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Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. United States Government Accountability Office: Transformation Challenges: The Honorable David M. Walker: Comptroller General of the United States: JFMIP Federal Financial Management Conference: Washington, DC: March 10, 2005: Composition of Federal Spending: [See PDF for image] - graphic text 3 pie charts with 5 items each. 1964: Defense: 46.0%. Social Security: 14.0%. Medicare & Medicaid: 0%. Net interest: 7.0%. All other spending: 33.0%. 1984: Defense: 27.0%. Social Security: 21.0%. Medicare & Medicaid: 9.0%. Net interest: 13.0%. All other spending: 30.0%. 2004*: Defense: 20.0%. Social Security: 21.0%. Medicare & Medicaid: 20.0%. Net interest: 7.0%. All other spending: 33.0%. * Current services estimate. Note: Numbers may not add to 100 percent due to rounding. Source: Budget of the United States Government, Fiscal Year 2005 (February 2004) and Budget of the United States Government, Fiscal Year 2005, Mid-session Review (July 2004), Office of Management and Budget. [End of figure] Federal Spending for Mandatory and Discretionary Programs: [See PDF for image] - graphic text 3 pie charts with 3 items each. 1964: Discretionary: 67%; Mandatory: 26%; Net Interest: 7%. 1984: Discretionary: 45%; Mandatory: 42%; Net Interest: 13%. 2004*: Discretionary: 39%; Mandatory: 54%; Net Interest: 7%. * Current services estimate. Note: Numbers may not add to 100 percent due to rounding. Source: Budget of the United States Government, Fiscal Year 2005 (February 2004) and Budget of the United States Government, Fiscal Year 2005, Mid-session Review (July 2004), Office of Management and Budget. [End of figure] Fiscal Year 2004 Deficit Numbers: On-Budget Deficit; -$567 Billion; -4.9% of GDP. Off-Budget Surplus; $155 Billion; 1.3% of GDP. Unified Deficit; -$412 Billion; -3.6% of GDP. * Includes the $151 billion Social Security surplus and a $4 billion surplus for the Postal Service. [End of table] Surplus or Deficit as a Share of GDP: Fiscal Years 1962-2004: [See PDF for image] - graphic text: Line/Stacked Bar combo chart with 1 line (Unified) and 43 bars. Fiscal year: 1962; On-budget: -1%; Off-budget: -0.2%; Unified: -1.3%. Fiscal year: 1963; On-budget: -0.7%; Off-budget: -0.1%; Unified: -0.8%. Fiscal year: 1964; On-budget: -1%; Off-budget: 0.1%; Unified: -0.9%. Fiscal year: 1965; On-budget: -0.2%; Off-budget: No data; Unified: -0.2%. Fiscal year: 1966; On-budget: -0.4%; Off-budget: -0.1%; Unified: -0.5%. Fiscal year: 1967; On-budget: -1.6%; Off-budget: 0.5%; Unified: -1.1%. Fiscal year: 1968; On-budget: -3.2%; Off-budget: 0.3%; Unified: -2.9%. Fiscal year: 1969; On-budget: -0.1%; Off-budget: 0.4%; Unified: 0.3%. Fiscal year: 1970; On-budget: -0.9%; Off-budget: 0.6%; Unified: -0.3%. Fiscal year: 1971; On-budget: -2.4%; Off-budget: 0.3%; Unified: -2.1%. Fiscal year: 1972; On-budget: -2.2%; Off-budget: 0.3%; Unified: -2%. Fiscal year: 1973; On-budget: -1.2%; Off-budget: No data; Unified: -1.1%. Fiscal year: 1974; On-budget: -0.6%; Off-budget: 0.1%; Unified: -0.4%. Fiscal year: 1975; On-budget: -3.5%; Off-budget: 0.1%; Unified: -3.4%. Fiscal year: 1976; On-budget: -4.1%; Off-budget: -0.2%; Unified: -4.2%. Fiscal year: 1977; On-budget: -2.5%; Off-budget: -0.2%; Unified: -2.7%. Fiscal year: 1978; On-budget: -2.5%; Off-budget: -0.2%; Unified: -2.7%. Fiscal year: 1979; On-budget: -1.5%; Off-budget: -0.1%; Unified: -1.6%. Fiscal year: 1980; On-budget: -2.7%; Off-budget: No data; Unified: -2.7%. Fiscal year: 1981; On-budget: -2.4%; Off-budget: -0.2%; Unified: -2.6%. Fiscal year: 1982; On-budget: -3.7%; Off-budget: -0.2%; Unified: -4%. Fiscal year: 1983; On-budget: -6%; Off-budget: No data; Unified: -6%. Fiscal year: 1984; On-budget: -4.8%; Off-budget: No data; Unified: -4.8%. Fiscal year: 1985; On-budget: -5.3%; Off-budget: 0.2%; Unified: -5.1%. Fiscal year: 1986; On-budget: -5.4%; Off-budget: 0.4%; Unified: -5%. Fiscal year: 1987; On-budget: -3.6%; Off-budget: 0.4%; Unified: -3.2%. Fiscal year: 1988; On-budget: -3.9%; Off-budget: 0.8%; Unified: -3.1%. Fiscal year: 1989; On-budget: -3.8%; Off-budget: 1%; Unified: -2.8%. Fiscal year: 1990; On-budget: -4.8%; Off-budget: 1%; Unified: -3.9%. Fiscal year: 1991; On-budget: -5.4%; Off-budget: 0.9%; Unified: -4.5%. Fiscal year: 1992; On-budget: -5.5%; Off-budget: 0.8%; Unified: -4.7%. Fiscal year: 1993; On-budget: -4.6%; Off-budget: 0.7%; Unified: -3.9%. Fiscal year: 1994; On-budget: -3.7%; Off-budget: 0.8%; Unified: -2.9%. Fiscal year: 1995; On-budget: -3.1%; Off-budget: 0.9%; Unified: -2.2%. Fiscal year: 1996; On-budget: -2.3%; Off-budget: 0.9%; Unified: -1.4%. Fiscal year: 1997; On-budget: -1.3%; Off-budget: 1%; Unified: -0.3%. Fiscal year: 1998; On-budget: -0.3%; Off-budget: 1.1%; Unified: 0.8%. Fiscal year: 1999; On-budget: No data; Off-budget: 1.4%; Unified: 1.4%. Fiscal year: 2000; On-budget: 0.9%; Off-budget: 1.5%; Unified: 2.4%. Fiscal year: 2001; On-budget: -0.3%; Off-budget: 1.6%; Unified: 1.3%. Fiscal year: 2002; On-budget: -3.1%; Off-budget: 1.5%; Unified: -1.5%. Fiscal year: 2003; On-budget: -4.9%; Off-budget: 1.5%; Unified: -3.5%. Fiscal year: 2004; On-budget: -4.9%; Off-budget: 1.3%; Unified: -3.6%. Source: Office of Management and Budget and Congressional Budget Office. [End of figure] Selected Fiscal Exposures: Sources and Examples 2004[A]: Type: Explicit liabilities; Example (dollars in billions): Publicly held debt ($4,297); Type: Explicit liabilities; Example (dollars in billions): Military and civilian pension and post- retirement health ($3,059). Type: Explicit liabilities; Example (dollars in billions): Veterans benefits payable ($925). Type: Explicit liabilities; Example (dollars in billions): Environmental and disposal liabilities ($249). Type: Explicit liabilities; Example (dollars in billions): Loan guarantees ($43). Type: Explicit financial commitments; Example (dollars in billions): Undelivered orders ($596). Type: Explicit financial commitments; Example (dollars in billions): Long-term leases ($39). Type: Financial contingencies; Example (dollars in billions): Unadjudicated claims ($4). Type: Financial contingencies; Example (dollars in billions): Pension Benefit Guaranty Corporation ($96). Type: Financial contingencies; Example (dollars in billions): Other national insurance programs ($1). Type: Financial contingencies; Example (dollars in billions): Government corporations e.g., Ginnie Mae. Type: Exposures implied by current policies or the public's expectations about the role of government; Example (dollars in billions): Debt held by government accounts ($3,071)[B]. Type: Exposures implied by current policies or the public's expectations about the role of government; Example (dollars in billions): Future Social Security benefit payments ($3,699)[C]. Type: Exposures implied by current policies or the public's expectations about the role of government; Example (dollars in billions): Future Medicare Part A benefit payments ($8,236)[C]. Type: Exposures implied by current policies or the public's expectations about the role of government; Example (dollars in billions): Future Medicare Part B benefit payments ($11,416)[C]. Type: Exposures implied by current policies or the public's expectations about the role of government; Example (dollars in billions): Future Medicare Part D benefit payments ($8,119) [C]. Type: Exposures implied by current policies or the public's expectations about the role of government; Example (dollars in billions): Life cycle cost including deferred and future maintenance and operating costs (amount unknown). Type: Exposures implied by current policies or the public's expectations about the role of government; Example (dollars in billions): Government Sponsored Enterprises e.g., Fannie Mae and Freddie Mac. [A] All figures are for end of fiscal year 2004, except Social Security and Medicare estimates, which are as of January 1, 2004. [B] This amount includes $845 billion held by military and civilian pension funds that would offset the explicit liabilities reported by those funds. [C] Figures for Social Security and Medicare are net of debt held by the trust funds ($1,531 billion for Social Security, $256 billion for Medicare Part A, and $24 billion for Medicare Part B) and represent net present value estimates over a 75-year period. Over an infinite horizon, the estimate for Social Security would be $10.4 trillion, $21.8 trillion for Medicare Part A, $23.2 trillion for Medicare Part B, and $16.5 trillion for Medicare Part D. Source: GAO analysis of data from the Department of the Treasury, the Office of the Chief Actuary, Social Security Administration, and the Office of the Actuary, Centers for Medicare and Medicaid Services. Updated 