The AGA Weblog

Federal Financial Management: A New Way Forward

2010-02-19T16:53:11-05:00

Daniel I. Werfel, the youthful controller of the Office of Federal Financial Management, U.S. Office of Management and Budget, began his presentation by wondering when the jokes about his age will end, but said he’s getting to the stage where he welcomes them.

Werfel began his Friday afternoon session at AGA’s National Leadership Conference by posing a question. What lens are we at OMB looking through when we look out on the financial management community, and what needs to be done in the long and short term? One of the lessons he said he is learning with the current administration is to come at management challenges by not shying away from far-reaching change, and by celebrating short-term victories along the way. The actions we’re taking are having results, he said. “It’s important for us as a community to see important success milestones achieved along the way,” Werfel said. If our first moment of truth about what we did is five years from now, that is not OK. In everything we’re pushing for, Werfel said, the building block accomplishments “let the world know and let ourselves know that we mean business.”

Where are we today? Thanks to the CFO Act of 1990 and subsequent reforms, a foundation of strong accounting practices is in place. We’ve seen high-functioning risk management after Sarbanes-Oxley and the new OMB A-123 on internal control, Werfel said. “I think A-123 has been a very critical success." We now have the ability to look at risks, understand them, test internal controls, see how risks change over time, and see how audit results can inform risk management frameworks. Also making a difference is the integration between transaction processing and accounting records. “We’re getting more and more efficient all the time,” he said. “That is the very positive foundation in the federal sphere from which we can build.”

Topping Werfel’s list of concerns is complexity of financial systems, which in OMB’s estimation is leading to unnecessary costs and inefficiencies. Cost of modernizing systems is increasing, leading to project delays. In the end, many of these systems are not performing enough for the investment of time and are not able to handle the emerging needs we’re faced with today. Core financial functions are still not fully automated, he said, using accounts receivable as an example.

Second on the list of concerns is that traditional financial reports are not meeting user needs. “I’ll keep talking about it until the problem gets fixed,” he said. The public’s demand for financial information, particularly “spend” data (where the money is going) is expanding before our eyes and we’re producing it. “I’m extremely proud to be part of the community that is working until midnight most nights to get it done,” he said, adding that we’re still not nimble enough yet. “We need to get out of the business of heroic efforts to get this information out and get into more of a stable environment.”

“Improper payments is emerging as the critical metric of financial management success,” Werfel said of the third item on his list. The federal government hit an auspicious milestone in 2009: $100 billion in measured improper payments annually. “That’s really getting to the bottom line of what the taxpayers care about,” he said. We need to own this, figure out why it’s happening, what’s worked previously and what will work going forward. The Recovery Act brought attention to this issue because it arrived at the same time we hit the $100 billion mark and caused people to wonder about our ability to account for the stimulus money, he said.

In the 1990s after CFO Act, Werfel said, we saw a steep learning curve to tie together transactions, accounting ledgers and financial statements. “It took a while to crack that code,” Werfel said. Following the CFO Act, we created customized technologies and diverse accounting strategies, similar to that which we are seeing with the Recovery Act. Right now, we’re looking for fast solutions to get the information out. “You can already see the tensions emerging with nonstandard business practices,” Werfel said. The pressure is on to not repeat the mistakes of the past, which is a hard thing to do when deadlines are pending. We can’t stop what we’re doing to wait for the perfect systems. “Part of the battle is to understand what is happening while it’s happening,” he said. During the decade of the 2000s, we grew through the learning curve more effectively. We saw more clean opinions and fewer material weaknesses, but our investment in resources did not level off.

“Half the people in this room have been mentors to me over the years and taught me the history of the CFO Act,” Werfel said, adding that the “bandwidth” we were hoping for from all this investment never materialized. “I see a promised future of better data integration where this system will talk to that system,” he said. A lot of reliance and hope was pinned on our system modernization that has yet to materialized. Commercial off the shelf (COTS) customization turned out not to be the best way to go. Customizations entered their way into the process. The Recovery Act exposed a gap between the public’s demand for information and the CFO Act era infrastructure to produce it. “We are closing that gap every day,” Werfel said. “It’s not without a lot of cost to our resources and our human capital.” Werfel equated the Recovery Act to having kids—“It takes up a lot of time. And then sometimes the older children get jealous of the Recovery Act. I’m seeing that all over the agencies. It is a remarkable effort.

He called the Recovery Act “a seminal moment” for financial management and a turning point. “What we’ve been able to achieve is truly remarkable,” he said. He pointed to the first-year audit of the Troubled Asset Relief Program (TARP) as a benchmark of an agency achieving a clean audit opinion with no material weaknesses in the first year. Werfel shared the credit with the U.S. Government Accountability Office, which conducted one of the most complex audits in its history. So how did they achieve a clean opinion the first time out? “The right people were on the job,” Werfel said. “This was government at its best from a financial management standpoint.” He gives primary credit to Jenny Main who put together a team of experts and “that’s what got it done” against a backdrop of a strong financial management organization at Treasury. “It was a real team effort that I think will go down in history as one of the more impressive feats,” Werfel said. “It was an important test for us 20 years in and I think we passed with flying colors.”

When the Recovery Act was passed a year ago, the transparency requirement loomed over the OMB staff like Mount Everest. It took a few months to set up a nationwide data management system and after the first reporting period, it took 20 days to review and validate millions of lines of data coming in from recipients and sub-recipients who had never had to collect this information before using a system that was brand new. The effort brought together all our experience and lessons learned to get this done. Someone pointed out that EPA had a similar system in place for what was needed for recovery reporting, so we started copying and leveraging it, he said. On the second day after the act’s passage, Werfel asked if anyone had ever deployed a nationwide data collection system. When the answer was no, he realized he didn’t just need EPA’s system, he needed their people, too. This shift in skill and focus area was a real success.

Werfel also pointed to partnerships with state and local governments, who were “right there with us in dealing with the challenges.” What made it so successful? In addition to having the right people and thinking creatively, there was a real “relentless pursuit of effective implementation” of the Recovery Act. “The Recovery Act wasn’t signed with much fanfare, but it was implemented with tremendous fanfare,” he said. The president and vice president rolled up their sleeves and came to staff-level meetings and drove the message. “You can’t get much stronger support than that,” Werfel said. That kind of top-down interest and accountability is extremely effective. The vice president is on the phone with governors every week. “It’s really been an amazing lesson learned and it’s led to these implementation successes,” Werfel said.

