[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
THE FINANCIAL REPORT OF THE U.S. GOVERNMENT FOR FISCAL YEAR 2004
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
FINANCE, AND ACCOUNTABILITY
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
FEBRUARY 9, 2005
__________
Serial No. 109-3
__________
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
______
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California
CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
KATHERINE HARRIS, Florida LINDA T. SANCHEZ, California
DARRELL E. ISSA, California C.A. DUTCH RUPPERSBERGER, Maryland
GINNY BROWN-WAITE, Florida BRIAN HIGGINS, New York
JON C. PORTER, Nevada ELEANOR HOLMES NORTON, District of
KENNY MARCHANT, Texas Columbia
LYNN A. WESTMORELAND, Georgia ------
PATRICK T. McHENRY, North Carolina BERNARD SANDERS, Vermont
CHARLES W. DENT, Pennsylvania (Independent)
VIRGINIA FOXX, North Carolina
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on Government Management, Finance, and Accountability
TODD RUSSELL PLATTS, Pennsylvania, Chairman
VIRGINIA FOXX, North Carolina EDOLPHUS TOWNS, New York
TOM DAVIS, Virginia MAJOR R. OWENS, New York
GIL GUTKNECHT, Minnesota PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana CAROLYN B. MALONEY, New York
JOHN J. DUNCAN, Jr., Tennessee
Ex Officio
HENRY A. WAXMAN, California
Mike Hettinger, Staff Director
Tabetha Mueller, Professional Staff Member
Nathaniel Berry, Clerk
Adam Bordes, Minority Professional Staff Member
C O N T E N T S
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Page
Hearing held on February 9, 2005................................. 1
Statement of:
Hammond, Donald V., Fiscal Assistant Secretary, Department of
the Treasury............................................... 71
Martin, Jack, Chief Financial Officer, U.S. Department of
Education.................................................. 62
Walker, David M., Comptroller General, U.S. Government
Accountability Office...................................... 8
Letters, statements, etc., submitted for the record by:
Hammond, Donald V., Fiscal Assistant Secretary, Department of
the Treasury, prepared statement of........................ 74
Martin, Jack, Chief Financial Officer, U.S. Department of
Education, prepared statement of........................... 66
Platts, Hon. Todd Russell, a Representative in Congress from
the State of Pennsylvania, prepared statement of........... 3
Porter, Hon. Jon C., a Representative in Congress from the
State of Nevada, prepared statement of..................... 101
Towns, Hon. Edolphus, a Representative in Congress from the
State of New York, prepared statement of................... 5
Walker, David M., Comptroller General, U.S. Government
Accountability Office:
Information concerning credit program costs.............. 87
Prepared statement of.................................... 12
THE FINANCIAL REPORT OF THE U.S. GOVERNMENT FOR FISCAL YEAR 2004
----------
WEDNESDAY, FEBRUARY 9, 2005
House of Representatives,
Subcommittee on Government Management, Finance, and
Accountability,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:04 p.m., in
room 2247, Rayburn House Office Building, Hon. Todd Russell
Platts (chairman of the subcommittee) presiding.
Present: Representatives Platts, Towns, Dent, Marchant,
Westmoreland, Duncan, and Foxx.
Staff present: Mike Hettinger, staff director; Dan Daly,
counsel; Tabetha Mueller, professional staff member; Jessica
Friedman, legislative assistant; Nathaniel Berry, clerk; Adam
Bordes, minority professional staff member; and Jean Gosa,
minority assistant clerk.
Mr. Platts. A quorum being present, this hearing of the
Committee on Government Reform will come to order.
As we begin the 109th session, it is great to be serving
again with my ranking member, Mr. Towns from New York, as well
as our other colleagues on the majority and minority side. I
look forward to an active and productive 2-year session as we
go forward from this hearing of the committee today.
As stewards of taxpayer dollars, we owe our citizens no
less than full accountability. At the very least, we need to
ensure that assets are protected from loss or misuse. Ideally,
we need to ensure that every dollar is spent wisely and for its
intended purpose. We should also understand fully the cost of
the Government's operations and the implications of our
financial commitments.
To fulfill these important responsibilities, Congress began
requiring that the Federal Government would produce audited
financial statements beginning in fiscal year 1997. The 2004
financial report of the United States and accompanying audit
performed by the Government Accountability Office were released
on December 15th of last year. This deadline represents an
important milestone. It is a huge improvement over the days not
too long ago when agencies took nearly 6 months to close their
books. Timely financial information is necessary for
responsible budget decisions, and in times of fiscal
constraint, as many Federal agencies are required to do more
with less, real time financial data becomes a critically
important tool.
For the 8th straight year, unfortunately, GAO was unable to
provide assurance as to the reliability of the information that
underlies the Federal Government's financial statements. As has
been the case year after year, GAO reported significant
material deficiencies. Additionally, this year a new issue came
to light that warrants consideration. Eleven agencies restated
their financial information for the previous fiscal year.
Frequent restatements can undermine the credibility of our
financial reports.
During this hearing we will discuss the possible reasons
for these restatements and ways that we can improve the process
going forward to ensure that information is reliable as well as
timely.
Perhaps the most important benefit of the audit process is
learning how to correct systemic weaknesses. We have seen
improvement since the inception of the Government-wide audit in
1997, but until we can be assured that the reporting
information is reliable and GAO can issue a clean opinion, we
will not benefit from the full value of this report.
The Government Reform Committee has a responsibility to
ensure sound financial management through appropriate
oversight, and this hearing will establish the basis for our
work in the 109th Congress.
Our witnesses today will provide the subcommittee with
insight on the audit findings of the consolidated financial
statements and discuss areas that need improvement.
Today we are pleased to have the Honorable David Walker,
Comptroller General of the United States; the Honorable Jack
Martin, who will represent the Office of Federal Financial
Management at the Office of Management and Budget, and who is
CFO at the Department of Education; and Donald Hammond, Fiscal
Assistant Secretary at the Department of Treasury. We will
certainly look forward to the testimony of each of our
witnesses.
[The prepared statement of Hon. Todd Russell Platts
follows:]
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Mr. Platts. I now yield to our ranking member, the
gentleman from New York, for the purpose of making an opening
statement. Mr. Towns.
Mr. Towns. Thank you, Mr. Chairman.
Let me begin by saying I really thank you for your
leadership. I look forward to working with you to make
Government more responsible. It is good to be back here with
you.
I look forward to continuing our good work on improving the
performance and efficiency of the agencies and programs that so
many Americans depend on every day. While I am pleased to see
that the agency community is continuing to make progress in
meeting their imposed deadlines for annual auditing
requirements, these results seem to indicate that efforts to
achieve a clean Government-wide audit are stagnant.
As in previous years, a vast majority of agencies are
meeting their goals of achieving an unqualified audit opinion,
leaving us to focus our attention on a select few.
Nevertheless, there is noteworthy decline in the number of
agencies receiving clean audits when compared to last year's
results. For fiscal year 2004, only 18 out of 23 agencies
received a clean audit opinion, down from the 20 agencies
receiving clean audits for fiscal year 2003.
Furthermore, we are witnessing a sharp increase in the
number of agencies restating their results from the previous
year. According to GAO, there are 11 agencies that offered
restatements for fiscal year 2003 compared to only 4 agencies
during the previous cycle.
While the underlying reason for these restatements remains
unclear, it certainly merits our scrutiny. Publicly traded
entities that restated its prior results would face harsh
scrutiny from the FCC and its investors, so why shouldn't our
agencies be scrutinized the same way by Congress and the
taxpayers?
Perhaps it is too early to tell if our efforts to improve
agency financial management over the past decade have been
adequate or if the system and practices for managing our
Federal agencies are faltering. That said, the 2004 statements
remain troubling to me and merit a thorough review from the
Government Accountability Office.
There is no question that the road to sound financial
management and program efficiency within our Government runs
through the achievement of a clean Government-wide audit; thus,
it is imperative for us to continue with adequate oversight of
agency efforts if we are ever to bring our Government's chronic
budget deficit and debt burden under control.
I look forward to hearing from the witnesses and gaining
their perspectives for making our Government a more effective
and accountable institution.
On that note, Mr. Chairman, I yield back.
Mr. Platts. Thank you, Mr. Towns.
[The prepared statement of Hon. Edolphus Towns follows:]
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Mr. Platts. Thank you for your kind words. Again, I look
forward to working with you. We have taken a great team
approach in the past 2 years. It worked so well. I was
delighted that we got to stay in the same chairs that we are in
as chairman and ranking member.
Mr. Towns. Mr. Chairman, I must admit I agree with
everything you said but that.
Mr. Platts. We will proceed to our witnesses. We appreciate
all three of you and your staff for your preparation for
today's hearing and your appearance here today. As is a
practice, if I could ask our witnesses to stand and any staff
who will be assisting them, as well, to take the oath with
them.
[Witnesses sworn.]
Mr. Platts. Thank you. The clerk will note that all
witnesses affirmed the oath.
We appreciate the written testimonies and we will proceed.
We are going to use a rough framework of about 8 minutes each.
We won't be real close to that, but if we are able to we will
have more time for questions and more of that give-and-take.
Mr. Walker, we are going to start with you. In advance--I
think you said 6 years and 3 months in your position--I thank
you for your service and your true and clear dedication to the
fiscal integrity of the operations of the Federal Government.
That name change is appropriate. The Federal Government is
accountable to the people of our great Nation.
If you would like to proceed?
STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL, U.S.
GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Walker. Thank you, Mr. Chairman and Mr. Towns. I
appreciate my statement being entered into the record in its
entirety, and therefore I will try to summarize the highlights
and the lowlights for this subcommittee.
I am pleased to be here again to be able to talk about the
results of the U.S. Government's consolidated financial
statement audit for the fiscal year ended 2004. I would like to
thank this subcommittee for continuing its tradition of holding
annual hearings. I think it is very, very important that you do
that, and I would note that because of your interest and
efforts I think it has helped to make faster progress. I do
think we have made progress over the last several years in a
number of different ways. I think that has to be acknowledged.
As you mentioned, Mr. Chairman, one of the aspects of the
good news is that for the first time in its history the Federal
Government issued its annual report, which included audited
financial statements, on December 15, 2004, clearly a much
expedited schedule from what has been the case in the past. I
think that is clearly a positive action that we should all be
pleased with and proud of.
At the same point in time, for the same basic reasons as we
have for the last 7 years, the Government Accountability Office
has not been able to express an opinion on the consolidated
financial statements for three primary reasons.
