budget issues and operational issues for those two bureaus, I find them to be very engaged and very involved in not only the financial management but the overall program management from the standpoint of how it relates to consistent Treasury policy. Mr. Everson. Could I weigh-in on this one? Mr. Horn. Yes. Mr. Everson. Secretary O'Neil is not a bashful fellow---- Mr. Horn. I have noticed that. Mr. Everson [continuing]. And he totally, totally supports both the governmentwide efforts that we have all been speaking to, but dramatic reform efforts at Treasury. He has tasked Ed Kingman--and, as Don is saying, I chair the President's Management Council. Ed is a frequent participant in the substance there and also chairs one of our CFO committees. Just as Don chairs the financial acceleration, Ed chairs another. He has the total support of the Secretary. You can set up any boxes you want. But, if the leadership, meaning the Secretary and the Deputy, doesn't empower these people and drive them to change, nothing will happen. Changes are happening at Treasury. They are moving to the 3-day close, very aggressive programs to eliminate the two remaining material weaknesses. So I think that even though it is a very hard department to manage, because, as Don indicated, everything from the IRS to international trade elements, tracking to the ATF, this administration through those players I know is tackling those tasks that you are concerned about. Mr. Horn. Well, the other one told us that, too, and that is when I started getting upset and--back in, as I say, 5 years ago--and I never saw much happening. Well, a little bit is happening now, and they are in the category of improvement, and that is a clean-bit on there for a while. But it just seems to me that--and that is what I said way back during the Clinton administration, what are you doing? I mean, for heaven's sake, can't you focus on something and not just have a position and overwhelm one person and not take advantage of the CFO and the CIO? Mr. Everson. Yes. Mr. Horn. That bothers me. I guess it is going to continue to bother me. But until they really get the job done, I don't know how you can do anything else. That is part of your problem. You are right about saying, get the staff to start moving. That is what a staff is supposed to be for. I think there has been some progress to improve the financial management, but I think it has a long way to go. What role do you see your agency--or under your jurisdiction taking in developing strategies for addressing the problems that continue to prevent the government from preparing auditable consolidated financial statements? That group is going to stay out there in malaria-land until you three get there, because you are the only ones left practically. And what would you do? How would you keep after them? They just smile at you. I mean, I know what the bureaucracy does. I have been in it. And I was bothered then. That was the Eisenhower administration. I am still thinking about it. Yes. Mr. Walker. Mr. Chairman, I think you have to start at the top, and there are a lot of other things that have to happen. But let me touch on a few things. First things first. As I noted in my testimony, the President has identified financial management as one of his top five management priorities. Now, frankly, the last President did, too. This President has a CFO Council. You know, the last President did, too. But, the fact of the matter is that there are some things that are fundamentally different that cause some hope. First, this President has been personally engaged on occasion in dealing with some of these management issues. That is unusual, if not unprecedented, at least in modern times. Second, most of the Cabinet-level officials--or at least many if not most of the Cabinet-level officials--in the administration have some private sector experience and have a better understanding of the need for timely, accurate and useful information, because of some of the reasons I have articulated. Third, the JFMIP principals, which comprise the individuals that I talked about, have never been more active in identifying what are the problems, what the barriers are, and determining an action plan that can be implemented by the staff who are critically important to getting us to where we need to be. And all are fully committed. I have got to tell you, Secretary O'Neil has been at every JFMIP pricipals meeting. Director Daniels would have been at every meeting but for a last-minute meeting with the President that he was called to before our last one. Director James has also been involved in every meeting. We are all confirmed for the next meeting. So there are a lot of things that have to happen. But I am hopeful that if we can sustain this momentum we will see much more progress over the next year or two than we have seen in a number of years. Let me mention one other thing. I think one of the things we have to deal with is that, while we have a lot of capable and committed players at the present point in time, I think we have to recognize that not only in the financial management area but also in the human capital area, in the information technology area, in the strategic planning area and a variety of others, we are talking about a fundamental transformation of how the government does business. We are talking about looking longer range. We are talking about looking more integrated. We are talking about changing some fundamental things. That takes years. I think one of the things the government is going to have to face is