Responses to Posthearing Questions Related to GAO's Testimony on the U.S. Government's Consolidated Financial Statements for Fiscal Year 2002
Gao ID: GAO-03-848R June 16, 2003On April 8, 2003, GAO testified before the House Committee on Government Reform, Subcommittee on Government Efficiency and Financial Management at a hearing on our report on the U.S. government's consolidated financial statements for fiscal year 2002. This letter responds to questions related to our testimony from the Subcommittee's Chairman and the Ranking Minority Member and to subsequent questions from the Vice Chairman that the Chairman asked us to answer for the record.
At a meeting on April 16th, GAO agreed to compile a list of the 24 Chief Financial Officers Act agencies' core financial systems along with key data related to each system, such as whether it is a commercial off-the-shelf system. We will identify the status of agencies' plans to acquire new core financial systems and whether any mixed financial systems at the agencies are slated to be updated. The Department of Energy (DOE) is responsible for management and cleanup of environmental contamination related to the process of producing nuclear weapons. For fiscal year 1998, the DOE Inspector General's (IG) financial audit opinion stated that auditors were unable to satisfy themselves that DOE's recorded environmental liability of $186 billion was fairly stated. To ensure the reliability of future environmental liability estimates and to guide cleanup efforts, DOE developed a program based on site-developed, project-by-project forecasts of the scope, schedule, and costs to complete DOE's projects. For fiscal year 1999, the DOE IG was able to conclude that DOE's reported $231 billion environmental liability was fairly stated. The Department of Defense (DOD) is responsible for management and cleanup of very diverse types of environmental contamination. Although the types of cleanup are different, the obstacles to reliable cost estimates are similar to those faced by DOE in fiscal year 1998. The DOD IG has reported that the environmental liability figure reported in DOD's financial statements is not auditable because of problems related to insufficient guidance, lack of audit trails, use of inconsistent or unvalidated cost-estimating models, and incomplete inventories of sites. In its fiscal year 2002 performance and accountability report, DOD management included a discussion of progress being made to address material weaknesses, including environmental liabilities. DOD claims that various components of its environmental cleanup and disposal costs are now auditable. Reducing the relative future burdens of Social Security and health programs is critical to promoting a sustainable budget policy for the longer term. Absent reform, the impact of federal health and retirement programs on budget choices will be felt long before projected trust fund insolvency dates when the cash needs of these programs begin to seriously constrain overall budgetary flexibility. Early action to change these programs would yield the highest fiscal dividends for the federal budget and would provide a longer period for prospective beneficiaries to make adjustments in their own planning. Unfortunately, the long-range challenge has become more difficult, and the window of opportunity to address the entitlement challenge is narrowing. For Medicare and Medicaid, the sustainability challenge has three levels--the level of the individual programs, the health care system in which they are embedded, and our long-term federal fiscal challenge. Current budget reporting is not always designed to promote the recognition and explicit consideration of the costs of some policies and programs. Specifying the estimated potential future costs associated with current decisions would improve transparency. Other entities also can promote transparency and visibility of fiscal exposures by various actions. Ultimately, the objective is for agencies to generate high-quality data and measure performance in a meaningful way to help inform decision makers during the budget process when allocating resources and determining the most efficient and effective means of achieving policy objectives. The audited financial statements present data as of a single point in time or for a specific period. However, as part of the audits, material weaknesses in internal control and inadequate financial systems are often identified.
GAO-03-848R, Responses to Posthearing Questions Related to GAO's Testimony on the U.S. Government's Consolidated Financial Statements for Fiscal Year 2002
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June 16, 2003:
The Honorable Todd R. Platts:
Chairman:
Subcommittee on Government Efficiency and Financial Management:
Committee on Government Reform:
House of Representatives:
Subject: Responses to Posthearing Questions Related to GAO's Testimony
on the U.S. Government's Consolidated Financial Statements for Fiscal
Year 2002:
Dear Mr. Chairman:
On April 8, 2003, I testified before your subcommittee at a hearing on
our report on the U.S. government's consolidated financial statements
for fiscal year 2002.[Footnote 1] This letter responds to questions
related to our testimony from you and the Ranking Minority Member and
to subsequent questions from the Vice Chairman that you asked us to
answer for the record. The questions and my responses follow.