1/25/05. [End of table] Another Way to Think About These Numbers: * Debt held by the public—$4.3T; * Trust fund debt—$3.1T; * Gross debt—$7.4T; * Gross debt per person—about $25,000; If we add everything on the previous slide that is not included in gross debt, the burden rises to more than $145,000 per person or more than $350,000 per full-time worker. Alternatively, it amounts to a total unfunded burden of more than $43 trillion in current dollars, which is about 19 times the current annual federal budget or about 4 times the current annual GDP. Note: The calculations are based on 75-year projections for Social Security and Medicare. Updated 12/17/04. Composition of Spending as a Share of GDP Under Baseline Extended: [See PDF for image] -graphic text Line/Stacked Bar combo chart with 4 groups, 1 line (Revenue) and 4 bars per group. 2004; All other spending; Percent of GDP: 10.3%; Medicare & Medicaid; Percent of GDP: 3.8%; Social Security; Percent of GDP: 4.3%; Net interest; Percent of GDP: 1.4%; Revenue; Percent of GDP: 16.3%. 2015; All other spending; Percent of GDP: 7.6%; Medicare & Medicaid; Percent of GDP: 5.2%; Social Security; Percent of GDP: 4.7%; Net interest; Percent of GDP: 1.5%; Revenue; Percent of GDP: 19.6%. 2030; All other spending; Percent of GDP: 7.6%; Medicare & Medicaid; Percent of GDP: 8.1%; Social Security; Percent of GDP: 6.6%; Net interest; Percent of GDP: 2.1%; Revenue; Percent of GDP: 19.6%. 2040; All other spending; Percent of GDP: 7.6%; Medicare & Medicaid; Percent of GDP: 9.9%; Social Security; Percent of GDP: 7.2%; Net interest; Percent of GDP: 4.8%; Revenue; Percent of GDP: 19.6%. Notes: Although expiring tax provisions are extended, revenue as a share of GDP increases through 2015 due to (1) real bracket creep, (2) more taxpayers becoming subject to the AMT, and (3) increased revenue from tax-deferred retirement accounts. After 2015, revenue as a share of GDP is held constant. Source: GAO’s January 2005 analysis. [End of figure] Composition of Spending as a Share of GDP Assuming Discretionary Spending Grows with GDP After 2004 and All Expiring Tax Provisions Are Extended: [See PDF for image] -graphic text Line/Stacked Bar combo chart with 4 groups, 1 line (Revenue) and 4 bars per group. 2004; All other spending; Percent of GDP: 10.3%; Medicare & Medicaid; Percent of GDP: 3.8%; Social Security; Percent of GDP: 4.3%; Net interest; Percent of GDP: 1.4%; Revenue; Percent of GDP: 16.3%. 2015; All other spending; Percent of GDP: 9.7%; Medicare & Medicaid; Percent of GDP: 5.2%; Social Security; Percent of GDP: 4.8%; Net interest; Percent of GDP: 2.8%; Revenue; Percent of GDP: 17.4%. 2030; All other spending; Percent of GDP: 9.7%; Medicare & Medicaid; Percent of GDP: 8.1%; Social Security; Percent of GDP: 7.0%; Net interest; Percent of GDP: 8.0%; Revenue; Percent of GDP: 17.4%. 2040; All other spending; Percent of GDP: 9.7%; Medicare & Medicaid; Percent of GDP: 9.9%; Social Security; Percent of GDP: 8.4%; Net interest; Percent of GDP: 16.6%; Revenue; Percent of GDP: 17.4%. Notes: Although expiring tax provisions are extended, revenue as a share of GDP increases through 2015 due to (1) real bracket creep, (2) more taxpayers becoming subject to the AMT, and (3) increased revenue from tax-deferred retirement accounts. After 2015, revenue as a share of GDP is held constant. Source: GAO’s January 2005 analysis. [End of figure] Current Fiscal Policy is Unsustainable: The “Status Quo” is Not an Option: * We face large and growing structural deficits largely due to known demographic trends and rising health care costs. * GAO’s simulations show that balancing the budget in 2040 could require actions as large as: - Cutting total federal spending by about 60 percent or - Raising taxes to about 2.5 times today's level. Faster Economic Growth Can Help, but It Cannot Solve the Problem: * Closing the current long-term fiscal gap based on responsible assumptions would require real average annual economic growth in the double digit range every year for the next 75 years. * During the 1990s, the economy grew at an average 3.2 percent per year. * As a result, we cannot simply grow our way out of this problem. Tough choices will be required. The Sooner We Get Started, the Better: * Less change would be needed, and there would be more time to make adjustments. * The miracle of compounding would