Are there imperfections? Absolutely. The infrastructure that we’ve put in place over the last 20 years couldn’t answer all the questions, which identified another central concern. “This was our moment and both the media and the citizens were demanding the answers,” he said, adding that it took a lot of work to get the answers. Mistakes were made because you’re getting the answer any way you can, which creates a custom solution to the problem. It was challenging, he said, to teams who had to watch systems they devoted decades to developing sitting idle while new systems are cropping up overnight.

In the area of financial systems, Werfel is finding an unsettling trend: It is no longer unusual to see a system modernization cost a billion dollars and last a decade. Werfel referred to a “whole suite of reasons” while the costs are rising. Frustration sets in when you’re tracking down information and a billion-dollar implementation is not giving you the answer you need. Whatever we invest in these systems, they have to answer the questions that are being asked in financial management today. “We have to close that gap.”

Three critical priorities:

· Eliminating waste. Werfel called for an “all-out war” against improper payments. To do this, OMB is generating targeted efforts to get at the root of the problem. A Senate-approved accountability official is now in place at each agency. An effort is under way to measure more frequently for errors. In the past, there have annual scans for errors and with a significant lag time, “That’s a very difficult way to manage a problem.” OMB is asking agencies a very difficult question: How can we get more frequent information about what we’re doing today and the impact it’s having? Transparency can be improved by publicly naming the entities that received the most improper payments in a given period of time while enacting incentives and penalties. We are looking at state financial incentives and at the single audit and strengthening it around improper payments. Werfel referred to items in president’s budget for funding to target certain areas, such as stopping payments to tax-delinquent vendors.

· Closing the efficiency and quality gap in financial systems. What are we going to do about it? The president recently had a summit for 40 CFOs from around the world to discuss closing the technology gap between the public and private sector. Werfel said it was fascinating to hear CFOs talk about best practices in their organization and then to transpose that to ask how it is occurring in government. When do you stop a project that isn’t going well? Werfel learned at the summit that the private sector has a much more sensitive stopping point. “That caused me to ask questions about our tolerance point,” he said. The private sector might not have fewer failures than we do, but they pull the plug quicker, he said, adding this is harder to do within the constraints and elements in our environment. “We have to change the footprint of our financial operations.”

· Promoting accountability and innovation through open government by issuing reports that are relevant and user-friendly and high quality. He noted that audited financial statements aren’t read but the unaudited information on USA Spending is widely read. “We need to start building quality assurance into these activities that have tremendous transparency,” he said. In guidance issued last week, OMB named agency CFOs as responsible for data assurance.

Finally, he put in a plug for a new initiative called partnerforsolutions.gov through OMB’s Program Integrity Partnership Fund. Innovative solutions are being found all over the country, yet no clearinghouse is available to share all that information to connect one point to another—until now, he said. The website is the home base of this effort.

“I always look forward to talking to AGA,” Werfel said. “One of the best parts of this job is being a part of this community. There has never been a more critical time for the financial management community to roll up our sleeves and get things done.”

A GAO Perspective on ARRA and Other Critical National Issues

2010-02-19T11:08:48-05:00

J. Christopher Mihm, managing director, Strategic Issues, at the U.S. Government Accountability Office (GAO) kicked off the second day of AGA’s National Leadership Conference in Washington, D.C. When told that the news from yesterday’s sessions was rather grim, Mihm said, “I’m structurally incapable, being from GAO, of being Little Miss Sunshine.”

In discussing current fiscal issues, the sooner we make decisions, he said, the broader the array of options available to us and the less draconian the choices we have to make. “The longer we wait to kick the can down the street the harder it will be,” Mihm said. “We know what we’re confronting and we need to get working on the issue. The sooner the better.”

GAO has been making long-term projections of the fiscal situation since the 1990s. This is no longer a long-term issue. “We’re already beginning to see the real drivers of the long term,” he said, pointing directly to health care.

Mihm said we’re in a period of profound transformation and the underpinnings are changing for a whole variety of reasons, including security threats, market meltdowns, etc. “We are by no means out of the woods yet,” he said, referring to sustainability concerns, maintaining growth and competitiveness, and other issues.

“We’re going to be in a world of hurt,” he said, referring to the costs for entitlements and debt leaving nothing left for the rest of government. If we wait until 2040, we’ll be cutting spending by 60 percent or raising taxes to twice their current rate—neither of which will happen. We can’t grow our way out of it either, he said. That would require double-digit annual growth for the next 75 years. “This is why we cannot and must not wait,” Mihm said. We as citizens have key roles in making sure decision-makers are focused on issues for the long term. Are we having the debate about what we want government to do, how we want it to be done and how we’re going to fund it?

Mihm discussed GAO’s role in overseeing the spending of the now $862 billion American Recovery and Reinvestment Act. Across the board, he said, health care issues are driving the recovery at all levels. “It’s health care down at the state level that’s killing them as well,” he said. As the ARRA money begins to taper off, the fiscal holes remain. GAO is required to comment on the jobs estimates from the recipient reports. “We’re making good use of the comment function,” he said to laughs.

GAO is conducting longitudinal reviews of 16 of the more populous states as well as the District of Columbia and conducting sub-sampling of localities within selected states to get a sense of how the money is being used. Two senior executives are responsible for the teams in each state, operating on a $25 million appropriation that ends this fiscal year. “A concern to us is that the mandates don’t sunset this year,” he said. Staff have been out in the states several weeks each month, and their reports describe the flow of funds, the safeguards and internal controls put in place, and the impact of the funds on citizens.

Of the $862 billion in recovery funds, $260 billion is flowing through states and localities. Three-quarters of that money has gone out through the Federal Medicaid Assistance Program and State Fiscal Stabilization Fund, both of which have gone a long way toward shoring up state budgets. This has, in turn, freed up state money that otherwise would have gone to increased needs in food stamps and unemployment benefits.