whether it is well organized? Does it have the right kind of people responsible and accountable who over a period of time, will transcend presidents, political secretaries, and assistant secretaries in different areas to try to make sure that the infrastructure issues get dealt with and dealt with effectively over time? I have concerns about that. Mr. Horn. Any other thoughts on that? Mr. Hammond. Well, just one. I think I wanted to reemphasize something that is apparent to me but I think isn't also necessarily apparent to the public, which is the level of involvement that Secretary O'Neil brings and commitment to those areas. He has demonstrated a focus and an interest that I have not seen during my tenure at Treasury on financial management from the secretaries. Bob Rubin had a strong interest but not the level of detailed interest that Paul O'Neil brings to this. For example, this year with regards to the management representation letters across government, he was involved in the preparation for the governmentwide management representation letter. As you can imagine, there a number of weaknesses noted in that. Mr. Horn. Now, Secretary Rubin was committed to getting at the debt, and I just haven't followed it yet. But what about Secretary O'Neil? Is he pushing the agencies to get the debt turned over for the credit and the debits and the--getting rid of the debt? Mr. Hammond. Very definitely. There is a great example of a program, once it gets high-level attention and focus, that every agency comes on board, participates cooperatively, and we have got a whole range of success stories. Debt collection is a great example of when you bring the kind of high-level focus and commitment, you can get some very, very strong results. I am encouraged that after the Secretary this year went through the agency rep letters, for example, that he is going to followup with some of the agencies. Because I think it is very eye-opening, when you see a three-inch binder of disclaimers from various agency officials about the state of their financial systems, someone with our Secretary's experience looks at that and immediately understands that this is a bigger issue than it may appear, you know, at first glance. Mr. Horn. Well, it is especially important when we are trying to get a balanced budget again; and one way to do it is to take care of the debt situation all over the executive branch. I do hope the administration will ask the Ways and Means Committee that we get at the tax debt. Right now, everybody says, oh, well, that really isn't in the law. Well, if you are sitting there, you got to have a little energy and do what is needed to be caught up. And it has not been very well caught up except for Rubin's pushing on that. His successor didn't do a thing, so I am glad that Secretary O'Neil wants to do it. Because it is--I think for the average citizen, when they say, hey, I pay my taxes, what is wrong with these jokers? And getting away time after time after time in terms--just saying, oh, you know, I am going into bankruptcy. And we shouldn't allow that. We shouldn't have that kind of thing. Constantly the same old gang is the one that is just--is thieving away at the Treasury. And that gets me, and it gets everybody else when you pay your taxes. Mr. Hammond. I do have some encouraging news with regard to the collection of delinquent tax debt, which is that the tax levy offset system is now fully operational. So we are in the process of working with the IRS to get those debts certified so--the only thing worse than not collecting debt is collecting the wrong debt. So we are wanting to make sure that those numbers are good and that the debts are validly owed. Once those are loaded in the system we will have another tool to collect the--exactly those delinquent obligations. Mr. Horn. Are we going to get tax collectors in the private sector or are we going to continue to let the bureaucracy continue to do it in IRS? Mr. Hammond. With regard to the private collection agencies, that at this point is still an IRS operational issue. Mr. Horn. That is why we haven't collected the debt, and we knew that from day 1. They phonied us up here when they said, oh, we have got this great bit for you to have a little pilot of this. Well, it was a 5-year-old debt, and you never get anywhere with a 5-year debt. I was shocked because I have a great opinion of Commissioner Rossotti. But I was shocked last year that he hadn't taken some really moving ahead action. You can't just take one phone call or one letter. You have got to keep after it. The Commissioner before Mr. Rossotti said, we can't do that, that is the privacy law. That is nonsense. Just give them the address, say they owe us $10,000. If they are gripping about that, fine, then you turn them over to the IRS and say, well, now is this right or wrong? So, again, we just let the money go down the drain, and that bothers me. I don't know. What does the General Accounting Office think about that? Mr. Walker. Clearly, we think there are more aggressive steps that need to be taken with regard to debt collection. I think, as Secretary Hammond noted, it is important, though, to make sure that when people are aggressively attempting to collect valid debt. That leads us back to the problem with the basic financial systems. We don't have timely, accurate and useful information. So I think we need to keep that in mind in determining what type of safeguards might need to be in place, so that as you pointed out, Mr. Chairman, if somebody believes that they don't owe anything, there