work with us rather than against us. * Our demographic changes will serve to make reform more difficult over time. GAO’s Work to Modernize the Accountability Profession: GAO is actively working to modernize and transform the accountability profession, both inside the government and in the private sector, and to lead by example in this area. * Opinion on system of internal control; * Independence Standard issued in 2002; * Nature of GAO’s audit opinion and related products and public activities; * Assistance to the Congress in evaluating accountability profession issues and needed reforms prior to the Sarbanes-Oxley Act; * 2003 revision of Government Auditing Standards; * Creation of the U.S Auditing Standards Coordinating Forum (i.e., GAO, PCAOB, ASB); * Coordination with accountability organizations around the world (e.g., INTOSAI); * Comment on proposed standards ; * Monitor implementation of the Sarbanes-Oxley Act; * Sarbanes-Oxley studies on accounting firm consolidation from Big 8 to Big 4 and on mandatory audit firm rotation; * Definition of success in financial management: clean opinion, no major weaknesses in controls or compliance, and financial systems that produce timely, accurate and useful information for management; * Enhance federal financial management, reporting, and accountability; * Assure appropriate treatment of restatements by auditors and others. Selected Federal Government Reporting Challenges: Financial and Performance Reporting: * long-range fiscal challenges (e.g., per capita burden); * “trust funds” (e.g., restricted vs. unrestricted revenues, intra- governmental obligations); * DOD assets, liabilities, and contingencies; * performance reporting; * Other. Audit Reporting: * system of internal control; * financial vs. performance vs. other information; * restatements. Selected Government Accountability Issues: Leading by Example: Definition of success in financial management: * Clean opinion on financial statements; * No major control weaknesses; * No major compliance issues; * Systems that produce timely, accurate, and useful financial and management information; Scope of audit: * Internal controls (current); * Compliance matters (current); * Performance and projection information (future); Additional issues; * FASAB restructuring; * Accelerated financial reporting; * Enhanced performance and accountability reporting; * Audit/financial management committees; * Auditor independence. The Federal Financial Audit Environment: The federal financial audit environment is evolving: * Closer to an opinion on the consolidated financial statements of the U.S. government (CFS); * GAO, as the auditor of the CFS, needs to be able to use the work of the auditors of the agency financial statements; * Agencies need to meet accelerated due dates, maintain unqualified opinions, and address their internal control and financial management system deficiencies; * More timely financial and performance reporting should not come at the price of less reliable reporting. The Future Accounting/Reporting and Audit Reporting Model We need to review and revise the existing accounting/reporting model to reflect several dimensions: * Generic provisions; * Industry information; * Entity-specific information (i.e., value and risk); We need to recognize the difference between certain types of financial and other information: * Historical cost; * Readily marketable assets; * Non-readily marketable assets; * Projection information; * Performance information. In modernizing audit reporting we need to: * Communicate the auditor’s considerations in determining the overall “fairness” of the financial statements, including: - management’s selection and application of accounting principles; - the reasonableness of estimates; - the adequacy of disclosures; - whether literal compliance with GAAP results in financial statements that may be misleading. Determine whether changes to the auditor’s report are needed, such as * stating that the financial statements are not just prepared in accordance with GAAP but that they also “fairly” (or reasonably) present the reporting entity’s financial condition; * providing additional explanation or emphasis of matters; * conveying that the financial statements and disclosures and the audit process include a series of judgments and estimates. * recognizing that the financial statements