No. 1, the Department of Defense. The Department of Defense
is the tail on the dog. We will not be able to express an
opinion on the consolidated financial statements, in my view,
until the Department of Defense gets its act together.
There are two other reasons: one, because of certain intra-
governmental transactions; and, second, because of certain
activities dealing with actually preparing the consolidated
financial statements. My personal view is we will solve those
issues well in advance of solving the challenges associated
with the Department of Defense, which I am happy to get into
during the question and answer period.
While it is good news that we achieved this record
reporting date, one area of concern that you mentioned is the
fact that there was a significant increase in the number of
restatements of prior year agency financial statements. These
statements primarily relate to the reconciliation of the budget
results with the financial statement results, which is a fairly
new statement and one that people, I think, are still trying to
get comfortable with. But the fact of the matter is that when
you have restatements of financial statements, that is a very
serious matter and would be taken very seriously in the private
sector.
The fact of the matter is that it is important that we not
trade improved timeliness for decreased reliability. I believe
over time we won't do that, and I think it serves to reinforce
the importance of making sure that agencies have the right
types of systems and effective controls in order to be able to
get this done in a timely and reliable manner. That is
critically important, not just to be able to generate audited
financial statements at the end of the year, but in order to be
able to have timely, accurate, and useful information to be
able to make informed management decisions on a day-by-day
basis.
I would also note, as you are aware, that the principals of
the Joint Financial Management Improvement Program, the three
primary ones dealing with financial management matters being
the Secretary of the Treasury, the Director of OMB, and myself
as Comptroller General of the United States, agreed several
years ago that success in financial management was not merely a
clean opinion on the financial statements, but you also had to
be able to achieve no material control weaknesses, no major
compliance problems, and have systems that provided timely,
accurate, useful information to make informed decisions on a
day-to-day basis.
Based on that criteria, only 4 of 24 major departments and
agencies meet that test, up from 3 last year. As the chart
shows, 18 of the major 24 Federal agencies received clean
opinions this year, the same as last year. But keep in mind
this: when somebody has restated their financial statements,
that means they didn't deserve a clean opinion in the prior
year and they shouldn't be stating, ``We got a clean opinion
last year and we got a clean opinion this year,'' because by
definition if their financial statements were restated, other
than for a change in accounting principle, it means they should
not have received a clean opinion in the prior year.
In fact, one of the things that we are looking at is to
determine what, if any, modifications should be made to
generally accepted governmental auditing standards to make sure
the auditors point out what the effect of that restatement
would have been had they known about it in the prior year. I
think it is also something that OMB needs to consider in
determining the criteria for when you get to green in the
financial management area, because if you have restatements
something is wrong. We need to make sure that people are held
accountable when they have that type of situation happen.
If I can, in the balance of my time I just want to
reinforce with this subcommittee something that I have been
talking to many committees of the Congress about on both ends
of the Hill, and that is if you look at the consolidated
financial statements of the U.S. Government you will find that
since the beginning of the republic in 1789 we have run up a
net negative position of about $7.7 trillion. Worked out a
little differently, right now total debt is about $7.6
trillion, another way of looking at it.
But if you look at these financial statements and also the
management discussion analysis section, the footnotes, etc.,
you will find there are a lot of other very big numbers in
there, many of which are not on the balance sheet of the U.S.
Government. For example, you will find that we have made
significant promises through Social Security, through Medicare,
and other programs that, in current dollar terms, represent
huge mismatches between what we have promised and what
dedicated revenues are there to be able to deliver on those
promises.
In fact, if you were to take current liabilities and add on
top of that the present value dollar difference between what we
have been promised and what dedicated revenues are there in the
form of payroll taxes or premiums or whatever else to deliver
on those promises, then our current burden is about $43
trillion and rising every day. That is about $350,000 for every
full-time worker. It is $145,000 per American. The total
estimated net worth of all individuals in the United States
combined, including Bill Gates, is $47 trillion, and yet we are
already committed to $43 trillion.
That reinforces the point that we need to continue to
provide enhanced transparency through our annual financial
reporting as to where we are and where we are headed.
By the way, these bonds that are in the so-called ``trust
funds,'' you won't find them as a liability on the balance
sheet of the U.S. Government. The reason being, under current
accounting and reporting treatment the right hand owes the left
hand; yet, nonetheless, we took the people's money, we spent
the people's money in operating expenses, we replaced it with
an IOU, and I think we need to reconsider the accounting
treatment for that and other areas, as well.
Last, we are on an unsustainable long-term fiscal path. Due
to known demographic trends and rising health care costs, we
face a sea of mounting red ink. We are not going to be able to
grow our way out of this problem. It is going to be critically
important that we engage in a fundamental baseline review of
discretionary spending, mandatory spending, entitlement
programs, and tax policy. It may take up to a generation to be
able to deal with this gap, but the sooner we get started the
better.
For the benefit of this committee, on February 16th, before
a full committee hearing of Senate Homeland Security and
Governmental Affairs, GAO will release an unprecedented 21st
Century Challenges report which will summarize where we are and
where we are headed. This report will raise a number of key
questions that need to be asked--and hopefully answered--about
the base of existing Government programs, policies, functions,
and activities, and offer some possible alternatives for a way
forward, because our country, our children, and our
grandchildren are counting on us to deal with this problem. And
in order to deal with it we need timely, accurate, useful
financial reporting and we also need performance reporting that
is results based so we can understand what is working and what
is not working and where we are generating a return on
investment and where we need to reconsider our current position
and plan.
Thank you, Mr. Chairman.
Mr. Platts. Thank you, Mr. Walker.
[The prepared statement of Mr. Walker follows:]
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Mr. Platts. You hit on the things that we want to focus on:
timely, transparent, reliable, useful information that will
benefit all aspects of the Federal Government as we try to
achieve those goals that we are all after.
Next we have Mr. Jack Martin, CFO of the Department of
Education. As you are hitting your third anniversary at the
Department coming up here later this month, we appreciate your
service and also again thank you for your service in the past
as a U.S. Marine and your service in uniform.
STATEMENT OF JACK MARTIN, CHIEF FINANCIAL OFFICER, U.S.
DEPARTMENT OF EDUCATION
Mr. Martin. Thank you, Mr. Chairman and members of the
committee.
As the Chief Financial Officer at the Department of
Education I am very pleased to be here today to provide some
perspective on the Federal financial reporting process for
fiscal year 2004. I look forward to sharing with you some
observations on the Government Accountability Office's report
on the financial report of the U.S. Government, as well as the
significant progress made by Federal agencies during the past
fiscal year.
During this past fiscal year the Federal Government
achieved a significant milestone in the area of Federal
financial reporting. For fiscal year 2004, 22 of 24 major
agencies issued audited financial statements in their
performance and accountability reports just 45 days after the
end of the fiscal year. Prior to this year, agencies generally
took up to 5 months to produce these same reports.
Complying with an administration requirement that took
effect this past year, agencies have now significantly reduced
the reporting delay that had been typical in the past. As a
member of the CFO Council, where I have had the opportunity to
work with other agency CFOs and their deputies, I can tell you
the entire CFO community is pleased and proud to have played a
role in this major accomplishment.
The Department of Education was 1 of the 22 agencies that
met the 45-day reporting deadline in fiscal year 2004. In fact,
Education met this accelerated deadline for the second year in
a row, since we issued our 2003 in mid-November the previous
year, a year ahead of the requirement. Our success was
certainly not attained overnight; rather, the work done over
the previous fiscal years, with careful planning and efficient
execution, enabled us to reach this milestone.
The financial reporting efforts at the agency level enabled
the Department of Treasury to issue the governmentwide
financial report on December 15th for the first time. In
previous years, the Government-wide financial report was
typically not issued until March.
With the accelerated reporting deadline taking effect this
past year, agencies faced a 1-year fiscal period in which there
was less time to prepare audited financial statements compared
to previous years. Despite this shorter reporting timeframe, a
comparable number of CFO Act agencies received unqualified
audit opinions on their financial statements in fiscal year
2004 as in the prior year. Of the 24 major Federal agencies, 18
received unqualified audit opinions in fiscal year 2004. This
result in the face of a more rigorous audit schedule is
especially noteworthy since greater financial discipline and
reliance on internal controls was needed to successfully meet
the 45-day reporting timeframe. Accelerated schedule demanded
good planning and timely reconciliations, and we are pleased
with these efforts.
For fiscal year 2004 I am pleased to report that the
Department of Education was 1 of 18 agencies that received an
unqualified audit opinion. Education has received an
unqualified opinion for the last 3 fiscal years, and we look
forward to continuing our fiscal vigilance in the coming years.
Some have questioned the accelerated reporting requirement,
asserting that the earlier date may result in poor-quality
data. From our perspective at Education, this is certainly not
the case. Education has met the accelerated deadline for the
past 2 years, receiving unqualified audit opinions each time.
An unqualified opinion we have received has required a more
rigorous financial reporting and audit schedule compared to the
previous fiscal years.
Further, the early reporting date has allowed our
department and others the benefit of having financial
information throughout the year on which daily management
decisions can be made on a routine basis. The accelerated
reporting requirement has driven process and control
improvements that have laid a foundation for management reports
such as Education's Fast Facts report.
Fast Facts is a monthly reporting tool that highlights key
financial and performance data in a consolidated and user-
friendly format. Managers at the Department use Fast Facts to
monitor performance and derive improved results in a variety of
areas including grants administration, financial matrix, and
educational outcomes.
In the Government-wide financial report, GAO identified
three main impediments to rendering an opinion: financial
management problems at the Department of Defense, ineffective
processes for preparing the consolidated financial statements,
and deficiencies in accounting for intra-governmental
transactions.
These three items were reported by GAO as material
weaknesses in its report. All these issues are complex, long-
term challenges and will take sustained efforts to resolve. DOD
is addressing specific weaknesses and progress is being made.
It is important to recognize that longstanding issues in a
department that has over 300 sub-entities are not easily fixed.
In some cases, eliminating DOD material weaknesses depends on
the implementation of new financial management systems. In
other cases, material weaknesses require an incremental
approach to transforming business processes, which involves
focusing on one component at a time or one financial statement
line item at a time.
For fiscal year 2004 the auditors determined that three
significant financial statement items at the DOD-wide level--
appropriations received, investments, and Federal Employment
Compensation Act liabilities--passed audit scrutiny. In
addition, six components, up from five the previous year,
earned an unqualified opinion on the fiscal year 2004 financial
statement.
