Improving Financial Management

Executive Summary

In the recent hit movie "Dave," a presidential look-alike finds himself
in the Oval Office, acting as chief executive. He brings in an
accountant friend to look over the federal government's books, hoping to
find money for a favorite program. "Who does these books?"  the friend
exclaimed. "If I ran my business this way, I'd be out of business!" With
a few hours' application of accounting know-how, they find the money and
save the program.

In real life, it's not quite that simple. But the satire identified an
all-too-true phenomenon--Washington's financial management practices are
tangled and inadequate. They do not give managers good tools to govern.
Nor do they save taxpayers money by using the best innovations of
business.

And where government has the know-how, it uses it only sporadically.
Take electronic funds transfer (EFT), which can speed the exchange of
funds to and from government and reduce processing costs. With a 1992
cash flow of $2.5 trillion, the government accepted only 10 percent of
its collections electronically and made just 42 percent of its payments
that way. When some agencies sought to force employees to accept pay by
EFT, rather than paper checks, as a condition of employment, they faced
objections from unions.

Vastly improved financial management is a critical part of the overall
effort to reinvent government. First, as we have said, it saves
taxpayers money. Even a relatively small improvement in managing funds
can recover billions of dollars. Second, we need accurate and timely
financial information if we are to give managers greater authority to
run agencies. Greater responsibility for line managers requires greater
accountability through budgeting, or the best-intentioned reforms will
only create new problems. Finally, better financial management is
necessary to give the President, Congress, and other policymakers an
accurate picture of the federal budget when they make broad policy
decisions and to show Americans that their money is managed well.

The Nature of the Problem

Today, to put it simply, the federal books are a mess. Any business with
separate, uncoordinated systems for budgeting, accounting, and product
sales would soon be bankrupt. But the federal government has such
systems. Indeed, our government requires companies, states, and
localities to meet professional financial standards that it does not
come close to meeting itself.

Consider, for instance, what the Office of Management and Budget (OMB)
found in its 1992 survey of 878 agency financial systems: Over half
don't meet agency financial processing requirements; nearly half don't
meet their own internal automated data processing requirements; 40
percent don't meet internal reporting requirements; a third don't meet
functional requirements for reporting to OMB and the Treasury
Department; over 30 percent are more than 10 years old; and, perhaps
most shocking, the age of nearly 20 percent couldn't be firmly
established.

To be sure, OMB also found that a quarter of agencies say they're
replacing their systems or planning to do so; another quarter have
upgrades planned or under way. Many of these improvements, however, have
been largely piecemeal and uncoordinated, lacking a governmentwide
framework. Agencies with state-of-the-art approaches, such as the
Internal Revenue Service's integrated data collection system, are
"islands of best practices" in a sea of backwardness.

Hundreds of rules, 120,000 financial management employees, and millions
of lines of reports have not produced useful, accurate information for
line managers who actually decide to spend federal dollars. [Endnote 1]
Why? Not due to the lack of hard work or dedication by financial
employees or those line workers delivering direct services to the
public. Rather, the problem is due to decades of uncoordinated,
budget-obsessed focusing on cash flows that are unrelated to any
measures of achieving a mission as well as to multiple procedures to
create the illusion of control.

Currently, 60 percent of major federal agencies have one or more
programs on OMB's high-risk list of programs particularly vulnerable to
fraud or waste. Of course, policymakers have sought to ward off abuse.
Over the years, scandals have prompted new laws, OMB has issued
circulars to implement the laws, and agencies have then issued further
guidance and regulations, including a growing burden of reporting
requirements.[Endnote 2] But while each was well-intentioned, this
profusion of laws and regulations is like having six thermostats in a
room at different settings to maintain climate control, guaranteeing
wasted energy without accomplishing a satisfactory result.

A Vision of the Future

The National Performance Review (NPR) envisions a much better day, not
far off, when virtually all funds in and out of the government flow
electronically and financial information is a normal byproduct of
operations. This information would be accurate and readily available to
line managers, financial staff, and auditors--enhancing probity and
policymaking.

Technology now allows data to be collected as part of normal program
operations--not as a separate task--and made available to all
appropriate individuals. Automated systems can be programmed to alert
supervisors to actions falling outside established norms. Such controls
would allow program managers to make timely decisions, eliminating most
staff approvals prior to action. The government could monitor
accountability for program managers' decisions with an effective
computer/telecommunications infrastructure, thus letting managers focus
on performance, not process and paperwork.

In this report, the NPR offers recommendations that should result in a
need for significantly fewer federal staff support employees, and shift
the emphasis of financial management to timely and useful support for
program delivery to the public. Notwithstanding large annual overhead
savings, the real value to taxpayers will be much better stewardship of
their tax dollars. Federal managers will be clearly accountable for
measurable program results at the most efficient cost. Financial
managers will be respected advisers to line program managers--effective
members of a team ensuring excellent public services. And, due to clear
reporting of tangible results, the government will earn Americans' trust
that it is well managed.

Recommendations and Actions

This report provides the needed road map to change today's
unsatisfactory status quo. The first part deals with the steps necessary
to build a strong financial management infrastructure. The second
concentrates on adopting good business practices. Key recommendations
include the following:

--The President should issue an annual financial report to the citizens.
The public deserves a clear, concise, accurate financial accounting of
the nation's books. The public reads little of the deluge of official
reports submitted to Congress. As a result, public perceptions of the
federal financial condition result from fragmentary coverage in the
media. As the steward of the taxpayers' dollars, the President can offer
a simple and readable report each year to help the citizens receive a
fair and balanced picture of the nation's financial condition.