contain information with different degrees of certainty. How Do We Move Forward? Good governance and accountability are critical: * in the private sector to promote efficiency and effectiveness in the capital and credit markets, and overall economic growth, both domestically and internationally; * in the public sector for the effective and credible functioning of a healthy democracy, and in fulfilling the government’s responsibility to citizens and taxpayers; * in both sectors to support a healthy economy that provides economic opportunities and benefits to citizens; Sorting out the needs and effective and appropriate governance and accountability mechanisms for different sectors and types of organizations and on an international scale will be critical. GAO’s High-Risk List: 2005: Addressing Challenges in Broad-based Transformations: High-Risk Areas: Protecting the Federal Government's Information Systems and the Nation's Critical Infrastructures; Year Designated High Risk: 1997. High-Risk Areas: Strategic Human Capital Management[A]; Year Designated High Risk: 2001. High-Risk Areas: U.S. Postal Service Transformation Efforts and Long- Term Outlook[A]; Year Designated High Risk: 2001. High-Risk Areas: Managing Federal Real Property[A]; Year Designated High Risk: 2003. High-Risk Areas: Implementing and Transforming the Department of Homeland Security; Year Designated High Risk: 2003. High-Risk Areas: Establishing Appropriate and Effective Information- Sharing Mechanisms to Improve Homeland Security; Year Designated High Risk: 2005. High-Risk Areas: DOD Approach to Business Transformation[A]; Year Designated High Risk: 2005. High-Risk Areas: DOD Approach to Business Transformation[A]: DOD Supply Chain Management (formerly Inventory Management); Year Designated High Risk: 1990. High-Risk Areas: DOD Approach to Business Transformation[A]: DOD Weapon Systems Acquisition; Year Designated High Risk: 1990. High-Risk Areas: DOD Approach to Business Transformation[A]: DOD Business Systems Modernization; Year Designated High Risk: 1995. High-Risk Areas: DOD Approach to Business Transformation[A]: DOD Financial Management; Year Designated High Risk: 1995. High-Risk Areas: DOD Approach to Business Transformation[A]: DOD Support Infrastructure Management; Year Designated High Risk: 1997. High-Risk Areas: DOD Approach to Business Transformation[A]: DOD Personnel Security Clearance Program; Year Designated High Risk: 2005. Managing Federal Contracting More Effectively: High-Risk Areas: DOE Contract Management; Year Designated High Risk: 1990. High-Risk Areas: NASA Contract Management; Year Designated High Risk: 1990. High-Risk Areas: DOD Contract Management; Year Designated High Risk: 1992. Management of Interagency Contracting; Year Designated High Risk: 2005. Assessing the Efficiency and Effectiveness of Tax Law Administration: High-Risk Areas: Enforcement of Tax Laws[A, B]; Year Designated High Risk: 1990. High-Risk Areas: IRS Business Systems Modernization[C]; Year Designated High Risk: 1995. Modernizing and Safeguarding Insurance and Benefit Programs: High-Risk Areas: Medicare Program[A]; Year Designated High Risk: 1990. High-Risk Areas: HUD Single-Family Mortgage Insurance and Rental Housing Assistance Programs; Year Designated High Risk: 1994. High-Risk Areas: Medicaid Program[A]; Year Designated High Risk: 2003. High-Risk Areas: Modernizing Federal Disability Programs[A]; Year Designated High Risk: 2003. High-Risk Areas: Pension Benefit Guaranty Corporation Single-Employer Insurance Program[A]; Year Designated High Risk: 2003. Other: High-Risk Areas: FAA Air Traffic Control Modernization; Year Designated High Risk: 1995. [A] Legislation is likely to be necessary, as a supplement to actions by the executive branch, in order to effectively address this high-risk area. [B] Two high-risk areas-Collection of Unpaid Taxes and Earned Income Credit Noncompliance-have been consolidated to make this area. [C] The IRS Financial Management high-risk area has been incorporated into this high-risk area. [End of table] 21st Century Challenges Report: Report was issued February 16; Based on GAO’s work for the Congress; Provides framework and questions to assist in reexamining the base; Covers entitlements & other mandatory spending, discretionary spending, and tax policy and programs. Strategic Plan Themes: Long-Range