During this fiscal year 2004 reporting cycle, significant
progress was made in implementing a new process for preparing
the financial report. The new process facilitates a stronger,
more direct link to agency financial statements, something that
has been a concern of GAO. While the new process was successful
in producing Government-wide financial statements within the
new accelerated reporting timeframe, there are issues that need
to be refined and improved during fiscal year 2005. The CFO
Council looks forward to working with OMB, Treasury, and the
other agencies to improve this process.
It is my understanding that the inability to balance
significant amounts of intra-governmental transactions is being
addressed on several fronts by OMB and Treasury. Process
enhancements such as more-frequent reporting and
reconciliations and new tools like the intra-governmental
reporting and analysis system will support the efforts to
eliminate reporting errors. These new analytical tools have
helped to better focus corrective actions.
In December 2004, OMB issued the revised Circular A-123,
Management's Responsibility for Internal Control. Circular A-
123 defines management's responsibility for maintaining
effective internal control and requires management to adhere to
broadly accepted internal control standards and undertake a
strengthened process when assessing internal control
effectiveness. The strengthened assessment process is similar
to the process that public corporations must follow under the
financial reforms of the Sarbanes-Oxley Act of 2002.
The policies contained in Circular A-123 further emphasize
a foundation of disciplined accounting processes and good
internal control for providing timely and reliable information
and demonstrating financial accountability.
Eleven agencies restated their fiscal year 2003 financial
statements when issuing their fiscal year 2004 reports. These
restatements relate to a period prior to the implementation of
the November 15th accelerated reporting requirement. Overall,
the restatements reflect the greater scrutiny and attention the
financial reporting process has received in recent years.
Process and control improvements resulting from accelerating
reporting and material weakness monitoring under the PMA
scorecard, as well as recent revisions to OMB Circular A-123
emphasizing internal control over financial reporting, will
likely serve to reduce restatements in the future.
One of my goals as CFO is to produce more timely and
reliable financial information and to use this information in a
daily decisionmaking to reduce costs and better manage
programs. These efforts are currently tracked by OMB as part of
the improved financial performance initiative of the
President's management agenda.
I am pleased to report that the Department of Education has
been in green status in the improved financial performance
initiative for just over a year. Education was the fourth
Federal agency and the first Cabinet agency to reach this
milestone, and several other agencies have joined us since
then. Today a total of eight Federal agencies have received a
green score on the PMA improved financial performance
scorecard. With the recent additions of the Departments of
Commerce and State, eight agencies have an overall green status
indicating that they have demonstrated they are using financial
management information to manage their programs.
I am further pleased to report that the Department of
Education received three prestigious financial management
awards during the last year: The President's Quality Award for
Improved Financial Performance; a Certificate of Excellence in
Accountability Reporting from the Association of Government
Accountants; the Alexander Hamilton Award for Technology, the
Silver Award from the magazine ``Treasury and Risk
Management,'' an award that normally goes to private sector
corporations.
Conclusion: the outlook for the Federal Government to
improve the quality and timeliness of financial reporting to
the American citizen is positive. While many challenges remain,
others that appeared similarly insurmountable just a few years
ago are being solved.
The Department of Education looks forward to working with
OMB and the other agencies to improve Federal financial
management in the months and years ahead.
Thank you for listening. I am happy to answer your
questions.
Mr. Platts. Thank you, Mr. Martin.
[The prepared statement of Mr. Martin follows:]
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Mr. Platts. Your example of the Fast Facts is a perfect
example of that--the internal controls and process, that you
have responded to the accelerated deadline in getting that
timeline information that your managers have to really act on.
A great example for other agencies to follow.
Next we have our Fiscal Assistant Secretary at the
Department of the Treasury, Don Hammond.
We appreciate your being with us. I think you and the
Comptroller General started in your positions about the same
time, so a good tag team as we here try to get our arms around
the financial challenges of the Federal Government.
Mr. Hammond. Thank you, Mr. Chairman.
Mr. Platts. Actually, Mr. Hammond, before you start, I did
want to recognize we have been joined by three other members of
the subcommittee: Charlie Dent from Pennsylvania, who is on the
subcommittee, and two other full committee members, Mr.
Marchant from Texas, and Mr. Westmoreland from Georgia. We
appreciate your participating here today. Go ahead, Don.
STATEMENT OF DONALD V. HAMMOND, FISCAL ASSISTANT SECRETARY,
DEPARTMENT OF THE TREASURY
Mr. Hammond. Thank you very much, Mr. Chairman, Ranking
Member Towns, members of the committee. It is my privilege and
pleasure to represent the Treasury Department today to discuss
the state of reporting on the finances of the Federal
Government. Your continued interest in this important subject
is much appreciated.
I would ask that my full statement be included in the
record.
Mr. Platts. Without objection.
Mr. Hammond. Thank you.
The financial report of the U.S. Government incorporating
the consolidated Government-wide financial statements is
designed to report on the financial condition of the Government
using the accrual basis of accounting employed and understood
worldwide for financial reporting. The report for fiscal year
2004 was the eighth time that Treasury has prepared and issued
this report. We have learned a lot over these past 8 years, and
considerable progress has been made toward producing a timely,
accurate, and useful financial report.
Perhaps even more importantly, the efforts to provide
effective financial reporting have led to significant
improvements Government-wide in the underlying financial
management practices and processes.
We are pleased this year to have completed the fiscal year
2004 report on December 15, meeting the objective the
administration set out 3 years ago. Every agency met Treasury's
November 18th deadline for data input into our new report
preparation system. These were significant accomplishments,
considering that we also concurrently launched a new
consolidation process. I am extremely proud of the considerable
effort that was expended across Government to make these
results happen.
The financial report has been an important addition to
Federal financial reporting. The timely availability of this
additional information can more fully inform the budget
process. The standardized reporting framework promotes
comparability and consistency in reporting across years, among
agencies, and increasingly among countries.
The report goes beyond simple reporting of results as it
displays the effects of all significant assets, liabilities,
stewardship responsibilities, and other commitments and
responsibilities, including social insurance. While the
appropriate accounting treatment in the future for these social
insurance programs is a topic of discussion at the Federal
Accounting Standards Advisory Board, the existing standard does
provide for comprehensive disclosure.
We think this year's financial report shows significant
improvement from the first one we prepared for fiscal year
1997. Many enhancements have been made over these past 8 years.
Additional information has been added, the presentation
improved over the years, increasing the usefulness of the
report for the reader. Less visible but no less important, the
discipline and rigor associated with the production of regular
financial statements have resulted in improvements in basic
financial operating activities. All of these improvements have
helped us hone in on those areas that need further attention on
and will be the focus of our activities this year.
GAO's audit enhances the reports credibility and highlights
areas for improvement. Through this rigorous and continuous
process, we will improve our financial management environment
and achieve more credibility in our financial reporting. Once
we have achieved a level of credibility, we will have created
the solid foundation for a better public understanding of the
Government's finances.
In order to pass audit scrutiny, we must address three
major areas: serious management control issues at the
Department of Defense, the Government's inability to properly
eliminate transactions between agencies, and deficiencies in
the report preparation process.
Defense continues to make progress, but much work remains.
They are such a significant portion of the total financial
picture that it is extremely unlikely that improvement in the
audit opinion will occur without significant further
improvement in DOD reporting.
Two new initiatives were included in the 2004 report
process that were designed to reduce the out-of-balance
conditions that exist between agency transactions with other
agencies. While it is too early to assess these initiatives,
preliminary results are, indeed, very encouraging. Our new
report preparation system is a work in progress. We met our
first phase objective for agencies to be able to fully utilize
the data collection portion of the system to submit their
financial statement data. We plan to complete the consolidating
portion of the system in 2005, which will aid us in
demonstrating consistency with the agency's financial
statements and greatly streamline the preparation process. That
being said, a comprehensive draft of the financial report was
produced this year in less than 2 weeks.
Accounting standards require some disclosures that are not
currently included in the Government-wide financial report. For
the fiscal year 2004 reporting cycle, we asked agencies for
data that relate to these particular disclosures, and we are in
the process of analyzing that data to determine its materiality
to the statements.
The Federal Accounting Standards Advisory Board has also
launched a project to determine which of the currently required
disclosures would not be necessary in a Government-wide
financial report.
We continue to make progress on the problems of imbalances
in intra-governmental transactions and are devoting increased
attention to help agencies fully reconcile these differences.
Treasury's Financial Management Service has added a new tool to
help agencies properly identify and record these intra-
governmental transactions. Treasury and OMB now require
agencies to report and reconcile intra-government activity
quarterly instead of just at the end of the year, which has led
to significant reductions in differences in agency reporting.
Supporting the accelerated reporting efforts have been our
internal efforts to accelerate our reporting of monthly agency
data to financial managers. The monthly Treasury statement, the
public source of budgetary results, has been accelerated in
issuance from the 17th work day to the 8th work day each month,
facilitating agency efforts to verify and use the data in their
reports.
As I have mentioned in the past, we continue with our plans
to improve the routine outlay and receipt process by replacing
the current two-step classification process with a single
classification. We have a pilot scheduled for this coming fall.
If that goes as expected, we will be implementing this new
feature in the coming years to the dramatic benefit of every
single agency.
In summary, we continue to make substantial progress in
reaching our objective of effective financial reporting and
sound financial management. Through the efforts to date,
numerous issues have been identified, corrective actions
instituted, and processes changed. Serious challenges remain
before we reach our objective, but we understand our tasks and
our commitment to resolving them is firm. Improved financial
reporting leads to the ultimate benefit of effective financial
management. As the stewards of taxpayer funds, our
responsibility is to meet those highest standards of financial
management.
Thank you, Mr. Chairman. That concludes my prepared
remarks. I will be happy to answer any questions the committee
may have.
Mr. Platts. Thank you, Mr. Hammond.
[The prepared statement of Mr. Hammond follows:]
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Mr. Platts. We are going to go to the Q and A, and we will
begin with about 5 minutes for each Member and have as many
rounds. Good news or perhaps bad news--meaning we will have
more time for a Q and A--is our next series of votes apparently
won't be until about 5 p.m. now, so we don't have that crunch
coming up at 3 p.m. we thought we may have.
There are a number of issues I want to get into. I think I
will start where all of you have touched on up front, the issue
of the timeframe. While we are pleased to have the information
in a more time-sensitive manner, the November 15th and then
December 15th for the consolidated statements, the issue of the
pros and cons of that. The one that seems to be an example is
the HUD situation where HUD's auditor put their pencils down
November 15th. The Department expressed that they believe they
would have gotten a clean opinion if the auditor could have
finished the audit and not stopped then. One result of that is
HUD will have to re-audit their 2004 statement when we come
back next year and there is another expense here.