--Legislation should be enacted to allow funds for debt collection
activities to come from revenues generated from collections, letting
agencies keep a portion of any increased collection amounts for further
improvements. Compared to spending program money, agencies have not
placed a high priority on debt collection. Based on experience at
several agencies, paying for the activity on a self-funding basis would
dramatically increase the dollars recovered. Letting agencies keep some
funds would create an additional incentive.

--Issue all federal payments through Electronic Funds Transfer (EFT) or
Electronic Benefits Transfer (EBT). EFT (commonly known as direct
deposit) replaces checks and costs about a sixth as much. It has grown,
on a voluntary basis, to over 40 percent of all federal payments over
the last 15 years. EBT is a newer system to bring the same lower-cost
distribution of funds and benefits to people without bank accounts. Now,
the federal government should accelerate toward a full electronic system
for payments to all businesses and individuals.

--Issue a comprehensive set of federal financial accounting standards
within 18 months. The federal government's failure to adopt generally
accepted accounting standards has contributed to the uneven quality of
information as well as other problems. While the government has begun to
correct this failing, it must take further action to produce an initial
set of standards that would lay a foundation to meaningfully implement
the Chief Financial Officers and Government Performance and Results
Acts. Reports on value for the dollar need consistency across
government.

--Allow agencies and departments to create "innovation capital funds"
out of retained savings from operational funds as well as other sources.
Without additional appropriations, agencies can effectively use a
portion of money unspent at year-end to invest in major improvements
that can cut future costs and improve services.  These funds have worked
in several agencies.

--The President should instruct agency heads to implement, at their
discretion, franchising for service functions. Internal administrative
support services, such as personnel, finance, and procurement, are
duplicated in every federal agency as separate, inside monopolies. The
franchising option will allow line program managers to control the money
and obtain such services from whichever agency offers the best service
at the lowest cost. The incentive of competition should increase
responsiveness to the line customers in agencies and lower costs.

Achieving Results

Implementing actions in two of the 13 recommendations should begin
providing spending reductions or increased revenue quickly. During the
next five years, the growth in electronic payments as a replacement for
checks and the increase in electronic collections should reduce
expenditures by over $350 million.

Recommendations for strengthening debt collection should result in $1.5
to $6.0 billion in additional collections during the same period.

The remaining recommendations will not provide immediate savings, but
should provide the basis for hundreds of millions less in overhead
dollars each year once the infrastructure is in place.

During the next three years, a strong financial management
infrastructure needs to be built, and the spread of good business
practices needs to take root. With the changes in place, significant
redirection of financial staff into line program positions should occur.
Ultimately, over one quarter of the financial management positions
filled today would no longer be needed. All of the above figures have
been incorporated in other accompanying reports.

The manner in which change of this nature is implemented is crucial to
its success or failure. Until the investment and implementation in
systems and changes in other processes are completed, these positions
will still be needed. Reductions in personnel prior to these changes
will likely result in more serious financial problems.

Endnotes 

1. "1969-1991 Trend of the Federal Civilian Workforce in Accounting and
Budget Occupations," special report from Office of Personnel Management.
Figures represent 1991 employment in occupation series 501, 503, 505,
510, 511, 525, 530, 540, 544, 545, 560, 561, 593, 599, and half the
total number in 343 (Management and Budget Analysis).

2. The Treasury Financial Manual, providing guidance to agencies, is
approximately 630 pages.

Build a Strong Financial Management Infrastructure

Introduction

Travelers on the Pennsylvania Turnpike often remark about the narrow
lanes and tunnels and other design features that are inferior to most of
the segments of the interstate highway system today. Many are unaware
that it was the earliest of the high- speed, limited access highways, on
the leading edge of highway design at the time it was built over a
half-century ago. As money was allocated in the 1950s through 1980s to
build new interstate highways using the latest technology and following
higher standards, the pioneering Pennsylvania Turnpike became outdated,
but continued to serve tens of thousands of motorists.

A similar problem exists with federal financial management.  Accounting
systems were among the first applications of computer technology in the
U.S. government. They were installed on large central computers in the
1960s and 1970s by individual agencies without much redesign of the
manual practices or much thought given to consistency among agencies.

Leadership, planning, standards, experienced and fully trained managers
and employees, the incentives of competition, and technology--these are
the elements needed to build a strong financial management
infrastructure. They are all within view but slightly out of focus.
After many partially successful legislative and executive branch
initiatives, most of the elements for fundamental change are present.

Generally accepted accounting principles (standards) for the federal
government are being established, wide accessibility of data through
technology is being developed, and the Chief Financial Officers Act of
1990 and the Government Performance and Results Act of 1993 offer a
solid legislative foundation for progress. The Chief Financial Officers
Act established chief financial officers in every department and major
agency and required audited financial statements. The Government
Performance and Results Act will require performance measures, focusing
on the outcome of programs.

With information technology today permitting databases accessible
through telecommunications, the opportunity for systems with clear
standards, timely and accessible data, and stronger accountability is
here. Leadership and a clearly defined plan can create a solid and
modern financial infrastructure to replace the multitude of systems and
standards that exist today. The recommendations in this section of the
report can accomplish these objectives in the next several years.