is some type of mechanism whereby the validity of the debt can be verified one way or the other and not have people aggressively going after debts when there could be some real legitimate dispute about whether or not the amount is owed. But once that has been decided, I think we need to consider some experimentational alternative ways of collecting that debt, because you want to have incentives for people to do the right thing. If they don't do the right thing, then you have to have appropriate accountability. Otherwise, that creates pervasive incentives not to comply. Mr. Horn. Any other comments on that? Mr. Everson. I agree with both of those remarks, sir. Mr. Horn. Good. Well, maybe we can get something done, particularly on the private collections. I just don't understand why that can't be done. I realize they have got a union in the Treasury and all that. But we said, hey, you can have the first crack at it in 3 months. If you haven't collected it, turn it over to collectors that know what they are doing. So that is what bothers me. Because I don't know--they talk a good game, but let's see what happens. When you are after money and we are waging a war, we need to find every dollar we can find to get it into the Treasury. Now the administration and the executive branch has done a fine job with your management scorecard to highlight the agencies progress in achieving the management and performance improvements. I just wonder, how do you plan to measure agencies progress? What are you primarily thinking about? Is it just dollars or it is accomplishments and results of what you were given the power by Congress to do it? So how are we going about that? Mr. Everson. In each case, as you will recall from our earlier discussions, we did a baseline evaluation as of the end of the last fiscal year, the end of 2001, against the standards for success. The standards for success were articulated for each of the five agenda initiatives. In the case of the financial standards for success, we developed them at OMB. We had them commented upon by the agencies. And then we took them to the JFMIP, so that the JFMIP staffs and then the principals reviewed and adjusted the standards. So you have the vision that is articulated in each of those areas for what is success. And I would tell you that is a first and significant step. In financial management, for years the administration, the government has been responding to GAO high-risk lists or your own interventions from the Congress for investigations. And that, frankly, is the wrong way to do it. It is reactive as opposed to having a set of standards that you are driving to and always, of course, being attentive to the events or to areas that come up from time to time. But you should have standards. We have got that now. As we made those evaluations, we went back and asked each agency to develop plans to improve their status. They have done that now. There was a series of negotiations that took place. Some have just only been completed. They all differ. Because each agency's situation is unique, of course. We have been talking about the Treasury Department. But the Treasury Department, with all of its disparate functions, is different form the Social Security Administration, which is sort of a more of a single-purpose entity, if you will. We have worked with the agencies, and they have established a set of deliverables and timetables. We will measure progress, once having accepted the plans by how they are adhering to the deliverables and the timetables that they agreed to with us. Each quarter we will sit down with them. I am going to be sitting down with the leads on each of the five agenda items actually later this month to review where the agencies--what they got done in this first calendar quarter of 2002, and we will assess the progress that way. If they are making progress in accordance with the established deliverables and the timetables, that would be green on the progress side for the agenda item. If they are showing some slippage, which calls into question the timing or maybe some elements of the deliverable, that would be a yellow. If, on the other hand, they are at risk of achieving the objective absent strong intervention, meaning that they are headed toward not achieving the objective, that is going to be a red on the progress side. We are just starting that. We are going to do our first evaluations at the end of March. So we are sort of tweaking that process and tightening it up as we go. Mr. Horn. Well, I will stick with you for a minute. The preparation of reliable financial statements is only the first step to financial management improvement. In the testimony the General Accounting Office stated that many agencies resort to extraordinary efforts to prepare financial statements. What's being done to address the internal control and systems weaknesses that are preventing agencies from having reliable financial information for day-to-day management? Mr. Everson. I think there are--there are three things. First, we are--on a governmentwide basis Don spoke about the efforts he is leading to look at, let's say, certain governmentwide standards and issues on reporting and fund balances and transactions that Treasury has the lead on. We're trying to, from a policy point of view, cleanup things and make them better governmentwide. Joe Cul, my deputy, Don, and I got a group of people who have worked very closely on that. But second, the two other areas which are internal to the agencies are really related to two things; one, systems, and