Should there be more flexibility? While we are pushing for
this time, should we have some more flexibility built into that
date of November 15th? I will throw that out to all three of
you.
Mr. Hammond. I would be happy to start.
Mr. Platts. Sure.
Mr. Hammond. I think once you establish deadlines such as
these, the objective should be to hold firm to them. Our
experience has found that, while there is a difficult
transition to getting to the accelerated reporting, once you
achieve them the benefits of consistently making those dates or
even further acceleration voluntarily before that really
benefits the agency.
I will give you one practical example of a benefit. Getting
the management letter report from the auditor in a timely
fashion early in the fiscal year allows the agency to be able
to address those issues within the current year, as opposed to
if they were reporting in March, not getting that feedback
until midway through the fiscal year or beyond and then, in
essence, being a whole year behind cycle in being able to fix
those identified areas.
Mr. Platts. So focusing more on things that the Department
of Education has done internally to make sure you meet that
deadline, as opposed to knowing you may have some window of
flexibility if you support those internal changes to meet the
deadline?
Mr. Hammond. Absolutely.
Mr. Platts. Yes. Mr. Walker or Mr. Martin?
Mr. Martin. I think that we need to stay with the November
15 reporting date. I think the over-arching goal should be for
us to get timely financial information so that our managers can
use this information to make decisions throughout the year and
at year end. Receiving a clean audit 5 or 6 months after the
end of the fiscal year, it is great to say you have a clean
audit opinion, but it really doesn't do anything to manage the
Federal dollars that we collect from our taxpayers. So I think
we need to stay with that date. I think that the agencies that
have difficulties making the date once they improve their
internal control structure and perhaps start their audit in
February or March as opposed to June or July, I think they will
be able to make it.
Mr. Platts. OK. Mr. Walker.
Mr. Walker. Two points. One, I see nothing wrong with the
November 15 date. The fact of the matter is that people have to
end up having the right processes, systems, and controls in
place no matter what the date is, especially if it is an
accelerated date. They also need to start the audits earlier
rather than what they have been doing in past years.
The second aspect is whether or not, you have the date of
November 15, whether there might be a circumstance in which you
might allow a particular agency on a business case-by-case
basis, a little bit of extra time if it would make any
difference on the opinion they might otherwise receive.
So my view is that you ought to stick with November 15, but
that shouldn't preclude the ability of OMB, if it so desires,
to provide a little bit more flexibility on a case-by-case
basis where a little bit more time might make a difference, and
they have the ability to do that now. That is a policy
decision.
Mr. Platts. The issue that may be related to this next year
when we see the audits--that was a big issue this time. We
dropped from 20 clean opinions to 18, but if we add in the
restatements and we knock out 7--we actually drop down to, I
think, 10 maybe clean opinions, maybe about 13 or so; 18 minus
11 is 7; we have 7. Let me get my math right here. So we drop
down to seven. So in appearance we actually went up
dramatically if we say they were not clean last year and this
year we have 18. We really won't know that, because how many
restatements will we see next year.
But that broad issue of restatements, I mean, clearly the
fact that 11 departments had restatements tells us there is
something wrong with what we saw from last year.
If we want to start with what you think the major cause of
that number of restatements and how do we avoid that next time
around?
Mr. Walker. I would speculate two things, and I would ask
my co-panelists to add their remarks.
First, it is my understanding that a disproportionate
amount of the restatements have to do with the reconciliation
of the budget to the financial statements, and that is a
relatively new statement. Some people are still having some
difficulty in trying to deal with it, so one would hope that
this situation would improve with time.
Second, not all agencies have the type of systems,
processes, and controls in place to be able to deal with
accelerated reporting dates as effectively as they should be
able to.
I would say those are probably the two biggest contributing
factors, but I would also like to hear the opinion of my co-
panelists.
Mr. Martin. Well, I believe that internal control material
weaknesses contribute, the failure to reconcile accounts in a
timely manner. Heroic efforts, as we have talked about, I
think, at previous hearings, where the opinions are developed
based on brute force, I think those lead to restatements. So to
the extent that we can implement the financial management
systems implemented, clean up our material weaknesses, which
OMB has programs to monitor, then I think you will see the
number of restatements declining.
I don't think it is a trend, and I think that they will
continue for a variety of reasons, but I don't think it is a
trend and I think that as we can get our arms around internal
control issues we will see a steady decline.
Mr. Hammond. Just to add to that, I would agree with both
my colleagues. I think it really does highlight an issue that
is going to be one of continuing focus, which is the need to
seamlessly manage both budgetary data as well as proprietary--
what we characterize as proprietary or financial accounting
information, because to the extent that those restatements do
stem from the budgetary area, it means that the controls
leaping back and forth between those two sources of data need
to be very solid.
Mr. Platts. Thank you. We are going to move to the ranking
member, but I want to recognize we have been joined by Mr.
Duncan from Tennessee. Thanks for being with us.
Mr. Duncan. Thank you very much, Mr. Chairman.
Mr. Platts. Mr. Towns.
Mr. Towns. Thank you very much, Mr. Chairman.
Let me again welcome all the new members to the committee.
I am looking forward to serving with you.
Mr. Martin, let me begin with you. From your perspective,
what reforms are actually necessary to improve the longstanding
financial management problems across the executive branch? What
is the status of the reforms currently in place?
Mr. Martin. I think there are a number of initiatives
taking place right now within OMB that are focusing on
providing greater consistency between the various Federal
agencies with respect to the systems that they use, and I think
that long-term these OMB initiatives, not tomorrow, but long-
term I think we will see significant improvement across
Government based on systems improvements, internal control
improvements.
I think back to where the Federal Government was 15 or 20
years ago, I think most of us would never think we would be at
a point now where most agencies are receiving clean opinions.
Mr. Towns. Thank you.
Mr. Hammond, can you update us on the developments and
efforts underway of recovering improper payments referred to
you for collection? Are there any hindrances or anything that
we should do here to sort of assist you in being able to recoup
that money?
Mr. Hammond. Our efforts to collect the delinquent debt
owed the Government, whatever its source, whether it is from
improper payments or from credit-related programs, are really
moving along very nicely, in part attributable to the wonderful
leadership that has come from this subcommittee over the years.
Last year we collected over $3 billion on behalf of the
Federal Government through delinquent debt collection activity.
That is a significant source of repayment, primarily coming
from the offset of tax refunds. This year the President's
budget has two legislative proposals contained in it that would
help us to further enhance and refine our debt collection
activities, and I would look to you all for your
acknowledgement and support of those two important additions to
our debt collection program.
Mr. Walker. Mr. Towns, if I may add a point on that?
Mr. Towns. Sure.
Mr. Walker. There is one area that I don't believe Congress
has addressed yet that I would put back on the table. Under the
Prompt Payment Act, it is my understanding that if the Federal
Government doesn't pay certain amounts within a certain
timeframe they incur certain additional costs and penalties. At
the same point in time, if the Federal Government happens to
pay twice for a particular item, the individual who received
duplicate payment not only does not have to notify the Federal
Government, but, in fact, they never have to pay interest or
penalty if down the road it is found out that a double payment
occurred. I think we need to think about leveling that playing
field in this area.
Mr. Towns. Excellent point. I mean, especially when I think
about the fact that you mentioned the $7.6 trillion and then
the $43 trillion. I mean, I think that we need to do everything
we can.
Let me just go to you, Mr. Walker. In your view, what is
GAO's continuing role in taking to accelerate progress in
financial management reform and in developing short- and long-
term strategies for addressing problems that continue to
prevent the U.S. Government from preparing auditable
consolidated financial statements?
Mr. Walker. There is no doubt in my mind that the key
players are committed to making continued progress in this
area. There is also no doubt in my mind that the key players
are looking for substantive wins, not pyrrhic victories.
The biggest concern that I have, quite frankly, Mr. Towns,
is, of the three big areas that are preventing us from being
able to express an opinion on the consolidated financial
statements, the one I have by far the most concern about is the
Department of Defense, and I am happy to come back to that if
you want. That is the one that I still have very significant
concerns about.
Mr. Towns. Thank you, Mr. Walker.
Mr. Martin, back to you. This year the Government
celebrated their timeframe for the submission of financial
statements from agencies to November 15th. Is this perhaps an
over-aggressive schedule for agencies to meet? Could this be a
fact in the decline of the number of agencies that received
clean audits for the year?
Mr. Martin. I think that the November 15 date is an
appropriate date, an appropriate target for all agencies to
meet. I think one element that we haven't talked about that I
haven't read much about in terms of meeting that accelerated
date is the importance of having all individuals in the agency
or department onboard, working toward a common goal of meeting
that date. That means not only the people in the CFO office,
but the Inspector General, the auditors, the program people,
everybody in the entire department. I think at the Department
of Education that is pretty much how we get it. So it is not a
solo run for myself and my staff. Everybody has to say, ``We
are going to work together. If we have to work 14 to 16 hours a
day for a period to make that deadline, that is what we are
going to do. If we have to work weekends to make the deadlines,
that is what we are going to do.''
I received a commitment from our IG. We talked and we said,
``We are going to do this. We are not going to cut any corners.
We are going to cross T's and dot the I's. We are going to do
it right and we are going to have our people work to make that
goal.
Mr. Towns. All right. Thank you very much.
Thank you, Mr. Chairman. I have used up my time.
Mr. Platts. OK. We will come back around. Thank you, Mr.
Towns.
Mr. Duncan.
Mr. Duncan. Thank you very much, Mr. Chairman.
Mr. Walker, a few months ago I heard a talk by Charley
Cook, a very respected political analyst, and he made a very
interesting statement. He said that people could relate to and
get upset about $600 hammers and $900 toilet seats and things
like that, but he said he had never seen a figure over $1
billion that anybody could really comprehend. That made some
sense to me.
And then I read in this one article that I was given here.
It says, ``Agencies reported $35.7 billion worth of improper
payments in fiscal year 2003, according to the testimony of Mr.
McCoy Williams of the GAO.'' And then I read a few days ago
that the Defense Department couldn't account for about $9
billion over in Iraq. I guess there are two or three questions
there.
First of all, how do we get people to understand how much a
billion dollars is? I mean, everybody in this room should be
shocked or horrified by that $35 billion worth of improper
payments or the $9 billion that couldn't be accounted for in
Iraq. We should be horrified by that, but we aren't.