People assume, Mihm said, that all the money flooded out to the economy last February. The act was designed to send the money out to states and local governments over a number of years. Billions will be going out through 2016 and even as late as 2019. It is structured in such a way that the so-called shovel-ready projects would be funded right away. Longer-term projects will be funded in later years. Over time, the character of the money will change. States are worried about how they will pay for increased Medicaid caseloads after this year when there is less recovery money targeted toward that area. “The nature of the program mix changes as the years go on,” Mihm said. GAO’s Recovery Act efforts are at detailed at gao.gov/recovery. The site is updated at least every two weeks, which he joked is fast for GAO.

ARRA has taken the accountability community to the next level, Mihm said. We recognize that there were legitimate and high expectations that Congress and the American people were placing on the accountability community to make sure the money was properly spent and accounted for. A lot of the money went out through existing funding streams with ongoing relationships. Other programs are being funded through new funding streams. In some cases, the increase in funding was so large it changed the entire character of the program. “It’s been a real effort to make sure we’re putting in place the program infrastructure where this can be effectively managed,” Mihm said.

The upshot is that discussions that occurred last March, April and May at the federal and state levels laid the groundwork for the ongoing coordination of work, which is important for efficient use of funds and to maintain accountability. Mihm said he is happy to report that GAO is hearing from state auditing colleagues and the Recovery Accountability and Transparency Board that everything is going well. “It’s going to be a continuing challenge as we go forward to make sure this coordination remains,” Mihm said.

He covered GAO’s High Risk List, which was started in 1990. It is issued at the start of each new Congress to identify areas within the federal government that have economy, efficiency and effectiveness issues. Recently, major transformation issues, such as human capital management, have been added to the list. So, Mihm said, why does something remain on the list year after year when we know what it takes to get it off the list? He said he has found that people are often willing to talk about what needs to be done but aren’t as good at the heavy lifting it takes to get it done. There are a lot of reasons for that—political appointees, for example, come with different agendas rather than a “sound management infrastructure.” The change of administration is a key vulnerable point for all key management initiatives because they have to be re-branded to fit the new president. The Obama administration, Mihm said, is carrying on the tradition and building on the fundamental infrastructure while putting its own spin on it. “Sustaining that kind of high-level accountability and focus is going to be absolutely critical to maintaining focus on these high-risk issues,” Mihm said.

In the matter of government versus governance Mihm has seen a shift in the unit of analysis away from government (what do individual agencies do) to governance (network of partners working together). Today, managers are far more interested in “managing the white space” between and across government levels than trying to eke 1 or 2 percent more in productivity out of any one agency. He pointed to the 911 Commission, which identified a failure to connect the dots. “In retrospect, it’s always easy to connect the dots,” Mihm said. The failure wasn’t one agency that dropped the ball or anything that simple. “We didn’t have the capacity to bring together information across the system,” Mihm said, which also occurred in the wake of Hurricane Katrina. Working across management levels is the policy challenge. Through transparency and cutting across organizational boundaries we are collectively achieving results, he said. Where this really came together was the H1N1 response and the Y2K effort—two recent examples of agencies working well together.

Finally, Mihm discussed the concept of open government with agencies posting information online so citizens can use government data to inform themselves. By getting the information out there, increasing agency cooperation and creating opportunities for citizen engagement, “We’re able to make real-time changes,” Mihm said. He acknowledged the down side of all this openness: data quality issues. When you put near-real-time information out there, you’re going to have issues, he said. “The only way to avoid that is not to put it out there, but that’s not an option any more.”

Washington From 30,000 Feet

2010-02-18T20:59:49-05:00

Ronald D. Elving, senior Washington editor, National Public Radio, gave an overview of the political atmosphere in the nation’s capital. He noted that earlier in the day, President Obama introduced co-chairs for a federal debt and deficit commission—Alan Simpson, former longtime Republican senator from Wyoming, and Erskine Bowles, who served as one of former President Clinton’s chiefs of staff. Elving said it takes enormous amount of intelligence and courage to tackle this “most frightening issue.” However, he noted that this is a problem that we might actually be able to fix. “None of the challenges are within our apparent power to control as much as this apparent, looming dragon of an issue.”

Elving posed the following question: The Obama Revolution—have the circumstances of the last year restrained that revolution or are we heading toward its demise? If you are an office holder in Washington, D.C., there are two important elections—the last one and the next one. Everyone in Congress is constantly paying attention to the day-to-day standings as to who is up and who is down for 2010.

What has the president done? Elving said President Obama began his journey at the top. It is extremely difficult to be much farther ahead in the life game than was young Barak Obama when he took the oath of office at age 46, Elving said. Obama’s approval rating was at 65 percent in the polls one year ago today. Obama represented “a catalog of firsts”—first African American president, first Democrat to get 50 percent of the vote since FDR, and he enjoyed a general belief that a new day had dawned.

Obama wanted to be perceived as a bipartisan president who reached out to all the people. He appealed to a very receptive media. He appealed to youth and idealism and he appealed to good government issues, such as transparency and lessening the degree of influence by lobbyists.

The groundbreaking nature of his presidency implies risk-taking, Elving said. While efforts were made to be bipartisan, he had to make choices and he had to remember what team he was playing for. Republicans very quickly realized they were being left out. In passing the Recovery Act, the administration began at a highly controversial place with only three Republicans in the Senate in favor of it and none in the House. Repudiating an administration is not the same thing as repudiating its debt: Obama had to deal with the obligations he was handed, including a greater-than-ever deficit. He then added $787 billion to it, which led to the first trillion-dollar deficit, Elving said.

According to Elving, there is no more pressing component affecting businesses and families than health care—“everyone agreeing there’s a problem and everyone agreeing something needs to be done doesn’t write legislation that can be passed,” he said. Good intentions are like a basketball team practicing with no one guarding them. It’s fun until the other team comes out to play against you. The U.S. government has a lot of other teams playing against it—Congress, the media, activists (in and out of your party), activists not affiliated with either party and interest groups. The dilemma of ruling involves issues and problems, and you create divisions just by trying to compromise. And we haven’t even talked about threats to the U.S. from overseas, he said.