Question from Chairman Platts:
What is the status of the financial management systems modernization
effort, agency by agency?
At a meeting with subcommittee counsel and staff on April 16, we agreed
on an approach based primarily on available data sources and an end-of-
June time frame for separately providing this information. We will
compile a list of the 24 Chief Financial Officers (CFO) Act agencies'
core financial systems along with key data related to each system, such
as whether it is a commercial off-the-shelf system. We will identify
the status of agencies' plans to acquire new core financial systems and
whether any mixed financial systems at the agencies are slated to be
updated.
Question from Ranking Minority Member Towns:
1. The Department of Energy for a number of years had problems
estimating its environmental liabilities, which it has since corrected.
How did Energy manage to correct its problem, and can these solutions
be used at the Department of Defense?
The Department of Energy (DOE) is responsible for management and
cleanup of environmental contamination related to the process of
producing nuclear weapons. For fiscal year 1998, the DOE Inspector
General's (IG) financial audit opinion stated that auditors were unable
to satisfy themselves that DOE's recorded environmental liability of
$186 billion was fairly stated because of the following deficiencies:
DOE lacked adequate documentation to support some cost estimates and
cost-estimating methodologies.
Valid environmental liabilities were not included in the estimate.
Cost estimates had not been updated through the end of the fiscal year
under audit.
Established cost-estimating guidelines were not consistently applied.
For fiscal year 1999, the DOE IG was able to conclude that DOE's
reported $231 billion environmental liability was fairly stated.
According to the DOE IG, DOE's Office of Environmental Management
completed corrective actions during fiscal year 1999 that included
strengthening internal controls over developing the estimate; assessing
individual cost estimates that make up the environmental liability in
terms of scope, cost, and schedule; and quantifying the uncertainty of
the estimates caused by technical problems and funding shortfalls. To
ensure the reliability of future environmental liability estimates and
to guide cleanup efforts, DOE developed a program, which it documented
in the June 1998 publication Accelerated Cleanup: Paths to Closure,
based on site-developed, project-by-project forecasts of the scope,
schedule, and costs to complete DOE's approximately 350 projects. The
objective was to manage the cleanup of 90 percent of contaminated sites
by 2006. This program, which had the support of top management, was key
to DOE's success.
The Department of Defense (DOD) is responsible for management and
cleanup of very diverse types of environmental contamination,
including:
closed and open sites where past and current waste disposal practices,
leaks, spills, and other activities have created a risk to public
health or the environment;
closed, transferring, and active military ranges where contamination
and unexploded ordnance create environmental hazards; and:
cleanup, demilitarization, and disposal of nuclear and non-nuclear
weapons systems, chemical weapons, and munitions.
Although the types of cleanup are different, the obstacles to reliable
cost estimation are similar to those faced by DOE in fiscal year 1998.
For the past few years, the DOD IG has reported that the environmental
liability figure reported in DOD's financial statements is not
auditable because of problems related to insufficient guidance, lack of
audit trails, use of inconsistent or unvalidated cost-estimating
models, and incomplete inventories of sites. We have also cited
deficiencies in DOD's reported environmental liabilities as a
disclaimer issue in the governmentwide audit reports since fiscal year
1997, and we have issued reports on several kinds of environmental
cleanup issues, including training ranges and ongoing
operations.[Footnote 2]
In its fiscal year 2002 performance and accountability report, DOD
management included a discussion of progress being made to address
material weaknesses, including environmental liabilities. According to
the report, DOD
has issued improved guidance--for all areas except ongoing operations-
-that will help its components compile complete, accurate, and fully
substantiated environmental liability data;
is developing and maintaining adequate supporting documentation and
audit trails for cost-to-complete estimates for the environmental
restoration of more than 30,000 closed contaminated sites on open
installations, closed installations, and Base Realignment and Closure
sites;
has validated the cost-estimating models used in the calculation and
documentation of environmental liability costs;
has developed a sound methodology for estimating liabilities associated
with nuclear-powered ships and submarines; and:
has completed inventories of all but training ranges and sites with
ongoing operations that result in contamination.