Fiscal Challenges; Changing Security Threats; Increasing Global Interdependence; The Changing Economy; Demographic Shifts; Science and Technology Advances; Quality of Life Trends; Changing Governance Structures. Generic Reexamination Criteria with Sample Questions: Relevance of purpose and the federal role: Have there been significant changes in the country or the world that relate to the reason for initiating it? Measuring success: If there are outcome-based measures, how successful is it based on these measures? Targeting benefits: Is it well targeted to those with the greatest needs and the least capacity to meet those needs? Affordability and cost effectiveness: Is it using the most cost-effective or net beneficial approaches when compared to other tools and program designs? Best practices: Is the responsible entity employing prevailing best practices to discharge its responsibilities and achieve its mission? Twelve Reexamination Areas: Mission: Defense; Education & Employment; Financial Regulation & Housing; Health Care; Homeland Security; International Affairs; Natural Resources, Energy & Environment; Retirement & Disability; Science & Technology; Transportation; Crosscutting Areas: Improving Governance; Reexamining the Tax System. Illustrative 21st Century Questions: * How should the historical allocation of resources across services and programs be changed to reflect the results of a forward-looking comprehensive threat/risk assessment as part of DOD’s capabilities- based approach to determining defense needs? * Should federally funded training programs operated across multiple federal agencies—9 federal agencies administer 44 such programs—be better integrated and restructured in order to increase their cost effectiveness? * To what extent do the tools and incentives increase spending on housing rather than promote affordable housing? Can the tools and incentives provided to homeownership be better targeted toward increasing home ownership among selected groups with less capacity to access credit markets? How can industry standards for acceptable care be established and payment reforms be designed to bring about reductions in unwarranted medical practice variation? For example, what can or should the federal government do to promote uniform standards of practice for selected procedures and illnesses? What criteria should be used to target federal funding for homeland security in order to maximize results and mitigate risk within available resource levels? Do we need to reexamine the U.S. force structure used for nation building and peacekeeping activities by the United Nations, NATO, and other international institutions? Should the United States have a separate force devoted to such functions? What role should the United Nations, NATO, and other international institutions perform in connection with such functions? To what extent are federal energy policies and incentive structures adequately preparing the nation to satisfy its energy needs over the long term? What is the appropriate balance between efforts to promote enhanced production of fossil fuels, alternative renewable energy sources, and energy conservation? How can federal disability programs, and their eligibility criteria, be brought into line with the current state of science, medicine, technology, and labor market conditions? How can the United States better develop a world-class technical and scientific domestic workforce that is not as dependent on large inflows of international students and researchers? •Can intermodal solutions to the needs of modes such as freight, air, and passenger rail service be effectively carried out within the framework of the existing trust funds and other transportation programs or is another model needed? •Is the federal government effectively informed by a key national indicator system about the position and progress of the nation as a whole—both on an absolute and relative bases compared to other nations—as a guide to helping set agency and program goals and priorities? •Which tax incentives need to be reconsidered because they fail to achieve the objectives intended by the Congress, their costs outweigh their benefits, they duplicate other programs, or other more cost- effective means exist for achieving their objectives. WHERE DO WE GO FROM HERE? 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