“The presidency has come back to earth after that extraordinarily heady beginning,” Elving said. High inflation and interest rates can kill a presidency. Low inflation and interest rates doesn’t necessarily do the president any good if everyone sees it as a consequence of the near collapse of 2008. Right now, there is unprecedented unity among Obama’s opponents in Congress, the media has turned critical (“that’s what we do”) and by last summer, Obama’s approval rating had fallen from 65 to 53.4 percent. This is not a terrible number, but then all of his bills got bogged down in the Senate. Despite these negatives, Elving noted that no president with a 50 percent or higher approval rating has ever been denied reelection.

House Republicans had little to gain from participating with Obama, Elving said. "They dug in their heels from the start.” Democrats have become very fractious and Speaker of the House Nancy Pelosi is being held hostage by the factions. “Even though she has supposedly 40 votes to spare,” Elving said, “it’s just not enough unless you can hold those votes together.”

In the Senate, Democrats had 58 votes and two independent members who aligned with them. The Democrats flexed their muscles and made the Republicans even more obstructionist than they’d been before. When the late Ted Kennedy’s seat in Massachusetts went to Republican Scott Brown last month, the Democrat’ss 60-vote majority was lost, which Elving sees as a good thing.

He discussed the role of the media and what they don’t do well: determine truth, find our own facts, sort out divergent testimony, resist manipulation, hold sources accountable, stay interested through the whole game. “If the story is good enough, we go with it, even if sources won’t identify themselves,” Elving said. He spoke to the pressure of the 24-hour news cycle and the relentless competition to tell compelling stories. “Nothing bears iteration more than a good scandal.” The media is good at telling stories, at serving the audience and at caring about what people want to see and hear. He noted the dichotomy between the media that told a “million” stories on health care reform and how badly it is needed and is now joyfully reporting that the bill is bogged down in the Senate. “Hope and change?” he asked, referring to the opening days of the Obama administration. “We were all for it. Well guess what? Now we’re bringing you people making fun of it.”

When the media gets bored it stops covering stories with urgency and saliency. Lack of coverage, he said, can kill an issue.

As for the 2010 elections, he called the Republicans the “happiest minority in Congress that you’ve ever seen.” This is because they expect a huge pushback of the 2008 election in the 2010 mid-term election. The Democrat’s flanks are “terribly exposed,” he said. Elving said disastrous mid-term elections don’t necessarily impair a president’s re-election hopes. He referred to Presidents Reagan and Clinton who went on to win re-election despite dismal mid-term elections. Elving expects the Democrats to experience significant losses, potentially enough to lose the Senate. However, he doesn’t expect the Democrats to lose the House, but they will lose some seats. As far as 2012, Elving said that it would be unwise to make predictions about the next presidential election based on what happens this year.

State and Local Budget Outlook

2010-02-18T20:00:03-05:00

The state and local budget outlook was the subject of the final session on day one of the NLC. Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers, discussed the economic downturn in all 50 states, including North Dakota, which had been doing well in comparison to other states. As a result of the “Great Recession,” Sigritz said there have been large revenue declines, widespread budget cuts, layoffs and furloughs, and the closing of prisons. He said states were heading for a “cliff” in 2011 and 2012. Other points made by Sigritz:

While the overall national gross domestic product is on its way back up, half of the states are not yet improving.
Governors, he said, are focusing on smaller governments, job creation, better efficiencies, requesting additional federal aid and temporary sales tax increases.
State spending declined in 2009-2010 for the first time since the 1980s, and in this decade, projections show just a 3 percent increase in expenditures.
Thirty-seven states are expected to show negative growth in FY 2010.
Rainy-day funds are declining and in some cases are being used to balance budgets.
Record level budget cuts. Forty-three states had to make cuts after their budget was approved.
Similar recession impact followed Sept. 11 with declining tax revenues.
Traditionally, it takes five years to recover from an event such as the recent recession.
Outlook is for long-term spending pressures in the areas of Medicaid and health care challenges; K-12 and higher education; changing demographics; corrections; and transportation.
The “term of the month” is “the new normal.” This is the latest phrase used by economists and other fiscal watchdogs to describe current conditions.
Expect austere budgets for the next several years. Health care reform is needed. Expect an increased demand for performance and results. All of this presents an opportunity for reform.

Martin Benison, CGFM, comptroller, Commonwealth of Massachusetts and co-chair, AGA’s Partnership for Intergovernmental Management and Accountability, discussed Massachusetts’ $48 billion budget and the various challenges facing the state. Specifically, he said:

The balanced budget requirement in Massachusetts is legislative, not constitutional.
Sixty percent of the state’s revenue comes from taxes; sales tax has been flat since Internet sales are not taxed.
Massachusetts is generally below the U.S. unemployment rate, which impacts the benefits paid out.
Capital gains sources are also declining, and they have been a major source of revenue.
It will take a few years for revenue growth to get back to 0 percent.
The American Recovery and Reinvestment Act (ARRA) is a one-time solution that “postpones the inevitable.” In fiscal year 2011, tax revenue will increase but ARRA funds disappear, resulting in a $2.7 billion deficit.
The state may resort to taxing certain food items, such as candy and soda.
Numerous government reforms are being considered, including pensions and transportation. Shared services in the areas of human resources and information technology are being explored.

Clark Partridge, CGFM, CPA, state comptroller, Administration Department, State of Arizona, said his state’s budget is about half that of Massachusetts at $25 billion. Partridge referred to the current state deficit of $1.4 billion as well as the structural deficit of $3.2 billion, which are compounded by a cash flow problem. In addition, Partridge said:

The economic decline in Arizona began one year before the U.S. decline, and the state couldn’t cut expenditures fast enough to react.
Prior to the decline, the state had gone through a period of very high economic growth that included pressure to spend new revenues. To reverse this trend, 75 percent of the legislature must approve and then the public has a vote, which makes quick action difficult.
It may take seven years to return to past job growth levels.
“Borrowing to balance the budget is a stop-gap approach, not a solution.”
The state will make use of a temporary sales tax in May if the public approves it.
Strategies: attack structural deficit with permanent reforms; close the FY 2010 and 2011 deficits; use real solutions; use temporary steps as necessary; and take quick action.
“Even if all the governor’s proposed changes are enacted, there will still be a deficit, but at least we’ll be back in the ballpark from the past.”