DOD has also reviewed Paths to Closure and believes that DOE's approach
is similar to that used by DOD to estimate and report for the Defense
Environmental Restoration Program (DERP). DOD reports site-by-site
information in its DERP report to Congress each year and estimates
cleanup costs for those sites out to the year 2030. DOD has stated that
it has also begun reconciling the DERP reported costs to the financial
statement reported costs. Finally, DOD has designated the Deputy Under
Secretary of Defense (Installations and Environment) as the focal point
for all environmental restoration and cleanup issues except for
chemical demilitarization, which is the responsibility of the Under
Secretary of Defense (Acquisition, Technology and Logistics).
DOD claims that various components of its environmental cleanup and
disposal costs are now auditable. For fiscal year 2003, the DOD IG
plans to review the Navy's methodology for estimating liabilities
associated with nuclear-powered ships and submarines and also to audit
the Army's chemical demilitarization cost estimates.
Questions from Vice Chairman Blackburn Submitted on April 24:
1. What are your recommendations to arrest spending on Medicare/
Medicaid and Social Security?
As I have testified on numerous occasions before various committees,
reducing the relative future burdens of Social Security and health
programs is critical to promoting a sustainable budget policy for the
longer term.[Footnote 3] While much of the public debate concerning the
Social Security and Medicare programs focuses on trust fund balances--
that is, on the programs' solvency--the larger issue concerns program
sustainability. Absent reform, the impact of federal health and
retirement programs on budget choices will be felt long before
projected trust fund insolvency dates when the cash needs of these
programs begin to seriously constrain overall budgetary flexibility.
Early action to change these programs would yield the highest fiscal
dividends for the federal budget and would provide a longer period for
prospective beneficiaries to make adjustments in their own planning.
Waiting to build economic resources and reform future claims entails
risks. First, we lose an important window where today's relatively
large workforce can increase saving and enhance productivity, two
elements critical to growing the future economy. Second, we lose the
opportunity to reduce the burden of interest payments, thereby creating
a legacy of higher debt as well as elderly entitlement spending for the
relatively smaller workforce of the future. Finally, and most
critically, we risk losing the opportunity to phase in changes
gradually so that all can make the adjustments needed in private and
public plans to accommodate this historic shift.
Unfortunately, the long-range challenge has become more difficult, and
the window of opportunity to address the entitlement challenge is
narrowing. In fact, the leading edge of the baby boom generation will
become eligible for Social Security in only 5 years. As baby boomers
retire and the numbers of those entitled to these retirement benefits
grow, the difficulties of reform will be compounded. Accordingly, it
remains more important than ever to deal with these issues over the
next several years.
Many proposals to control spending, increase revenues, and restructure
Social Security and Medicare have been put forth by various
commissions, members of Congress, and independent "think tanks."
Although we do not make specific policy recommendations, to assist
Congress in its deliberations, we have developed criteria for
evaluating Social Security reform proposals and soon will issue
criteria for evaluating health care reforms. Our criteria for
evaluating Social Security reform proposals aim to balance financial
and economic considerations with benefit adequacy and equity issues and
the administrative challenges associated with various proposals. The
use of these criteria can help facilitate fair consideration and
informed debate of reform proposals. The weight that different
policymakers may place on different criteria will vary, depending on
how they value different attributes.