there are any number of important systems projects under way, where I mentioned just a moment ago the start of something very significant at DOD where they're doing the enterprise architecture. So they'll have a coherent systems approach and they will rationalize over 600 different systems that they have that feed into the financial statement information. That clearly is a major thrust and if you look almost at any government agency now there's a lot of systems work under way. But it goes beyond that, I would say, to include looking at your business processes independent of systems. It's not only about money and new systems. It's also about doing things like looking at your unliquidated obligations on a regular basis instead of doing some sort of an analysis just 4 or 5 months after the close of the fiscal year, a lot of things that companies do on a monthly or quarterly basis that government doesn't bother to do except at the end of the year, and clearly one of our clear intentions by forcing acceleration of the statements is that there will be a rupture, there will be a change in practices and that will have two benefits. It will provide for the more timely information itself, but it will also get to the issue of actually making information useful internally. Mr. Horn. When will that happen on what you're doing with the agencies and the systems they have and how they can generate financial statements to meet the dates? What will happen? Mr. Everson. I think that's all going to happen on a case- by-case basis. What we've done now is we--the due date for the 2001 statements was February 27. We've done two things for the 2002 cycle. First, we've mandated joint or combined performance and accountability reports. Up until now, although some departments and agencies did it, there is no requirement to link your GPRA reporting to your accountability reports which has the financial statement information. That's nuts because the whole intention of GPRA is to have that kind of a linkage. So we're requiring that linkage. We're going to accelerate the due date to February 1, but then after a lot of internal discussion we decided to have a pause so that the 2002 date will be the same date in 2003 and then accelerate it from February 1 to November 15 in 2004 because we recognize that these issues and some of the systematic changes will take time. We want the agencies to plan correctly to do this because there are a lot of technical issues. Mr. Horn. Comptroller General. Mr. Walker. Mr. Chairman, I think there are three things that hopefully can help significantly to make progress in this area and avoid what we have referred to in the past as heroic efforts where people spend millions of dollars and thousands of person-hours trying to get a clean opinion but at the same time they have material control weaknesses, substantial compliance problems, and don't have timely and accurate, useful information to make decisions. No. 1, change how you keep score, change the definition of what is success in financial management. The last administration did a number of positive things; however, one of the things that I was always concerned about is that they tended to measure success based upon whether they achieved a clean opinion or not. That creates perverse incentives. GAO has said for some period of time that's the wrong measure. The JFMIP principals have now agreed. OMB has now adopted it for their ``getting to green'' efforts. And so we've got different measures of success to deal with the root causes. Second, the acceleration of the due dates of the financial statement reporting will serve to further discourage heroic efforts because people won't have time to be able to do a lot of things they've been doing and still hit the date. So you give them an incentive from the standpoint of how you keep score. You end up undercutting their ability to do it by accelerating the due dates. And the third thing which I hope is happening, and I'm sure that they will followup on if it's not, is one of the things that Mark just talked about--is linking performance and accountability, linking budget with management, and focusing on results and outcomes. So hopefully one of the things that is happening through the budget process is that OMB is integrating what the management plans are with the resource allocation decisions and they are funding things that are dealing with the root-causes and denying things that are superficial and that aren't ending up actually making substantive improvements that can be sustained over time. I think that's another critical element and one of the reasons why you really do need to link that M with that B in order to get the desired results. Mr. Horn. Let's take one example of Treasury Customs. When Commissioner Kelly was there, he recognized, and he had a software to produce it, that he looked at the East Coast versus the West Coast on the type of personnel that they needed in both places because of containers and the whole business of trade coming into the United States and so forth. So he was out at the end of that, and I don't know that the new Commissioner is doing anything about it. But it sure needs it and in order to do it, as we know, in a bureaucracy, you can't just take it from the New York crowd and put it in the two largest ports in the United States or the Long Beach Port and the Los Angeles Port, and together they are No. 1 right behind Singapore, and yet they don't have the people to check the containers and all the rest and you've got--some of the containers have people from this