National Leadership Conference Under Way in Washington, D.C.

2010-02-18T10:22:26-05:00

AGA’s Eighth Annual National Leadership Conference began this morning with an address by Robert A. Sunshine, deputy director of the Congressional Budget Office. The CBO is a nonpartisan analytic agency established in 1975 to provide budgetary analysis to Congress. It is made up of about 250 staffers, mostly Ph.D.s in economics and public policy. The CBO analyzes issues but does not make recommendations. Staffers work with congressional committees and members as they craft legislation to give information about how the legislation would affect the federal budget. In addition, the CBO prepares economic forecasts, 10-year forecasts for the federal budget and longer-term federal budget projections.

Sunshine told the nearly 700 NLC attendees that the deep recession seems to have ended in the middle of 2009, with the nation losing 8 million jobs. However, if the economy had been growing at regular rates, it is reasonable to assume that 3 million new jobs would have been created during the recession. So, in total, about 11 million jobs were lost during the recession. During this time, the U.S. economy generated 7 percent less than it was capable of producing, which translates to $1 trillion in gross domestic product (GDP). Unemployment exceeded 10 percent for the first time since 1983 and only the second time since World War II. “We anticipate a prolonged recovery from this recession,” Sunshine said.

The CBO is projecting the unemployment rate to remain around 10 percent this year, and to hover at 8 percent for the next few years. He expects that by 2014 it will drop to a more normal 5 percent. Recessions that are triggered by financial crises tend to have longer lasting effects, he said. The Federal Reserve will have to start pulling back on monetary policies so it doesn’t trigger inflation. “The timing of that is going to be a big challenge,” Sunshine said.

The impact of the American Recovery and Reinvestment Act (ARRA) will start to wane at the end of this year, he predicted. The CBO does projections for Congress based on laws that are already in place. He noted some potentially interesting ramifications since tax cuts enacted in 2002–2003 are due to expire this year. The alternative minimum tax, if left untouched, encompasses more and more people, he said. This makes the budgetary outlook better, but because tax increases depress the economy a little bit, it makes the forecast more sober. Household spending will be down, and because of limited borrowing capability, business investment will continue to be slow. The CBO projects economic growth of 2–2.5 percent over the next few years and expects it will pick up to a more normal level after that.

Unemployed workers are having a harder time finding new jobs than in past recessions, Sunshine noted. Because this was a deep recession, more jobs were lost permanently as opposed to the temporary layoffs that occurred in past recessions. “New jobs are often in new places or require different skills than the jobs that disappeared,” he said. With housing market also grim, it’s more difficult for people to relocate to places with more jobs because they can’t sell their existing houses.

Sunshine said the $787 billion Recovery Act is actually adding $860 billion to the deficit over three years. Driving up the total are unemployment costs, which are higher than anticipated. “That kind of federal budgetary activity does filter out into the economy, but there is a lag,” Sunshine said. He is often asked about how many jobs were saved or created by ARRA, but that is hard to determine. “We don’t know what would’ve happened if we hadn’t done it,” he said, adding that CBO estimates that 1–2 million jobs were created in the last quarter of 2009, and he believes that unemployment would be .5 to 1 percent higher without the legislation. The flow of recovery funds into the economy will start to diminish in the second half of this year, he said, adding that it will be important that the private sector and the rest of the economy start to perform to continue the recovery.

“We’re probably out of the recession,” Sunshine said. “It’s going to take a while for the unemployment rate to go down. But most of the economic indicators show that we have turned a corner.” Whether it was enough of a turn remains to be seen, he said.

Large federal budget deficits continue to be of grave concern. The deficit was $1.4 trillion last year and is expected to be in that ballpark this year as well. The last time we saw deficits that big as a share of GDP was during World War II. A number of factors are driving up the deficit. For one thing, tax revenues have dropped dramatically. In dollar terms, revenues have dropped $460 billion between 2007 and 2009. At the same time, spending has gone up significantly due to the Recovery Act, the Troubled Asset Recovery Program (TARP) and automatic stabilizers such as unemployment benefits and food stamps that kick in when the economy is weak. The underlying imbalance between revenue and spending predates the recession, he said. Even after we get past the recession, we’ll still see deficits of $500 billion or more later this decade, he predicted.

An obvious consequence of the growing federal debt is that we have to pay interest on it, which draws funds away from other things the government needs to do. We’ve been lucky to be able to borrow money at very low interest rates, but that won’t continue once the economy recovers. Interest on the public debt is going to more than triple from $200 billion to $700 billion, which makes balancing the federal budget harder and harder. Even if revenues grow to higher than they’ve historically been, we’d still be running deficits of 3 percent of GDP.

What’s driving the spending increase? The key factors, Sunshine said, are Medicare, Medicaid and Social Security. As the population ages and costs increase, these entitlement programs will make up 43 percent of the federal budget. Costs will soar from $1.5 trillion this year to $2.7 trillion in 2020 and will make up more than half of the federal budget at that time. National defense and debt interest make up the rest of the largest share of the federal budget. Those three areas: entitlement programs, defense and interest will on their own eventually exceed all revenues, with nothing left for anything else if allowed to grow at current rates. What does it take to fix that? Tax revenues will have to increase by about a third over historical levels or there will have to be a reduction in non-interest spending by 30 percent, including Social Security and Medicare. “This is not a problem one can solve just by tinkering around the edges,” Sunshine said.

When considering long-term projections, the CBO expects entitlement programs to explode in the latter decades of this century. “That can’t continue forever or health care spending would consume the economy,” he said. In long-term projections out as far as 2079, Social Security inches up to a larger share of GDP while the health care programs more than triple.

“The situation we face is daunting and sobering,” Sunshine concluded. “The problems are not decades away. They are happening now. And the longer we wait, the harder it becomes. Fixing it requires big changes.” He said there is a disconnect between what citizens expect from their government and the amount of money they’ve historically been willing to give to government to pay for these programs. “It’s going to take a combination of increased taxes and decreased spending to turn things around.”