And then I guess second, how does that happen? How are we
not able to account for $9 billion? I mean, maybe you could
understand a much, much smaller figure, but we are talking
about huge, huge sums here, just staggering amount.
Mr. Walker. First, Mr. Duncan, the bad news is the $35
trillion is $45 trillion for this year, and that is not all the
numbers yet because not all the agencies have reported yet, but
that is an accurate number for 2003.
Mr. Duncan. You said trillion twice there.
Mr. Walker. I am sorry. I am sorry, Mr. Duncan. I am
dealing in trillions now. I apologize.
Mr. Duncan. I thought my gosh.
Mr. Walker. Let me clarify.
Mr. Duncan. A trillion, a billion.
Mr. Walker. The number for fiscal year 2003 for improper
payments was about $35 billion or $36 billion. The number for
fiscal year 2004 was about $45 billion, and that is not
everything because not all agencies have reported.
Second, you are correct that even when you deal with
billions, much less than trillions, it is hard for people to
relate to it. One of the challenges you have is to try to
convert that number into something that people can relate to.
You mentioned, for example, the Department of Defense. A
billion dollars for the Department of Defense would fund
roughly 10,000 Army troops. So for every billion we waste, we
don't have the ability to fund 10,000 Army troops. So you have
to take these numbers and convert it in terms that I think
people can relate to. The $43 trillion number which I mentioned
is about $350,000 per full-time worker when the average family
income in the United States is $42,000. It compares to $47
trillion, which is the total accumulated net worth of all
Americans, including their home equity. So we need to put these
numbers in terms that people can understand them.
But we have large and growing structural deficits and we
have to get serious now. We can't afford to waste anything,
although waste will never be zero in the world's largest
enterprise, which is the U.S. Government.
Mr. Duncan. Well, it will never be zero, but we sure have
to do a lot better than what we are doing or we are going to
run into some terrible, terrible problems. I mean, we are
already--you know, the Congress voted to raise the national
debt to $8.5 trillion a few months ago. Now they tell us that
the deficit for this year is going to be $427 billion, and it
is going to be more than it was last year. It just keeps going.
At any rate, do you know about this $9 billion that they
were talking about a few days ago, how that happened?
Mr. Walker. Mr. Duncan, GAO right now is doing work to get
a handle on where the money went for the supplemental, because
I have zero doubt that it was spent. I do however have serious
concerns on what it was spent on. We haven't finished our work,
but there are serious issues being raised. I believe it comes
back to what I said before: the biggest problem agency in the
Federal Government by far--nobody is even close--on financial
management and accountability is the Department of Defense.
Mr. Duncan. Well, when you finish that report I would like
to see it. May I respectfully suggest, Mr. Chairman, that might
be something that we need to have another hearing about.
I especially like your suggestion that these complaints
that get double payments, they should have to pay penalties and
interest when that is discovered. You said they are not having
to do that now, but I think that would be some good legislation
that we could hopefully bring out of this subcommittee.
Mr. Martin. Mr. Duncan, let me add to that.
Mr. Duncan. Yes, either one of you.
Mr. Martin. With the proper internal control structure and
elimination of many of those material weaknesses that have been
identified at DOD, we would know where that $9 million is.
Mr. Duncan. No, billion.
Mr. Martin. Billion. He wants to go one way and I will go
the other way.
Mr. Platts. Mr. Duncan, your point is very well taken. In
fact, one of our priorities in our agenda for this session this
year is coming back to the Federal Financial Management
Improvement Act, which is really to focus on internal controls
which will lead us to either improper payments or unaccountable
payments, so we do plan on getting into that issue, and that
most recent example is yet one more that will relate right on
point.
Mr. Duncan. You know, I mentioned the hammers and the
toilet seats, but I remember several years ago people all over
the country got upset over $500,000 they were going to spend on
the Lawrence Welk Home in South Dakota, and then in your State
there was an outhouse that the Interior Department built in
some park, and I think they spent $260,000 on it or something
like that, and everybody got upset about that. But we need to
get upset about this $35.7 billion worth of improper payments
and this $9 billion that was lost in Iraq. As Mr. Walker said,
he said he has zero doubt that it was spent, but apparently
spent improperly.
Thank you very much.
Mr. Platts. We definitely are going to be following up on
that issue, and your interest and passion on the issue is
welcomed with the subcommittee. We will look forward to working
with you.
I am going to pick up a little bit out of the order that I
was looking at because I want to come back to the restatement
issue, but on the improper payments, Mr. Walker, you touched on
it, that the latest numbers are $45 billion with many agencies,
and my understanding is the Department of Defense, some parts
of the Department of Defense programs have done an improper
payments assessment but not in total, given the size of that
budget over there we expect to see.
Do you or either of our guests, our panelists, have any
guess of where you think we will end up? You know, the $45
million is where we start at now for 2004, but I said when you
used the word ``trillion,'' when we add DOD in completely we
might be at trillion. We have heard numbers of $75 billion or
$80 billion as maybe accurate. Any idea?
Mr. Walker. Since the executive branch has the primary
responsibility to be able to come up with those numbers, I will
let one of my co-panelists answer that.
Mr. Hammond. To try to attempt to answer your question, I
think, from my understanding, I don't have the information to
be able to estimate where it will go beyond that which is
reported. I think clearly, as you are looking at where improper
payments are likely to come from, what you want to look at is
programs that have either entitlement design or certain forms
of eligibility criteria, because they become prone to various
forms of practice which may result in improper payments. And
recognize that an improper payment may be a double payment. It
may also be an under-payment.
Mr. Platts. Mr. Martin.
Mr. Martin. I think our difficulty is actually trying to
identify improper payments. At the Department of Education we
have initiated a couple of projects, data mining projects where
we look at large programs attempting to identify data
anomalies. But even with those exercises, I am not satisfied
that we are really getting close to being able to identify
accurately improper payments.
So going down the road, what we are doing at Education
right now is looking at techniques and procedures to try to get
our arms around just what is the level of improper payments.
Right now we don't know. I think it is an area where we are
just getting started. It is going to require a lot of work
going forward, and it is a real front-burner issue with OMB
now. You know it is on the scorecard. So the short-term
challenge for me, and I think for many other agencies, is to
try to identify what that number is. We are just estimating,
and I am not happy with the estimating techniques so far. I
think we can do a much better job.
Mr. Platts. I think of the $45 billion, maybe to have an
accurate statement, my understanding is $40 billion is over-
payments and the other $5 billion is under, for a net loss of
improper over-payments of $35 billion. But we want to not pay
too much, but we also want to pay what we owe, and we are
missing it in a substantial way.
Mr. Martin, you are CFO of the Department of Education, but
also on behalf of OMB and a message to OMB is the continued
focus on the improper payments and that it just ties in to the
broad issue of internal controls. If we have those internal
controls we can get to the issue of these improper payments.
I put in perspective Mr. Duncan's question how do we put
these terms. When we did the Medicare bill in late 2003, the
prescription drug plan, the estimates, I used the number of
about $45 billion per year over 10 years, because we had
numbers of 400. We had over $500 billion over 10 years, what
the cost would be, including the transition years. But if you
say $45 billion a year, we are talking $450 billion every 10
years. The improper payments for 2004, $45 billion equals the
entire cost of the new prescription drug plan for that year.
That puts it in perspective for citizens to say yes, that is
one heck of a lot of money when we talk about funding that
entire program. To your fellow CFOs and to OMB in specific,
that continued focus is important.
Mr. Martin. Mr. Chairman, I want to say one other thing.
Mr. Platts. Yes?
Mr. Martin. Going back to our data mining project, I would
say, you know, we talk about estimates, but in terms of actual
erroneous payments where we paid a vendor, say, the wrong
amount of money, I think what we identified was less than
$100,000 where there were actual--out of millions, billions. So
from that standpoint it is good, but still I say we have a lot
of work to do.
Mr. Platts. It is one of the I will say legacies of my
predecessor, Chairman Steve Horn, on this subcommittee in
pushing that legislation through in his final term here in
Congress that I think long-term is going to really go a long
way to cleaning up our financial house.
I am going to yield to Mr. Towns if you have other
questions.
Mr. Towns. Thank you, Mr. Chairman.
Mr. Walker, what impact does information security
weaknesses have on Federal operations and safeguarding Federal
assets? And why is it important for agencies to establish a
comprehensive security management program? Can you provide us
with any specific examples of an agency making progress in
strengthening their internal controls for financial management
systems, because this seems to be a problem.
Mr. Walker. First, like anything in life, if you don't have
a plan you are going nowhere fast and you are not going to be
able to solve your problem, so it is important to be able to
have a comprehensive and integrated plan in order to make
progress. In the absence of having a plan and effectively
implementing a plan, you have Government assets that are at
risk of inadvertent or deliberate misuse or loss. You have
financial information that could be modified or destroyed. You
have sensitive information that could be inappropriately
disclosed. And you have critical Government operations that
could be subject to disruption. So there are a lot of
significant adverse consequences, some of which can be
quantified in dollar terms and some of which don't lend
themselves to being qualified in dollar terms.
Mr. Towns. I have also concerns actually relating to the
lending and credit activities within many of our Federal
agencies, particularly in light of your findings. Efficiencies
in determining the costs of certain lending programs and the
value of related loans--can you speak to the material problems
facing the agency community and how to adequately determine
credit programs' cost?
Mr. Walker. I will mention something briefly, but I might
have to provide something more for the record.
The issue of credit cost is to properly analyzing that,
properly accounting for that, is a matter of increasing
concern, one in which we are continuing to do work on. It is
one that we have done some reporting on in the past, and if it
is OK with you, I would like to be able to provide something
for the record on that.
Mr. Platts. Without objection.
Mr. Walker. Thank you.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T9783.064
Mr. Towns. Thank you very much.
Let me just go to one other thing. Mr. Walker, when you
testified before us last year I remember I commented on how we
had leveled off in the number of clean audits given in
comparison to the prior year. This year we seem to be reversing
that course without taking into account the number of agencies
that are restating prior audit results. Are there any broad-
based themes among the five agencies that received qualified or
disclaimers on their audits? Can you tell us what specific
actions may be taken in the short term to increase our numbers
of clean audits among--forget about DOD. Forget about that.
Mr. Walker. It is only about $100 billion, not counting the
supplemental.
Mr. Towns. If you can.
Mr. Walker. Sure. I will be happy, Mr. Towns.