The proposals we have examined, both in 2002 and earlier, reflect the
likelihood that the structural changes required to restore Social
Security's long-term viability generally may require some combination
of reductions from currently scheduled benefits and revenue increases,
and may include the use of some general revenues.[Footnote 4] Proposals
employ possible benefit reductions within the current program
structure, including modifying the benefit formula, raising the
retirement age, and reducing cost-of-living adjustments. Revenue
increases might take the form of increases in the payroll tax rate and/
or wage base, expanding coverage to include the relatively few workers
who are still not covered under Social Security, or allowing the trust
funds to be invested in potentially higher-yielding securities, such as
stocks. Similarly, some proposals rely on general revenue transfers to
increase the amount of money going toward the Social Security program.
Some proposals include individual accounts that would also involve
Social Security benefit reductions and/or revenue increases.
Medicare also faces a long-range, fundamental, and more serious
financing problem driven by known demographic trends and projected
escalation of health care spending beyond general inflation. As with
Social Security, Medicare reform would be done best with considerable
lead time to phase in changes and before the changes that are needed
become dramatic and disruptive. Given the size of Medicare's financial
challenge, it is only realistic to expect that reforms intended to
bring down future costs will have to proceed incrementally. We should
begin this now, when retirees are still a far smaller proportion of the
population than they will be in the future. The sooner we get started,
the less difficult the task will be.
We should also remember that the sources of some of Medicare's
problems--and its solutions--are outside the program and are universal
to all health care payers. Some tax preferences mask the full cost of
providing health benefits and can work at cross-purposes to the goal of
moderating health care spending. Therefore, it may be important to
reexamine the incentives contained in current tax policy and consider
potential reforms. Advances in medical technology are also likely to
keep raising the price tag of providing care, regardless of the payer.
Although technological advances unquestionably provide medical
benefits, judging the value of those benefits--and weighing them
against the additional costs--is more difficult. Consumers are not as
informed about the cost of health care and its quality as they may be
about other goods and services. Thus, while the greater use of market
forces may help to control cost growth, it will undoubtedly be
necessary to employ additional transparency and cost control methods as
well. Ultimately, we will need to look at broader health care reforms
to balance health care spending with other societal priorities. In
doing this, it is important to note the fundamental differences between
health care wants, which are virtually unlimited; needs, which should
be defined and addressed; and overall affordability and sustainability,
of which there is a limit.
We are preparing a health care framework that includes a set of
principles to help policy makers in their efforts to assess various
health financing reform options. This framework will examine health
care issues systemwide and identify the interconnections between public
programs that finance health care and the private insurance market. The
framework can serve as a tool for defining policy goals and ensuring
the use of consistent criteria for evaluating changes. By facilitating
debate, the framework can encourage acceptance of changes necessary to
put us on a path to fiscal sustainability.
For Medicare and Medicaid, the sustainability challenge has three
levels--the level of the individual programs, the health care system in
which they are embedded, and our long-term federal fiscal challenge.
GAO's long-term budget simulations continue to show that to move into
the future with no changes to federal health and retirement programs is
to envision a very different role for the federal government. Assuming,
for example, that the tax reductions enacted in 2001 do not sunset and
discretionary spending keeps pace with the economy, by midcentury
federal revenues may not even be adequate to pay Social Security and
interest on the federal debt. To obtain budget balance, massive
spending cuts, tax increases, or some combination of the two would be
necessary. Neither slowing the growth of discretionary spending nor
allowing the tax reductions to sunset eliminates the imbalance. In
addition, while economic growth would help ease our burden, the
projected fiscal gap is too great for us to grow our way out of the
problem.
2. What is your recommended course of action to address the true cost
of new legislation (for example, veterans' benefits, prescription drug
plans)?
Current budget reporting is not always designed to promote the
recognition and explicit consideration of the costs of some policies
and programs. For example, the government undertakes a wide range of
responsibilities, policies, programs, and activities that may obligate
it to future spending or simply create an expectation for such
spending. These "fiscal exposures" range from explicit liabilities to
implicit promises embedded in current policy or public expectations.