H. Glen Walker, executive director, Recovery Accountability and Transparency Board, reported that it’s been 366 days since the American Recovery and Reinvestment Act was passed, creating the oversight body for which he works. In brief, the “RAT” Board oversees the reporting and accountability functions attached to the Recovery Act.

Specifically, the act included:

$288 billion in tax benefits
$275 billion in contracts, grants and loans
$244 billion in entitlements

When President Obama hired former Inspector General Earl Devaney to chair the board, Obama told Devaney that he wanted him to be the “meanest cop in government” and to provide the public with unprecedented transparency while preventing fraud, waste and abuse. Walker poked fun at the “RAT” Board acronym, assuring NLC attendees that the members were fully focused on accountability and transparency at all times.

Walker discussed the revolutionary reporting website, Recovery.gov, which was developed by the board and its staff. On its first day in February 2009, it saw 4,000 hits per second, has welcomed 9 million unique visitors since then, and continues to average 14,000 hits per day.

Walker said the public wants recovery information available, and they want it to be transparent. The RAT Board has instituted a hotline that has received 800 calls reporting potential fraudulent uses of recovery funds. The board is encouraging millions of what they call “citizen IGs” to report fraudulent actions, and the board coordinates oversight to prevent fraud. Experienced people are reviewing every grant as it is awarded to make sure there are no warning signs. “We find a lot of these occurrences,” he said.

In addition, board and staff have forged solid relationships with the U.S. Government Accountability Office, state and local oversight officers, the U.S. Department of Justice and the IG community, while providing formal training to appropriate federal, state and local personnel to ensure awareness of requirements related to recovery funds.

Thousands of brochures detailing pre-award and award checklists that spell out specific requirements have been distributed to grantees and potential grantees. “I believe if we can keep up this momentum we can prevent the fraud and abuse that has gone on in previous government spending programs,” Walker said.

He outlined the Recovery Board’s Recovery Operations Center, which provides three levels of oversight:

Initial risk assessment—recipient screening
Target analysis—in-depth fraud analysis to identify relationships that are not obvious
Focusing limited resources—enhancing the IGs’ organic investigative capabilities

He noted that the second reporting period was a much smoother process due to enhancements and lessons learned from initial reporting phase.

For the January 2010 reporting deadline, 161,782 reports were received that showed more than 500,000 recovery jobs created during that quarter. “Nothing would please me more than to stand before you today and tell you the board has established flawless processes for reporting,” Walker said. However, that is not the case as there are still recipients who haven’t reported at all. “This is simply unacceptable,” he said, adding that agencies are debating whether to assess penalties to those who haven’t reported.

The RAT Board, he concluded, has “ushered in a new age of accountability.”

The Executive Order on Improper Payments: A Call for Action!

2009-12-18T15:18:34-05:00

By: Jeffrey C. Steinhoff, CGFM, CPA, CFE

Jeff Steinhoff, a Past AGA National President, is the Executive Director of the KPMG Government Institute

November 23, 2009, will go down as a red letter day in the fight against improper payments with the release of the Presidential Executive Order – Reducing Improper Payments and Eliminating Waste in Federal Programs.

In the words of Office of Management and Budget (OMB) Director, Peter Orszag, in announcing the pending issuance of the Executive Order on November 18:

“Each year, taxpayers lose billions of dollars in wasteful improper payments by the federal government to individuals, organizations, and contractors. ….. In 2008, improper payments totaled $72 billion; in 2009, they totaled $98 billion — an increase driven by improved detection and the significant increase in federal outlays associated with the economic downturn. These errors and mistakes are unacceptable. Taxpayers deserve to know that their dollars are being spent wisely and effectively.”

To quote from the November 23rd Executive Order:

“When the Federal Government makes payments …., it must make every effort to confirm that the right recipient is receiving the right payment for the right reason at the right time. The purpose of this order is to reduce improper payments by intensifying efforts to eliminate payment error, waste, fraud, and abuse in the major programs administered by the Federal Government, while continuing to ensure that Federal programs serve and provide access to their intended beneficiaries. No single step will fully achieve these goals. Therefore, this order adopts a comprehensive set of policies, including transparency and public scrutiny of significant payment errors throughout the Federal Government; a focus on identifying and eliminating the highest improper payments; accountability for reducing improper payments among executive branch agencies and officials; and coordinated Federal, State, and local government action in identifying and eliminating improper payments.”

Among the new requirements in the Executive Order are to:

Create an online dashboard of key indicators and statistics on improper payments. This is in line with the accountability and transparency concepts in the American Recovery and Reinvestment Act (Recovery Act).
Create and publicize a single mechanism for the public to report suspected incidences of waste, fraud, or abuse. Much like the Recovery Act, increased citizen involvement in combating fraud, waste, and abuse is being encouraged and facilitated.
Require agencies to establish more frequent error reduction targets, and more frequent error measurement for certain high-priority programs. This increases the focus on programs of the highest risk of improper payments.
Issue recommendations on new internal techniques agencies can use to better detect and mitigate improper payments. As discussed in several of my previous AGA essays[i] and an AGA Journal of Government Financial Management article, entitled Forensic Auditing – A Window to Identifying and Combating Fraud, Waste and Abuse[ii], the use of continuous monitoring/continuous auditing techniques and technology tools are important for this purpose. They can be applied and leveraged by agency management to help address fraud, waste, and abuse.
Require each agency to designate a current, Senate-confirmed appointee to be accountable to the President for meeting improper payment reduction targets. This makes a clear statement about the expectation for results and helps set the proper “tone at the top” and Presidential commitment.

For programs where targets for reducing payment error rates are not met for two years in a row, require the agency head, Chief Financial Officer, and the agency Inspector General to provide the OMB Director a report describing the likely causes of the agency’s failure and actions it will take to meet reduction targets. This would raise the stakes appreciably and foster greater accountability for results.
Increase data-sharing among federal agencies and programs and, where applicable, state and local governments and other stakeholders to improve eligibility verification and pre-payment scrutiny. Data-sharing has been a long-standing problem for some programs and is in need of a solution.
Require quarterly agency reports [correct??] on any high-dollar errors identified by the agency and actions the agency will take to recover the improper payment and to prevent future improper payments. Again, this provides added accountability and focus on those areas of greatest risk.