First, to set the record straight, while there are 18
agencies that received clean opinions in 2003, 11 of those were
restated as a result of the 2004 financial reports, but of
those 11, 4 didn't get a clean opinion last year, so in reality
it is 11 rather than 7.
Mr. Towns. Right. Exactly.
Mr. Walker. Although for the record, 18 minus 11 is 7. And
I will even certify that. But in any event, I think the common
denominators are some of the things that we touched on earlier:
not having effective systems and processes, not having
appropriate controls, not being able to do work earlier in the
year, not having the total team committed to getting things
done within the appropriate milestones, and then some of the
challenges that have been associated with reconciling budgetary
results with the financial statement results. I believe those
are the ones that are the primary challenges we need to
continue to work on.
Mr. Towns. Right. Thank you very much.
Let me just ask you very quickly, Mr. Martin, it seems to
me there are issues concerning the quality of audits received
by agencies. Can you cite for us any particular concerns
regarding the agency audit process you have noted during your
tenure? Are there specific shortcomings or deficiencies within
the agencies in order to meet the information requirements for
auditors to complete their work?
Mr. Martin. I think there are numerous impediments to the
auditors completing their work. I guess on the Government-wide
audit there are what we call ``scope limitations'' because the
information on the financial statements was not provided to the
auditors in a timely manner so that they didn't have the
opportunity to review a final set of statements, for example.
So there are issues with the auditors not being engaged in
a timely manner. Say, for example, we at the Department of
Education didn't get our books closed and our August statements
done until October, then there is no way the auditors would
have enough time to meet an November 15 deadline.
So the agency has a responsibility to produce statements in
a timely manner, which goes back to the issue of having good
financial systems so you can generate statements monthly. If
you can do that with the proper controls, then you can ask your
auditors to come in and start their audit work in February or
March. Or, as is the case in many corporations, the auditors
never leave. They are there year-round. We essentially invited
our auditors to come in year-round if they wanted to, if that
would help us meet the November 15 date.
Mr. Towns. All right.
Thank you very much, Mr. Chairman. I see my time has
expired.
Mr. Platts. Thank you, Mr. Towns.
I am going to come back to the restatement issue, which
will lead me into internal controls and the quarterly
reconciliation issue.
Mr. Walker, in your written testimony you reference the
range of restatements going from a few million dollars to $91
billion, and I wasn't sure what your reference was there. You
talk about restatements to CFO Act agencies for fiscal year
2000 ranged from correcting two line items on one agency's
balance sheet to numerous line items on several. The amounts
range from several million dollars to over $91 billion. The $91
billion, can you expand on that?
Mr. Walker. Mr. Chairman, that $91 billion was the
Department of Health and Human Services, and that was an
adjustment that was necessary with regard to that statement of
budgetary resources that I mentioned before.
Mr. Platts. So that is one of those where hopefully we
won't see--they are just getting transition to how to handle
that reconciliation, that will be fewer and fewer need for
restatements in the future as they get better experienced at
that?
Mr. Walker. That is our hope and expectation.
Mr. Platts. OK. Thank you.
We have talked a lot kind of internal control issue, and we
were at the committee delighted with OMB's Circular A-123
trying to strengthen internal controls. As you are aware, I
sponsored the DHS financial accountability legislation where we
are requiring an audit of their internal controls because of
where they are starting at, 22 agencies with many material
deficiencies, and trying to get it right up front rather than
coming back down the road and correcting it, so requiring that
audit. We did not include in that legislation that every CFO
agency has to have an audit of internal controls.
My question for the three of you would be: on the A-123
circular, does it go far enough, in your opinions, or should we
go further and be looking at audits of internal controls for
all agencies, knowing that there is a substantial additional
cost for that requirement?
Mr. Martin. I guess I wouldn't recommend audits for all
agencies. I think in some instances it might be appropriate,
but a cost/benefit of doing that I think is not there. So I
would say as a general proposition no, I wouldn't recommend it
for all agencies.
Mr. Platts. Do you believe that the circular requirements
go far enough in establishing when you should go farther?
Mr. Martin. Yes, sir, Mr. Chairman, I do.
Mr. Platts. Mr. Walker or Mr. Hammond.
Mr. Walker. This is an issue that I expect for the
principals of the Joint Financial Management Improvement
Program to deal with. One of the issues that is on our agenda
is to look at the Sarbanes-Oxley Act, which applies to the
private sector, and to be able to discuss whether and to what
extent any of those provisions should be applied to the Federal
Government.
I would note for the record that while we are not required
to do it, the GAO for years has voluntarily expressed an
opinion on the system of internal accounting controls for the
entities that we audit, not only the consolidated financial
statements of the U.S. Government, but the IRS, the Bureau of
Public Debt, the FDIC, and soon to be released the Securities
and Exchange Commission for the first time.
So I do think it is something the principals need to talk
about. I think we have to think about where does it make sense
and where does it not.
Clearly, every Federal agency it doesn't make sense, and so
I think we need to think about value and risk, cost/benefit,
and hopefully we will make some progress on it.
Mr. Platts. Mr. Walker, would you think that an agency like
DOD, which has significant internal controls, it should be more
likely a requirement, or is it an overwhelming task where they
stand, where it wouldn't be effective at this point in time?
Mr. Walker. Ultimately I believe that would be an agency
where it would likely meet the criteria, where it would be
something you would want to do; however, I think we have to
keep in mind right now and for the foreseeable future it is
likely that the DOD is going to end up issuing an annual
statement, which it is allowed to do by law, which basically
says they are unauditable.
Clearly, they are going to have to focus on their systems,
processes, and controls in order to be able to get in a
position where they are auditable. But you wouldn't achieve
much by telling them they have to obtain an opinion on their
internal controls now because they can't even get an opinion on
their financial statement.
Mr. Platts. Right.
Mr. Martin.
Mr. Martin. I think you will find if you look at the OMB
circular, what it really reflects is a very thoughtful approach
to implementing Sarbanes-Oxley at a Federal level to get
started. It allows for an incremental review and implementation
based on the nature of the agency, and I think, Mr. Chairman,
it gets to exactly the point you are after. It focuses
attention where attention is needed and doesn't cast an overall
blanket affecting everyone and spreading that cost.
Mr. Platts. And takes that cost/benefit approach.
Mr. Martin. Exactly.
Mr. Platts. OK.
Mr. Hammond. Mr. Chairman, it is highly likely that if one
was to try to attempt to conduct an audit of the system of
internal accounting controls for the Department of Defense that
it would likely be an adverse opinion if you got an opinion at
all.
Mr. Platts. All right. And that issue, Mr. Walker, your
staff is going to be with us next week for a hearing on this
issue in greater detail, and it is something we are going to
stay with because internal controls, I have come to believe--
now I am starting my third year as Chair--is so critical to
everything we have talked about, and so the greater our focus
on that. That is why, with the Federal Financial Management
Improvement Act, we are kind of trying to revitalize that,
focus on that, and hand-in-hand with the OMB circular, that we
hopefully will make some progress.
Mr. Hammond. I agree with you, Mr. Chairman. Internal
controls are absolutely critical.
Mr. Platts. On extension of restatement, I was trying to
find in my notes--I marked up all your testimonies and have too
many notes to find what I was looking for, but, Mr. Walker, I
think it was in your testimony talking about reconciliation, or
it might have been Mr. Hammond, and the number of agencies that
are not reconciling quarterly as they are supposed to. Was that
in your testimony?
Mr. Hammond. I presented some figures, Mr. Chairman, on the
nature of reconciliation having to do with the improvement in
fund balance reconciliation over time, as well as what we have
been learning from the reconciliation dealing with intra-
governmental activity. What we have learned there is that there
are a significant number of agencies that are out of balance on
intra-governmental activity, that number is getting smaller,
and what has allowed it to get smaller is our ability to focus
in on the specific items, understand the nature of the
differences, give the agencies information that they can work
with and work backward from.
What we have learned is that the situation is probably
worse than we thought when we started this, but it has gotten
better in the last year and a half as we have been able to
address it, which is a difficult place to be in but it is an
interesting realization for us to understand how this
information fits together and be able to work back to
understand how to get rid of the difference.
Mr. Platts. You helped me get ahead of what I wanted to get
to, and it was actually in Mr. Walker's specific testimony, but
it relates to the intra-governmental transfers, and that was
one of the issues I was going to move to, the size of the
problem there, but that we are making progress. As we have
talked before, there is a belief that you have identified it
now, what is driving it, and that a year from now we should see
less problems within that area of intra-governmental transfers.
Mr. Hammond. Yes. In fact, if I could split that problem
into three pieces for an understanding, I think it is very
helpful for me.
One is there are certain proprietary accounts--for example,
investments that one agency may have on the books of the
Treasury Department. They are very discrete. It is an area once
we isolated it we are able to find the differences, and for all
practical purposes we have resolved all those remaining
differences in those areas.
We have a second set of activity which is the commercial
type of activity that takes place between agencies. It is a
little less discrete. This is buying and selling goods or
services between an agency or paying rent or buying IT
services.
The difference there may stem from timing, it may stem from
accounting methodology, but fundamentally the only way to fix
that area is to get the agencies together to work up a common
solution and a standardized approach to dealing with it. It is
not the type of area that can be resolved unilaterally.
And then the third area, which is the one that we really
have to come to grips with, has to do with the transfers of
spending authority between agencies. In essence, this is the
whole way that the budgetary account system ties in behind the
proprietary systems. That is a much more difficult task at this
point, understanding how these flows be able to be matched up
and eliminated between, in essence, the centralized source of
those transfers as well as the agency that ultimately ends up
using those.
Mr. Platts. And the prognosis for all three? I mean, the
first obviously we are in good shape. The second two is where
we are still working.
Mr. Hammond. The second one there is a considerable
willingness on the part of the agencies to deal with this
because it does reflect--it ties back. That is the nice thing
about the subject we are dealing with is that everything is
inter-related, and what agencies are discovering is that some
of those restatements tend to the treatment of budgetary
activity which tend to the controls over the way they do
business between agencies, so there is a vested interest in
understanding where that comes from and resolving it at the
agency level.
The third problem is actually a problem in need of a
solution, and that is where we are going to spend some
considerable time over the next few months. It is not one yet
that we have been able to isolate what we think would be the
answer for solving it. Once we do that, I suspect it is going
to be pretty straightforward. But because of the nature of the
way appropriations are created and moved, it is a little more
technically challenging just to get our arms around it.