gang in Shanghai that charge $30,000 to get each of those persons into the United States, and we try to get them on the high seas and the Coast Guard has done a terrific job in doing that, and then you also have the problem of just a plain bunch of fouled-up invoices, and they need to deal with that. And I think Customs has a great opportunity but we've got to do that and you can't take it away. So let's do it for more where it's needed, and that was what Kelly's approach was to that and he was right. Mr. Hammond. I'm not all that familiar with the operations of the Customs Service obviously, but I can tell you from conversations that I've been part of that container inspections in particular, the way they're approached, the methodology, the data supporting how that development, how that inspection is done is something that Secretary O'Neil has personally expressed a lot of interest in. It is something that he understands and the--obviously the events of September 11th have focused a lot of attention on issues related to container security as well as other forms of port of entry. It is something that I can tell you that he is personally engaged in and I suspect that Judge Bonner, the new Customs Commissioner, is equally engaged in that same sort of very disciplined review of those practices. Mr. Horn. What they have now is they say, well, we check 1 percent. This was 1 year ago. We get 1 percent of the containers coming through. That's sort of laughable. So they got it up to 2 percent, and every 4th month or so 1.6 million containers go through the ports of Long Beach and Los Angeles and that moves to all over the United States, and we're about to realize this coming week that the Alameda Corridor is opened and that will move trade even faster in terms of trains moving 24-hours a day right up to the cargo and off it goes, and if they are suspicious about one they take it up 20 miles, unload all of the container and they take it apart, and sometimes they get a good hit and there's narcotics or whatever there and it just--but we need some more people power to really have any of this moving. So I would hope that we can get it in a fairer way so the West isn't constantly losing a lot of people and then not being able to hire others because it's on the East Coast. We had that on frequencies, by the way, on these terrorism things. Most of them are on the East Coast and we need to get frequencies for communication throughout the executive branch, and that's a real problem. And we shouldn't be having private sector things when the government needs the frequencies. And in our first hearing in Nashville we had a problem with the helicopters of the bases in Tennessee versus the civilian helicopters that bring people into hospitals from far away places, and again they can't talk to each other because they aren't on the right frequencies. So we need to do something with that, and that ought to be going fast. So in the results approach, a good bipartisan bill we had, and the Majority Leader Armey was pushing that for everybody just as I was and we need to get the results timed with the financial side and, as you say, the scoring and if it isn't of any use to making decisions, then we shouldn't even waste our time on it, but if decisions can be better and more effectively used, that would be important, it seems to me, for all of us to take a look at that, what is it and how do you know that this cabinet department really is doing something effective or just writing checks. Well, there's more to that than just writing checks. So what kind of penalty will the executive branch do if people sort of fail on the reporting deadlines? What kind of penalty is it? Do you take a few million dollars out of their budget? That would get their attention. Mr. Everson. On the deadlines itself, I haven't contemplated yet what would be the ramification of that. As you indicated earlier, all 24 of the CFO Act reports were timely this year. I don't yet have any indications--Don and I haven't talked about it but--that we'll have a problem next year with the 1-month acceleration. I believe that we will meet that uniformly in the sense that nobody's yet squawked and said they can't do it. It's too early to say, sir, where we'll be on the 45-day deadline. That's 2\1/2\ years out. We set a very high bar. I fully hope that we will achieve that across the board of all 24 agencies. That is what we're going to drive to. I can't tell you yet what the consequence would be if we fail in one or more instances, but I will certainly consider it. And all I want to just do is reiterate, as Dave said a few minutes ago, on the scorecards themselves the President has been using these. I don't know what more consequences or focus you could want than to have the chief executive of the land using the scorecard when he sits down, and it was mentioned--Ari Fleischer was talking about it last week, when the Social Security Administrator was in with her deputy--they went through the scorecard and they talked about it afterwards in the press. So I think there will clearly be consequences as time goes on because of the accountability and the focus and the thrust that the administration all the way through is bringing to these things. Mr. Walker. Mr. Chairman, can I jump in there? Mr. Horn. Certainly. Mr. Walker. I think we need to look at it from the standpoint of both individual and institutional perspectives. You've got to have appropriate accountability mechanisms if things aren't done, and obviously it depends upon how significant the slip is and