The examples you cite of new legislation for veterans' benefits or
prescription drug plans could be viewed as creating new fiscal
exposures. We have made the following recommendations[Footnote 5] to
increase the visibility and transparency of such exposures:
First, we recommend that OMB report the future estimated costs
associated with certain exposures as a new budget concept--"exposure
level"--as a notational item in the Program and Financing schedule of
the President's budget. As opposed to cash, the "exposure level" might
be reported in present value terms. Specifying the estimated potential
future costs associated with current decisions would promote
transparency.
We also recommend that OMB report annually on fiscal exposures,
including a concise list and description of such exposures, cost
estimates where possible, and an assessment of methodologies and data
used to produce the cost estimates. Explicitly and directly integrating
this report with long-range projections and analysis of the budget as a
whole would increase its usefulness for assessing the potential
implications for long-range fiscal sustainability and flexibility.
Legislation proposed by the President could be included if the report
were issued as part of the President's budget and thus could help
inform and provide long-term context to budget deliberations.
Other entities also can promote transparency and visibility of fiscal
exposures by various actions:
FASAB. Continue to make progress on the accounting and reporting front
(e.g., trust funds and social insurance).
Treasury. Enhance disclosures in the annual governmentwide performance
and accountability report.
GAO. Continue to emphasize the issue in existing reports and
testimonies. Comment on any annual fiscal exposures report published by
OMB.
Congress. Consider requiring that discounted present value numbers be
considered for major revenue-and spending-related legislative
proposals before legislation is enacted.
In addition, we have stated that Congress may wish to consider
exploring options for improving the information available on and the
attention given to fiscal exposures.[Footnote 6] To increase
congressional attention to such exposures, Congress could develop
budget process mechanisms that prompt more deliberation about fiscal
exposures. One type of mechanism that could be used is a point of
order. Congress could modify budget rules to provide for a point of
order against any proposed legislation that creates new exposures or
increases the estimated costs of existing exposures over some specified
level. Or, revised rules could provide for a point of order against any
proposed legislation that does not include estimates of the potential
costs of fiscal exposures created by the legislation. A second type of
budget process mechanism that would prompt deliberation of fiscal
exposures would be to establish triggers that require some action when
the estimated future costs of a given exposure rise above some
specified threshold.
3. How are audit results being used to affect budgeting processes for
the current and next year, and how should they be used?
Ultimately, the objective is for agencies to generate high-quality data
and measure performance in a meaningful way to help inform decision
makers during the budget process when allocating resources and
determining the most efficient and effective means of achieving policy
objectives. Financial audit results are the beginning point in this
process and should be considered along with the results of programmatic
audits and performance reviews.
Financial statements are included in the annual performance and
accountability reports for the 24 CFO Act agencies. These financial
statements, along with the accompanying management analysis and
performance reports, can provide a wealth of information regarding
agency performance and financial condition that can be considered as
budgeting decisions are made. One of the objectives of federal
financial management reform legislation is to improve the quality and
availability of information for decision makers. The results of agency
financial statement audits, including the related identification of any
internal control weaknesses, noncompliance, and systems issues, provide
the starting point for considering an agency's ability to generate the
information necessary to make informed decisions about its efficiency
and effectiveness in achieving its mission and goals. For fiscal year
2002, while 21 of the 24 CFO Act agencies received an unqualified
opinion on their financial statements, auditors for 19 of the 24
agencies reported that the agencies' systems did not comply
substantially with at least one of the three requirements of the
Federal Financial Management Improvement Act. This lack of compliance
raises questions about the ability of these agencies to generate
timely, useful, and reliable information needed for day-to-day
management and congressional oversight.
The audited financial statements also provide indications of the
quality of certain data included in budget requests and historical
information that could be considered during budget deliberations. For
example, the Statement of Budgetary Resources in the agency's audited
financial statements provides information as to the status and uses of
budgetary resources, such as amounts remaining available for obligation
as of the end of the fiscal year. Because this information is audited,
it provides assurance as to the reliability of these amounts in
relation to the financial statements as a whole. In areas such as
direct loans and loan guarantees, the accounting used for the financial
statements under generally accepted accounting principles closely
mirrors the Credit Reform Act requirements used for the budget. This
means that errors, weaknesses in the estimation process, or other
issues identified during the financial statement audit may also be
present in related budget requests.