Mr. Platts. As you move forward, we welcome that dialog as
you try to identify that solution for that third aspect and how
you are going to move forward with a solution once it is
identified.
Mr. Hammond. I would be happy to.
Mr. Platts. My followup is to you, Mr. Hammond. Really it
relates to Mr. Walker's testimony about the requirement of OMB
and Treasury that the CFOs of 35 departments and agencies
reconcile on a quarterly basis. What caught my attention was
the statement that a substantial number of these agencies did
not fully perform the required reconciliations for fiscal years
2003 and 2004. With there being a Treasury requirement, I guess
I have two questions. One, why didn't they? And what
repercussions were there for not doing what they are required
to do?
Mr. Hammond. Those are excellent questions. The primary
reason they didn't reconcile, as I understand it, stems from
the fact that those transactions that were unable to be
reconciled fall into that second category of activity: agency
commercial activity between each other. That commercial
activity is frequently done at a detailed sub-level and there
is not sufficient information available easily between agencies
to be able to match up that activity to be able to reconcile
it. That is a solvable problem.
Mr. Platts. How long have they been required to reconcile
quarterly?
Mr. Hammond. For about a year.
Mr. Platts. So that is new. So it is fair to say this time
around it is a newer requirement so they didn't have the detail
they needed; but if a year from now they still can't reconcile
because they don't have the detail required to reconcile, then
there is a little more responsibility that they are not
fulfilling?
Mr. Hammond. Right. Exactly. And that would be a more
fundamental problem, because what we do is we provide not only
the tools and the information, but we also provide feedback. We
prepare, in essence, a report card type of format of agency
performance on our reporting requirements at the end of the
year, which we then send back to the CFO of each of the
agencies.
So if you were to see a situation where it would constantly
stay the same, that would be indicative of a need for further
attention at the agency level, and I think both OMB and
Treasury would be committed to try and followup on that.
Mr. Platts. Thank you.
Mr. Towns, did you have any other questions?
Mr. Towns. Yes.
Mr. Platts. Sure.
Mr. Towns. This would be to you, Mr. Martin. I am trying to
understand so we can be helpful along the way, and I really,
really mean that. Maybe you can sort of help me through this
process a little.
Many agencies place extensive reliance, as I understand it,
on contractor support to prepare the financial statement. I
would think that would affect the agency's ability to build and
sustain a long-term financial management capability. Don't they
have to take bids and then, if the contractors don't do what--I
mean, walk me through this process. I am trying to make certain
I fully understand every aspect.
Mr. Martin. I think what you will find at our department
and probably throughout Government is that contractors are,
especially in the IT area and the accounting area, that there
is significant level of contractor participation, and what we
are trying to do at the Department of Education essentially is
to wean ourselves from this kind of contractor support.
I looked at some of my senior CFO staff a couple of years
ago and I said, ``Bring in the resumes. I want to see the
resumes of the contractors and I want to see the resumes of our
staff.'' Our people are just as good on paper, and in many
instances better, than the contract staff. So I said to my
folks, ``Why do we need contractors to do this work? Let me
know how many contract hours we have, and starting now we are
going to reduce the number of contract hours so we are not
dependent on those people. You folks should be able to produce
financial statements without significant contractor
intervention.''
Mr. Towns. So my concern is real?
Mr. Martin. You are right on point.
Mr. Towns. Thank you. Thank you very much.
Thank you, Mr. Chairman.
Mr. Platts. Thank you, Mr. Towns.
As you were correcting the record for our accuracy on math,
I referenced the FFMIA Act next week. We are actually doing the
Federal Managers Financial Integrity Act next week, FMFIA. My
staff director said we have talked openly about one of our
efforts of the committee this year is reorganizing the dozen or
15 different financial management acts of the last 20 years
into a more cohesive and easily understood and implemented plan
for all of our financial managers throughout the Federal
Government. One benefit would be to get rid of all the acronyms
so I don't get myself confused here.
On that point, that reorganization effort, we are certainly
going to look for insights and guidance from all three of you
and your agencies and your experience as we look to try to
bring all this together in a more efficient way.
I want to turn. Mr. Walker, we have touched on, in a
minimal sense but regularly throughout today's hearing, on the
Department of Defense and that 600-pound gorilla out there that
we need to deal with if we really want to get a clean opinion
on the consolidated Federal Government statements. One of the
issues there as chief management officer and your staff and
your office has been working with the committee on how to
approach that issue. I was wondering if you could give us your
emphasis or arguments on the importance in moving in that
direction. We talked a little bit before we started the
hearing. And then if there is an update where GAO stands on
maybe proposed legislation language, that would be great.
Mr. Walker. First, based upon our latest update of GAO's
high-risk report, which we issued in the last week of January
of this year, DOD now has 14 of 25 high-risk areas; 8 are DOD
only, and they also share the six Government-wide areas. That
is two more than they had last year. And several of these have
been on the list since the beginning.
I have become convinced, along with my colleagues at GAO,
that a number of things are going to have to happen in order
for DOD to effectively deal with these high-risk areas, of
which financial management is but one and it is related to a
number of other ones, such as the modernization of their
information systems, etc.
One of the things that I believe is that if you go to the
Department of Defense and you ask them who is in charge, who is
responsible, who is accountable, who is qualified, who is
resourced, and who is in the right position to be in charge of
business transformation, I don't know that you would get an
answer. Or if you did get an answer, you wouldn't get a
consistent answer. That is a problem.
We need to recognize the reality that it will take years to
address DOD's high-risk areas, and it will take the sustained
attention of a highly qualified individual with a proven track
record of success in dealing with these types of issues over a
sustained period of time.
Our view is that one way to go about that is to create a
new position. You could call it ``Chief Management Officer,''
or you could call it ``Chief Operating Officer.'' The words
shouldn't matter, but it needs to be somebody at the Deputy
Secretary level for management. A position that is not a
substitute for but a complement to the current Deputy Secretary
position. We need somebody with a proven track record of
success in both the public sector and the private sector who
woule focus on various fundamental business transformation
efforts.
We need to have somebody, I believe, who has a term
appointment, e.g., 7 years, because history has shown that,
irrespective of whether you are in the private sector, the
public sector, or the not-for-profit sector, on average it
takes 7 plus years to effectuate a needed transformation, and
in the Government it takes longer because it is not used to
changing as much, much less the Department of Defense with so
many layers and levels and systems.
We also ought to have a performance contract for that
person. I am pleased to say that the Defense Business Board,
which advises Secretary Rumsfeld and Deputy Secretary
Wolfowitz, of which I am an ex officio member--and I will go to
one of those meetings tonight and tomorrow--has recommended
that the Department of Defense establish such a position.
While the Department of Defense could theoretically do this
administratively by taking one of their current allocations,
you can't achieve certain things administratively. You can't
necessarily achieve the type of stature, the term appointment
that I believe is important, nor can you institutionalize the
issue.
There is no question in my mind that Secretary Rumsfeld on
down is committed to trying to deal with this problem. There is
absolutely no question in my mind on that. But, quite frankly,
they have a lot of other things they are having to deal with
and there are enough things going on day to day that each of
the Under Secretaries and Assistant Secretaries and Service
Secretaries have to deal with, and everybody is focused on
their own silo or line item. We need somebody who is focused
full time to make this happen.
As far as the audit, while the DOD has a goal, they don't
have a comprehensive, integrated, and credible plan with
appropriate milestones and accountability mechanisms to achieve
this goal. In orer to achieve a goal you need to have a plan,
and they don't have one yet. They need one. And when they
approach it, they are going to have to approach it in a
matrixed fashion. They are going to have to work over time to
try to get more entities that can get clean opinions and more
line items that are cleaned up so that over time they will move
to where they will get a qualified opinion, and hopefully
before the end of my term a clean opinion.
Mr. Platts. Before I continue I want to recognize we have
been joined by our subcommittee vice chairlady, the gentlelady
from North Carolina, Virginia Foxx. We are delighted to have
you with us.
Ms. Foxx. Thank you, Mr. Chairman. I am sorry there was a
conflict and I am late.
Mr. Platts. As a new member here, you will find that we are
called upon to be in four spots at once on a regular basis, so
we are delighted to have you be with us and look forward to
working with you and with our ranking member, Mr. Towns, as we
go forward.
Mr. Walker, I want to followup on what you have already
said. I share your belief. We have had great efforts. You look
at Secretary Rumsfeld September 10, 2001, when he lays out his
priorities, one of which that day is financial management at
DOD, and the events of the next day understandably run the
course here and dominated their challenges. I think that is one
of the challenges for Deputy Secretary Wolfowitz. Their
priority, as it needs to be, is fighting war and winning war.
While they have a great intent and had some good people--Dov
Zakheim and others--the fact of that turnover, the CFO, the
Deputy CFO, the Deputy Under Secretary for Management, all
those things have led--I think you said earlier, a well-
intended goal, but without a plan or ability to move forward to
reach the goal.
I look forward to working with you again, when CMO or
whatever office or title we want to have. One of the things you
mentioned, though, in creating it was doing it statutorily
instead of administratively, which I agree with because of that
permanence if you do it administratively. You can say we are
going to do it for a 7-year term, but change of administrations
one way or the other is going to be a change in 3-plus years
from now, whether that continues if we do it statutorily.
You also mentioned performance contract. Could you expand
on what you envision there?
Mr. Walker. Yes. A performance contract wouldn't require a
statutory provision, but the concept being that this person
would be responsible and accountable for making sure that
comprehensive and integrated plan was developed, that there
were key milestones, and that appropriate accountability
mechanisms are in place. I think it would be appropriate to
consider having some type of performance contract whereby the
individual would be held accountable for achieving those key
milestones, obviously with appropriate accountability for other
parties that are contributing, as well. That should affect how
much they get paid, and it also should affect their job
security.
Mr. Platts. I appreciate that because it kind of goes to my
question about reconciliation issues. I asked what are the
consequences. One of the challenges, I think, when we try to
analogize Sarbanes-Oxley and other issues of the private sector
to public sector is in my 2 years I have found that we often
aren't doing what we are supposed to be doing, what statues
require in the area of financial management. Where there is a
carrot/stick aspect to that would be important.
On the issue, update where you stand on proposed language.
Still in the early----
Mr. Walker. We are very close. We are happy to provide
technical assistance to the committee in that regard.
Mr. Platts. We greatly appreciate it and look forward to
moving forward on that issue with you, because it is something
that for DOD in particular, and as I have said when we have had
NASA here and DOD, helping them to clean up their financial
house is going to allow them to focus more efficiently and
effectively on their primary missions, whether it be going to
space with NASA or, you know, the efforts of defending our
Nation at DOD.