Pursue administrative actions to provide state, local, and other organizations with incentives for reducing improper payments. A greater partnership with state and local governments and non-profit organizations should help given their role in disbursing hundreds of billions of dollars of federal funds annually, including programs at high risk for improper payments, such as Medicaid which is state administered.
Seek to enhance contractor accountability by pursuing methods such as subjecting contractors to debarment, suspension, and financial penalties for failing to timely disclose credible evidence of significant overpayments received on government contracts. It is being made clear to contractors their responsibility to be stewards of public funds where there are improper payments. In the past, some contractors may have simply kept any federal overpayments unless the government identified the problem and sought the return of its money. This now places some of the onus on the contractor.

The Executive Order provides a framework to build on efforts that have taken place since enactment of the Improper Payments Information Act (IPIA) of 2002. By focusing attention on requiring estimates of improper payments, IPIA helped frame the issue, the magnitude of the problem, and the need for broader action, which led to the Executive Order. This is an example where requiring agencies to estimate and report annually can drive broader management reform.

Now is the time to develop solutions to previously thorny payment problems by changing business processes and leveraging technology. It is time to look outside of the box, or in some cases just better leverage what is already available, by implementing new techniques and using technology to first and foremost help prevent improper payments and then to enhance the ability to detect and recover any such payments.

My questions to you:

What are your views on the Executive Order?
What actions do you believe would best help achieve the President’s goals in the Executive Order to reduce improper payments?
What about the use of technology, such as forensic tools to help analyze and correlate information in order to prevent and detect improper payments?
Do you have any leading practices you would like to share?
What do you view as the impediments or challenges to meeting the goals and requirements of the Executive Order in your agency?

As this is the last essay to be posted on AGA blog, my thanks go to AGA for giving me the honor of being the first and last essayist. Thanks go to each of you who have read the essays and those who have shared their views and comments. Special thanks go to Marie Force and Chris Camara for their initiative and sterling leadership of this program.

The views in this essay are those of the author only, and do not necessarily represent the views or professional advice of KPMG LLP.

[i] Forensic Auditing—A Window to Identifying and Combating Fraud, Waste and Abuse, June 3, 2008; Are You Prepared to Protect the Integrity of Recovery Act Spending, May 27, 2009; Is Your Finance Organization A Leader in Supporting Acquisition and Contract Management, August 31, 2009; Check It—What Gets Checked Gets Done, September 25, 2009; and Odds Are Fraud Is an Issue in Your Organization, November 23, 2009

[ii] Forensic Auditing—A Window to Identifying and Combating Fraud, Waste and Abuse, Journal of Government Financial Management, Summer 2008, Vol. 57, No. 2

Non-Cancellable Operating Leases—What Challenges Do You Face in Accumulating the Necessary Information for Financial Statement Reporting?

2009-12-17T06:00:00-05:00

By: Andrew Lewis, CGFM, CPA

Andrew Lewis is a senior manager with KPMG LLP’s government audit practice and a Fellow of the KPMG Government Institute. In addition, Andrew is president-elect of the Montgomery/Prince George’s Counties AGA Chapter, and is an adjunct professor in the Masters of Accountancy program at The George Washington University.

Federal agencies are required to disclose the amounts of future non-cancellable operating lease payments in the footnotes to their annual financial statements. Through this reporting, the reader of the financial statements has a window into the government’s financial exposure for non-cancellable operating leases. Depending on the agency, operating leases could run into the hundreds of millions of dollars.

Operating leases are defined in OMB Circular No. A-11,Preparation, Submission, and Execution of the Budget (dated August 2009), Appendix B (3) as follows:

Operating lease means a lease that meets all the criteria listed below. If the criteria are not met, the lease will be considered to be a capital lease or a lease-purchase, as appropriate.

· Ownership of the asset remains with the lessor during the term of the lease and is not transferred to the government at or shortly after the end of the lease term.

· The lease does not contain a bargain-price purchase option.

· The lease term does not exceed 75 percent of the estimated economic life of the asset.

· The present value of the minimum lease payments over the life of the lease does not exceed 90 percent of the fair market value of the asset at the beginning of the lease term.

· The asset is a general purpose asset rather than being for a special purpose of the government and is not built to the unique specification of the government as lessee.

· There is a private sector market for the asset.

OMB Circular No. A-136, Financial Reporting Requirements(dated June 10, 2009), Section II.4.9.18, Note 18 Leases, requires that agencies include the following table (or comparable format) in the notes to their annual financial statements:

Operating Leases:

Future Payments Due:

Asset Category

Fiscal Year (1) (2) (3) Totals

Year 1 xxx xxx xxx xxx

Year 2 xxx xxx xxx xxx

Year 3 xxx xxx xxx xxx

Year 4 xxx xxx xxx xxx

Year 5 xxx xxx xxx xxx

After 5 Years xxx xxx xxx xxx

Total Future xxx xxx xxx xxx
Lease Paymts

Meeting the reporting requirements of OMB Circular No. A-136 typically means that accounting personnel at Federal agencies must accumulate information from the agencies’ real estate or procurement offices. Determining whether the agency’s leases contain cancellation clauses, and aggregating the future lease payments for all of the leases can be resource intensive for some agencies—especially those with limited information on their operating leases or those with a significant number of operating leases. Although most agencies lease space through the U.S. General Services Administration (GSA), those agencies that have authority to lease space directly from parties outside of the federal government could face even greater resource challenges.

The information that agencies gather should not just satisfy financial reporting requirements, but should also be useful for the agency’s day-to-day management of lease costs and the agency’s use of resources.

Questions for Discussion:

What challenges has your agency faced in gathering the future lease payment amounts for non-cancellable operating leases?

What processes do you find effective for accumulating this information? Is the information routinely available to management, or is it the product of an annual effort to prepare audited financial statements?

Do you find that having this basic information has been useful in managing operating leases apart from meeting financial reporting requirements? If not, what can be done to encourage the use of this information by agency management?