In addition, the audited financial statements provide information not
presented in the budget that could also be considered in the budgeting
process. For example, liabilities for the total estimated cost of
environmental cleanup and other liabilities, such as those for federal
employees' and veterans' benefits, are presented in the financial
statements. These amounts should include the entire estimated liability
for these programs, rather than the projected cash flows for limited
periods included in the budget. Further, the statements present
information on social insurance programs, such as Social Security and
Medicare, that shows the long-term fiscal challenges associated with
these programs that could also be considered in the budget process.
While much of this information is included in individual agency
financial statements, the presentation of this information in the
consolidated financial report of the U.S. government can provide a
basis for analyzing the overall long-range fiscal challenges faced by
our government as a whole, during the deliberative process on the
budget.
The audited financial statements present data as of a single point in
time or for a specific period. Even if an agency's financial statements
received an unqualified opinion, there are no direct assurances about
other data from the agency, such as quarterly results or performance
information. However, as part of the audits, material weaknesses in
internal control and inadequate financial systems are often identified.
These deficiencies can affect an agency's ability to generate reliable
cost information and measure the performance of its programs. The
impact of these conditions on the reliability of other, unaudited
agency data should be considered from an oversight or budget
perspective.
I am providing copies of this letter to the Ranking Minority Member and
Vice Chairman of your subcommittee. This letter is also available on
GAO's Web site at www.gao.gov.
If you or your staff have questions about the responses to your
questions, please contact me at (202) 512-5500 or Gary T. Engel,
Director, at (202) 512-3406 or engelg@gao.gov.
Sincerely yours,
David M. Walker:
Comptroller General of the United States:
Signed by David M. Walker:
(198195):
FOOTNOTES
[1] U.S. General Accounting Office, Fiscal Year 2002 U.S. Government
Financial Statements: Sustained Leadership and Oversight Needed for
Effective Implementation of Financial Management Reform, GAO-03-572T
(Washington, D.C.: Apr. 8, 2003). The fiscal year 2002 Financial Report
of the United States Government, issued by the Department of the
Treasury on March 31, 2003, is available through GAO's Web site at
www.gao.gov and Treasury's Web site at www.fms.treas.gov/fr/
index.html.
[2] U.S. General Accounting Office, Environmental Liabilities: DOD
Training Range Cost Estimates Are Likely Understated, GAO-01-479
(Washington, D.C.: Apr. 11, 2001), and Environmental Liabilities:
Cleanup Costs from Certain DOD Operations Are Not Being Reported, GAO-
02-117 (Washington, D.C.: Dec. 14, 2001).
[3] See, for example, U.S. General Accounting Office, Medicare:
Financial Challenges and Considerations for Reform, GAO-03-577T
(Washington, D.C.: Apr. 10, 2003); Medicare: Observations on Program
Sustainability and Strategies to Control Spending on Any Proposed Drug
Benefit, GAO-03-650T (Washington, D.C.: April 9, 2003); Social
Security: Analysis of Issues and Selected Reform Proposals, GAO-03-376T
(Washington, D.C.: Jan. 15, 2003); Budget Issues: Long-Term Fiscal
Challenges, GAO-02-467T (Washington, D.C.: Feb. 27, 2002).
[4] See, for example, U.S. General Accounting Office, Social Security
Reform: Analysis of Reform Models Developed by the President's
Commission to Strengthen Social Security, GAO-03-310 (Washington, D.C.:
Jan. 15, 2003), and Social Security: Evaluating Reform Proposals, GAO/
AIMD/HEHS-00-29 (Washington, D.C., Nov. 4, 1999).
[5] U.S. General Accounting Office, Fiscal Exposures: Improving the
Budgetary Focus on Long-Term Costs and Uncertainties, GAO-03-213
(Washington, D.C.: Jan. 24, 2003).
[6] GAO-03-213.