Virginia, did you have anything, any questions?
Ms. Foxx. Not at this time, Mr. Chairman.
Mr. Platts. Not at this time? OK.
I want to come back to one other issue, Mr. Walker, you
touched on, and I know you probably spent a fair amount of time
maybe at the Budget Committee today. When we talk about that
$43 trillion of liabilities that are out there, we could
probably spend days on all of them. Social Security though is
one that is on the front burner, and a lot of discussions in
your testimony. You also gave to us a copy of your statement,
which I appreciated receiving, your address a week or two ago
with State and local governments and some of the challenges out
there. You referenced that you want to go into more detail in
your question and answer period, and I obviously wasn't there
for that.
When I read your testimony and the need for changes, some
of the ideas that are out there such as the wage index for
initial calculation of benefits, you know, the cap on the
payroll tax at roughly $90,000, the idea of personal accounts,
could you touch on those as you read what ones we should focus
on most, or combination of, or you think is going to allow us
specifically for Social Security to get on the right track?
Mr. Walker. As you know, Mr. Chairman, GAO has done quite a
bit of work in this area already. I expect that we will be
doing some more. We have come up with criteria that we believe
any Social Security reform proposal should be evaluated based
on in order to make sure that it is a level playing field and a
fair and balanced analysis.
As you know, I used to be a trustee of Social Security and
Medicare from 1990 through 1995, so I am pretty deep on these
issues.
One of the things that you referred to me before that I
noted in my speech at the National Press Club last week was I
really believe that, while Social Security does not face
immediate crisis, it does face a large and growing financing
problem that is getting bigger every day, and it would be
prudent to address sooner rather than later. I think one reason
is because Social Security is only $3.7 trillion of our $43
trillion challenge.
The other thing that I mentioned was I believe that
Congress has an opportunity, working with the President, who
obviously would have to sign the bill, to exceed the
expectations of every generation of Americans in doing Social
Security reform. You don't have that opportunity in Medicare.
You do have that opportunity in Social Secretary.
The reason I say that is if you take individuals at a
certain age or older--the President has suggested 55, but that
may or may not be the right age--and you say those individuals
will not be affected in any way, shape, or form, they will get
the current deal, and those are the ones who are most concerned
because they don't have time to make adjustments.
If you then take people younger than whatever age you
select--for example, Baby Boomers, Generation X, Generation Y--
you could make progressively greater changes, whether it be on
the replacement rates, the retirement ages, the indexing
formulas, whatever, but progressively greater changes the
younger you are but phased in over a number of years, you can
end up giving everybody more than they think they are going to
get--not necessarily more than has been promised, but more than
they think they are going to get.
For example, my father, who is retired, is going to get
every dime. I am assuming there is going to be some hair cut to
my benefits. My children are assuming there is going to be a
bigger hair cut. The fact of the matter is that if we act soon
there is an opportunity to make more modest changes than
otherwise will have to be made, and hopefully it will give us
some credibility and some confidence to start dealing with some
of the bigger challenges that are going to be a lot tougher to
deal with, are going to take many years, and where you are not
going to exceed the expectations of potentially any generation.
The prima facie example of that is Medicare.
Mr. Platts. And your point of building credibility is one
that I think is so important, because these issues politically
have been that third rail--Social Security, Medicare there now
as well. If we are able to take on the issue--and Mr. Hammond
referenced earlier the third category of intra-governmental. A
problem in need of a solution goes to Social Security. We
should all agree that it is a problem. The question is: what is
the solution and how do we go about implementing it? If we can
get to that discussion, it is a lot more likely to be a policy
focus instead of partisan focused, as it is currently. But if
we do right on Social Security, then we will have that trust of
the people so when we take on Medicare and that huge unfunded
liability, that we can do it in a way that will do as best we
can by everybody in a fair and honest fashion.
I use my own family, the debate between 2042, which is in
the consolidated financial statements, versus 2052 in CBO. I
said my daughter is 5. She doesn't get retired until at least
2067. Either date, we have a problem. And I have got a Mom who
is 71 who is already there. So I am looking at it from a sense
of protecting those there and doing right by those who are
many, many decades away from getting there.
Your frankness on this issue, not just in the past month
but for many years, is--I am sure you have felt like you are
crying out and no one was listening. Well, finally we have a
President and I hope House and Senate that are closely
listening to the message you have been conveying and
documenting so effectively and are going to act.
I think President Bush has said--and I had the pleasure of
being with him yesterday, about 15 of us House Members--in the
end people respect if you are willing to take on problems and
actually present solutions and are willing to act to solve
problems, as opposed to just passing them on, which is, as you
have well told us, what we have been doing for years.
Ms. Foxx.
Ms. Foxx. Yes. Mr. Walker, I appreciate very much what the
chairman was just saying. Not having had the privilege to have
heard you before, I wonder if you are saying you wouldn't
characterize it as a crisis. That seems to be what the popular
press picks up in a lot of cases is that it is no crisis,
therefore we don't need to deal with it. The chairman is
indicating that you have tried in times past to indicate to
people that there is a real problem.
Do you have any other suggestions? Or you may want to tell
me this later if you have already said it in the meeting. How
do you get people's attention. If you don't want to call it a
crisis, then how do you get people's attention that if nothing
is done it soon will become a crisis?
Again, I don't need you to go into great detail, but it is
obvious you have given it some thought.
Mr. Walker. The first thing is before you can solve a
problem there has to be broad-based consensus that there is a
problem that needs to be solved, and there also has to be at
least majority agreement that--I mean on both sides of the
aisle, a majority of total members and of the population
hopefully--that believe that it is prudent to act sooner rather
than later.
I would be happy to provide you and your office my
testimony before the House Budget Committee--I will give you
one today. It lays out a number of reasons why it is prudent
that we act sooner rather than later.
The biggest reason is you can look at it micro or macro. On
a micro level, the sooner you act the less dramatic the changes
have to be, the more time you have to phase it in, because time
is currently working against us. The problem is getting bigger
every day because of known demographic trends.
From a macro standpoint, this is a small downpayment on the
work that has to be done. It is $3.7 trillion out of $43
trillion. We need to start solving some of these long-range
imbalances. With Social Security you have the potential to
exceed the expectation of all generations of Americans, that
sounds like to me it could be a win.
I think part of the problem is there has been too much
focus on individual elements of a possible proposal like, for
example, individual accounts. I mean, individual accounts may
or may not be part of a comprehensive solution to Social
Security, but even if they are, they are only going to be a
piece of a package and other things have to happen in order to
assure the solvency and sustainability of the system.
I have been very concerned because there is no doubt in my
mind I believe that a clear and compelling case can be made
that it is prudent to act now. At the same point in time, we
are not off on a very good foot because it is too partisan, it
is too ideological, and it is too focused on individual
elements of a potential reform package rather than reaching the
first objective. The first objective is to obtain agreement
that we have a problem. It is a large and growing problem. We
need to solve it, and it is prudent to solve it sooner rather
than later. Once we are there, then we can talk about how best
to go about that, what are the possible elements and related
tradeoffs, what are the pros and cons.
I honestly believe, based on my experience as a trustee,
and being on two Social Security Reform Commissions in the
past, having been involved in national town hall meetings
around the country on these issues in the past, that the
American people are a lot smarter than many give them credit. I
give them a lot of credit. I am sure you all do, too. They are
very smart. You give them the facts. You speak the truth. They
will empower you to act.
Mr. Platts. And that education process, what the problem is
today is a critically important first step, because I describe
it as a problem that we need to address. If we don't, it will
be a crisis for when we reach that 2018 or 2042, whatever year
in the future it will become a crisis if we don't address the
problem we have today.
Mr. Walker. That is true, and part of the problem is that
many times Government historically has not addressed issues
until a crisis is upon us, which is fundamentally imprudent
given these known demographic trends and our long-range
imbalances.
Let me give you an example real quickly and I will move out
of this. In 1983, when the Greenspan Commission was created, we
were within weeks of not sending out the checks on time. Now,
believe me, that would be a crisis. There would be a big
signal.
Mr. Platts. You wouldn't want to be in our District offices
when that happens.
Ms. Foxx. Right.
Mr. Walker. I would say there would be consequences. But
the fact of the matter is today's equivalent of 1983 is 2042.
But it would be fundamentally imprudent to wait until 2042, not
just because of Social Security; because of the much broader
fiscal imbalance challenge that we face.
Mr. Platts. Yes. I want to just conclude. In your
testimony, Mr. Walker, to put a plug in something we are
working on, a number of places in your written testimony you
talk about the way we are reporting not adequately showing the
results that agencies are getting for the taxpayer dollars and
the importance of program review and ongoing process at the
Department of Education and Treasury and with our legislation,
our PAR Act legislation that we moved last fall out of the full
committee. We didn't have time to get it on the House floor
schedule before the end, but I have talked to Chairman Davis
and we will likely move it in March in the full committee. It
is something that we are trying to help, again, from a
statutory standpoint, put some permanence into what the
administration is doing, I think, a wonderful job going through
the part process of trying to be more results oriented and not
just, ``You have X dollars and spent X dollars appropriately,''
but, ``Did you achieve any results for the American people when
you spent X dollars?'' Our legislation is going to try to help
push that in a statutory sense.
I want to thank the three of you again for your several
hours here today with us and your preparation and your day-in
and day-out work. We look forward very much to continuing our
interactions with each of you and your offices as we move
forward over these coming 2 years.
Mr. Walker. If I can, Mr. Chairman----
Mr. Platts. Sure.
Mr. Walker [continuing]. I would like to thank you again
for holding this hearing and making it an annual occurrence.
Second, I would like to thank all the very capable GAO staff
who worked on this year's financial statement audit, because
without their efforts it just wouldn't happen.
Thank you.
Mr. Platts. As I left the capital on December 15th, my
daily commute back to my home in York, I thought I heard a big
sigh of relief out of GAO that it was all done and submitted.
We know that is quite a herculean effort that goes into that
audit process.
We have a couple of things, I guess. We are going to keep
the record open for 2 weeks that you are going to followup
with, Mr. Towns, any information you want to submit.
I want to recognize staff from both sides, as well, who
help make these things run smoothly.
This hearing stands adjourned.
[Whereupon, at 3:57 p.m., the subcommittee was adjourned.]
[The prepared statement of Hon. Jon C. Porter follows:]
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