the item. But obviously something that should be looked at is, you know, to what extent is this affecting the individual's compensation, including whether or not they will receive a bonus. It should also affect their opportunities for promotions or different level increases to the extent they're in the SES, whatever level they are at. It should also affect in appropriate circumstances whether or not they continue to be retained in their position. So I think you have to look at it both individually as well as institutionally. Unfortunately, what has happened all too frequently in the past--and I'm not talking about this administration, I'm just talking generically--is that entities who get more of the money are the entities who have failed in the past, and so we need to have an incentive to make sure that we understand where we're going and we've got a game plan. We've got to get people focused on appropriate accountability mechanisms and try to get the money to these people who are really making a difference, both institutionally and individually, in achieving progress. Last thing, as Mark mentioned, the administration has decided to accelerate the due date for agency financial reports up to February 1st next year. Our statutory reporting timeframe for the consolidated financial statements, as you know, was March 31st. The Social Security and Medicare trustees' statutory reporting deadline is April 1. I can tell you if past is prologue we are going to have a problem next year in that this year we had about 3 days to be able to look at the Social Security and Medicare projections, which is absurd, especially given the fact that GAO has access to top secret information, special compartmentalized information, and yet the staff don't want to provide information on the Social Security and Medicare reports. Something has got to be done to make sure that information is accelerated and to make sure that type of information is included in not only the agency financial statements but the consolidated financial statements. Otherwise the government just looks foolish. Mr. Everson. We would agree with that. There are a host of sequencing issues that you get to when you start to do the acceleration, and those are the kinds of things we're grappling with right now. Mr. Horn. On the Results law Mr. Armey in particular likes that. He has told the chairs of the authorization committees and the appropriations subcommittees that you ought to be able to sit down with members of the executive branch and just talk and not just have the staff of both parties do it but the people that are selected by the President and the people that are elected by the people. And I don't know if any of them have ever sat in this last year. Has anybody ever said, hey, let's talk about some of this? And maybe they all want to run in opposite directions. I don't know. Mr. Everson. In terms of--you're speaking, sir, of the GPRA reporting and---- Mr. Horn. Right. Mr. Everson. I think that my perspective on this, and it goes back to what we were speaking about just a minute ago, the Comptroller General was talking about, what is really the fifth initiative, budget and performance integration. I see very serious efforts taking place at the departments to try and rationalize that continuum of establishing objectives, strategic objectives, which my impression from the discussions I've had with other administration officials is that by-and- large coming in our people tend to believe that the strategic-- the broad strategic objectives, what's the mission of the Interior Department at broadest level, has been pretty well articulated and we accept in many instances those overall mission statements. It's when you get down to the second and then the third level of what you might consider more tactical objectives that you get into trouble, where outputs rather than outcomes have been defined. Let's get 100,000 new cops; that's an output as opposed to is crime down and why is crime down. Let's get more teachers; that's an output as opposed to are kids reading better. Let's write more grants for diabetes; that's an output as opposed to is diabetes being reduced. We're trying to, through that initiative, focus on that continuum so that you're getting the right things measured because what you measure will change behaviors, and I think that through that initiative we're starting to see some progress. Mr. Walker. If I could add to that real quick, Mr. Chairman, I think part of that goes back to what we talked about earlier, which is how do you define success? We've redefined what success is in the area of financial management. The President's Management Agenda has taken a shot at redefining success in the other five major areas. Departments and agencies need to look beyond what historically they viewed in their mission and say, well, how are we going to define success, how are we going to know whether or not we are being successful or, if we're not, are we making progress toward achieving the desired outcomes? That is part of this fundamental transformation process. That is a multiyear effort, but is beginning and it is important that it continue. Mr. Horn. Well, I think that's you're absolutely right on that, and I'm delighted you're pushing it in that way and challenging the bureaucracy and the political appointees and the career appointees that you're serious. Mr. Everson. Could I make one additional point on this? I'm the vice chair and the acting chair of the President's Management Council and we've just recently made a change there based on