What other benefits does having this information in the annual financial statements provide to your agency?

Holiday Wishes for the Government Performance Management Community

2009-12-16T06:00:00-05:00

By: Jon Desenberg

Jon Desenberg is policy director at The Performance Institute.

To the dedicated performance and budgeting professionals in state and local government around the country: Remember, what doesn’t kill you makes you stronger. The budget headwinds and the demands of reporting for the Recovery Act have made this the toughest in the 20 years I’ve been working in government. However, wherever I went, from Alaska to Florida and many stops in between I saw that the transformational work in business intelligence, performance indicators, strategy maps and improved strategic plans have paid off. Better decisions were made, even when we all wished that we didn’t have to make those tough decisions. From the new reporting scorecard in Fulton County, GA, to the county and city stat systems in Dade County, Baltimore, Philadelphia, D.C. and elsewhere, we saw that a focus on performance truly becomes valuable as times get tough. You’re true leaders in performance and accountability.

To our esteemed senators and congressman, the time is now—please embrace performance and results-based management practices, before its too late. Kudos to Sen. Mark Warner for creating the new Senate Task Force on Government Performance, but where are your colleagues? At a recent hearing, your colleagues were missing for all but a few minutes. Not making time ask a few questions about improved results indicates a lack of inclination to begin thinking about improved performance and perhaps actually doing something about it. Hundreds of thousands of federal employees look to Congress for leadership on spending wisely, setting the right goals, and matching funding accordingly. You’ve continued to disappoint them and the American taxpayer this year.

To our president and his appointees, your careful and serious thinking about performance management has been much appreciated. Now, however, is the time to do the very difficult job of moving plans into action. For all the problems and mistakes in our previous President’s Management Agenda, speed of execution was never one of them. While some agencies are going to move in the right direction on their own, some very important ones will not, at least not fast enough. We appreciate your careful thinking and we now need some strong direction.

To AGA, thank you. AGA’s focus on performance at their annual conference and the efforts they’ve taken to move hundreds of local governments in the right direction on performance has been pitch perfect and spot on. We in the performance community greatly appreciate it.

From “Good to Great” and from “Great to Demise”—The Blog That Is!

2009-12-14T08:14:37-05:00

By: William A. Morehead, Ph.D., CGFM, CPA

William A. Morehead, Ph.D., CGFM, CPA, is Chair of Accountancy, CIS & Finance, Delta State University; AGA National President, AGA Past National Treasurer and Member, AGA National Executive Committee

AGA began a formal weblog, commonly called a “blog,” almost two years ago as part of our service to our members. The blog has been a wonderful forum and communication tool. It has provided a great opportunity for many of our members to discuss the latest information in our profession and “express themselves” regarding numerous issues in government financial management.

The creation of the blog took “good” communication strategies of AGA to “great.” Along the way over the past two years, we have witnessed the evolution and explosion of social media including LinkedIn, MySpace, Facebook, and Twitter—each of which has changed the way we communicate with each other. Each of these social networks have also begun to consume some folks as many consistently check their personal e-mail and Facebook accounts during the day on office computers.

I have seen studies where some organizations have encouraged their employees to become involved in and use these media to enhance relationships with customers, suppliers, employees and others interested in conducting business with the entity. However, many businesses believe such communication tools actually steal time away from the work employees are supposed to be conducting.

Because of this, a number of organizations, including the federal government and many state and local governments, have blocked access to blogs, personal e-mail accounts and social media websites. Add to this factor that many of us who work in the government do not wish to exposit online for fear our comments will be considered or construed as an “official” opinion of our governmental entity.

As a result, the traffic on and interest in the AGA blog has dwindled over the past few months. Recently, the National Executive Committee (NEC) decided to suspend the blog. What went from “good” to “great” has now met its “demise.” On limited occasions such as the Professional Development Conference, National Leadership Conference and Internal Control & Fraud Conference, AGA will bring the blog back to keep interested parties informed of the latest events and speakers at the conferences.

We will end the blog this Friday, Dec. 18, the same way we began with an essay from AGA Past National President Jeffrey Steinhoff, CGFM, CPA, CFE. Thank you to all the bloggers who shared their thoughts with AGA readers over the last two years and to those who made reading the AGA blog part of their daily routine. Communications is ever evolving! The “demise” of one communication tool will see the “rise” of another. Stay tuned to see what’s next!

“Think Big! Act Courageously! Make a Difference!”

The TARP Refund: What To Do With It?

2009-12-11T06:00:00-05:00

By: Robert Maitner Jr., CGFM, PMP

Robert Maitner Jr. is senior managing consultant with IBM Public Sector Financial Management.

Imagine this situation. You have encountered an unexpected expense that you had not planned or budgeted for, say perhaps a medical bill. So you take a loan in the amount of $500 to cover the expense. When the bill comes, you are pleasantly surprised that is for only $300. What do you do with the remaining $200? Should this be considered a windfall? Or should it be applied to the $500 loan amount? If the $200 would go toward basic necessities, such as food or shelter, the temptation is there to hold on to the cash. If it would mean a few more dinners out, then perhaps applying the money to the loan balance makes more sense.

This is the same scenario we see with the Troubled Asset Relief Program (TARP).

President Obama recently announced that the bank bailout cost about $200 billion less than expected, telling reporters, “It means that some of that money can be devoted to deficit reduction.”

Democratic leaders want to see those leftover TARP funds used for a new jobs bill. That may not be possible, however. The TARP legislation states that any unused money must go toward reducing the national debt, which sits now at a whopping $12 trillion. The Wall Street Journal explains that the Treasury secretary has some latitude in deciding how to use the funds, but that he first must consider taxpayers’ interests by maximizing overall returns and minimizing impacts on the national debt.

The debate here is a matter of priorities—what is more critical at this time, jobs creation or reducing the national debt? If you’re one of millions of Americans still out of work, you’d most likely opt for the jobs bill. If you’re not out of work, and hawkish about our growing national debt, you may say that the money should be applied back to the loan amount (the debt). It’s all a matter of perspective.

Perhaps some sort of split would make sense here as well. What about using half of the funds for a jobs creation bill, and apply the second half to reduce the national debt? What do you think?