our--we had a retreat at the beginning of March and wanted to figure out how we would do things better because it's been about a year, and what we've done is we've reconstituted the Council to include three committees. One is human capital and that's chaired by OPM Director Kay James. Another is on e- government because that is a particularly challenging initiative because it requires coordination across agencies, and that is chaired by Cam Findley, who is the Deputy at Labor. Bill Hansen, who is the Deputy Secretary of Education, is chairing the third group, which is on budget and performance integration because we recognize that unless we get buy-in from the cabinet departments and the agencies and they help us define what this has to look like, it won't help just having the Comptroller General and the Director of OMB and a few other people talking about it. It's got to be--this club has to be picked up and carried by the operators that run those departments. So we think that this will help do that. Mr. Horn. Good. So let me just close with a few things here. Does the Congress need to impose any additional legislative requirements to assist the agencies improve financial performance? Is there something that we can do that will help you manage the executive branch? Mr. Everson. I'd like to think about that, sir. We've had a series of conversations about very preliminary and very general--there are a lot of things that interact here. There have been some statutes that have been established over the last 10 or 12 years. They aren't always totally connected, and you've had evolution in duties and responsibilities of IGs and other areas. There are a lot of things to look at that could be considered in terms of defining a slightly better working model. I'm not suggesting the model that we have is a barrier. I think that certainly the burden is upon us to work with that model and there is a lot we can do with the existing model, but I want to reserve judgment before I would make any specific suggestions. Mr. Horn. The kind of thing I'm thinking of is in the Debt Collection Act back in 1996 we provided that the agency that collected the debt, to help it along because they needed computing and take part of that and let the agency improve their computer situation; in other words, we're given a little carrot out there. Mr. Everson. No. I'm going to back up and I'm going to reverse myself here. I think that the erroneous payments area, I'll tell you something that's pending before the Congress right now that I'm concerned about. In the farm bill the quality control program is being weakened rather than strengthened and as we go--one of the vexing things is not just our systems but in a lot of cases this $20 odd billion or so dollars that GAO reports on as erroneous payments. A lot of times these are moneys--these are programs that are conducted by States or counties or other officials on behalf of the Federal Government. There needs to be clear accountability on the part of the third parties. It's not just the fact that Treasury or Ag or somebody is not running the program correctly. I would watch--I would take a look at that farm bill if you could. Mr. Horn. I'm going to be in Iowa in a month or two; so we might ask that question. Mr. Walker. Mr. Chairman, I think it's appropriate for the JFMIP principals to talk about this issue. We already have identified a couple of areas where we know there are problems that need to get resolved. They may be able to be handled administratively but to the extent they can't be handled administratively, we won't be shy about letting you know. Mr. Horn. Well, any other thoughts you have? Mr. Everson. No. I'm just thankful that you have this continued interest and, as I said at the top of the hour, I think that we have an unusual alignment right now of people who are really trying to get some things done. Your continual poking and prodding and corralling us is very helpful because it makes sure that we get centered correctly from time to time and aren't only talking to each other. Mr. Horn. Well, I agree with you on that, and anything we can do to be helpful we'll be glad to do it, at least up through December, or part of December. I want to thank the people that put this hearing together. J. Russell George is our very distinguished staff director and chief counsel right back there. And Bonnie Heald, deputy staff director, next to him. And then Henry Wray, senior counsel, right behind me here, and we're delighted to have Rosa Harris, who's done a terrific job as professional staff on loan from the General Accounting Office. Don't hold anything against her. Just hold it against me. Give her a raise. Detailee. She's done a terrific job. I've seen the best questions and so forth, and I haven't given her justice because I haven't used all her questions. Justin Paulhamus, the majority clerk, he's gone with us now all over America. He'll see America. And Michael Sazonov, the subcommittee intern. And the minority staff here is David McMillen, professional staff for the minority, and Jean Gosa, for the minority clerk, and without her we couldn't use this place. The court reporters, Mark Stuart and Lori Chetakian. And we thank you all, and I'd like to thank the inspectors general of the 24 departments and agencies for their invaluable contributions to our financial management grades this year and we thank you. You're moving in the right direction and if we can help you, we'll be glad to. With that we're adjourned. [Whereupon, at 11:29 a.m., the subcommittee was adjourned.]