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THE IBM CENTER FOR
THE BUSINESS OF GOVERNMENT
Assistant Director of the Finance Division and Chief Financial Officer
Federal Bureau of Investigation
Mr. Keegan: Welcome to another edition of The Business of Government Hour. I'm your host, Michael Keegan and managing editor of The Business of Government magazine.
The Federal Bureau of Investigations has a critical mission: Managing its resources efficient and effectively is key to FBI's successfully meeting that mission. With us to discuss his efforts in this area is Rich Haley, Assistant Director of the Finance Division and Chief Financial Officer of the Federal Bureau of Investigation. Rich, welcome to the show.
Mr. Haley: Thank you. It's good to be here, Michael.
Mr. Keegan: Also joining us from IBM is Angela Carrington, partner in IBM's Federal Financial Management Practice. Angela, welcome.
Ms. Carrington: Thank you, Michael.
Mr. Keegan: Rich, I'd like to start by providing our listeners with some context about the FBI. Could you briefly discuss the mission and evolution of the Federal Bureau of Investigation?
Mr. Haley: Absolutely. The Federal Bureau of Investigation, the FBI, it's a national security organization. We're uniquely positioned. The FBI has an intelligence community role and also a traditional law enforcement role. Obviously our mission is to defend and protect the American people and we do this against terrorism, foreign intelligence threats, our traditional law enforcement criminal type of issues; violent crime, gangs.
But in addition we provide leadership to our partners, our state, local, as well as our international partners and our other federal agency brethren that we work with.
Mr. Keegan: What about the scale of the FBI? Could you give us a sense of how it's organized, its geographical footprint, its budget, the number of employees?
Mr. Haley: It's a very complex organization from a CFO's perspective. We have over 30,000, approaching 33,000 employees in addition to our headquarters' function which we have about 11,000 people here in the D.C. area. We've also got 56 field offices and each of our field offices have satellite offices that we call resident agencies. We have over 400 of those. There's a good chance that if you're living out there anywhere in the country there's a FBI office in your local town or most likely in some of our rural areas where we often times are the only federal law enforcement present in that area.
But in addition we have an international presence as well. We're in over 70 cities around the world, those are aligned to 62 offices we call legal attaches where we work with our international partners on everything from bombings going off to criminal matters that our countries share interest in.
Ms. Carrington: Very interesting. Now that you've provided us with a sense of the larger organization, perhaps you can tell us more about your area of responsibility within the FBI, your specific responsibilities and duties as the Chief Financial Officer at FBI. What mission support functions are under your purview and how does your division support the overall mission of the bureau?
Mr. Haley: So I call it a full body shop. What I do in terms of my role. I have budgeting functions and that's everything from formulating the budgets that we send to the Department of Justice so it gets reviewed by the Office of Management and Budget, Director of National Intelligence and then ultimately go up to our appropriators.
We also have the execution roles within our budgeting side where we load the funds, we distribute those funds to over 75 different program offices, monitor those funds to ensure that they're being executed efficiently. And then the acquisitions of those, which is really the area for us is the most critical. It's putting out the resources, being good stewards in terms of the acquisition of services, equipment, and other products that we're purchasing on behalf of the operational support functions.
And then on the back end of that is the accountability. It's being good stewards and making sure our financial statements -- which we do just like a corporation and other government agencies -- it's tracking inventory. We have over 500,000 pieces of inventory that we're accountable for and we monitor and ensure that those are being maintained properly.
Several years ago the corporations incorporated what's known as Sarbanes-Oxley which are internal control mechanisms and we have a similar A-123 effort which are internal controls within the federal government and we also oversee that.
I have a lot of other functions that travel. Anybody that's traveling in the FBI and we do over 200,000 travel vouchers a year, we oversee all of those activities.
Ms. Carrington: Regarding your responsibilities and such a complex organization, I know that you have faced a lot of challenges. Can you talk about kind of the top three challenges that you've faced and how you address those?
Mr. Haley: If you look at the FBI resources in mid-1970s we were about a billion dollars, we had just hit a billion dollars. It took us 25 years to get up to $3 billion, so we grew over a 25 year period by $2 billion.
Since 9/11 our organization has grown to almost $8 billion today. So phenomenal growth in a short period of time and I think one of main challenges for the finance division and for me as the CFO is to stay relevant with the organization's transformation.
So as we've added programs and we've stood up a national security branch and we've created a Director of Intelligence and our roles have both as an intelligence agency as well as law enforcement agencies, how do I provide our customers -- the director, our executive management, our field offices -- a relevant product? And that requires us to look at our own processes and our own systems and making sure that we're being able to provide resources in a timely manner, forecasting and other activities.
The second area on that is we have a 30-year-old financial system. We're still using a Cobalt system that was designed a number of years ago when the organization had about six or seven different divisions on it. Now we have -- just at headquarters -- we have over 25 different major organizations. And how do you take that legacy technology and still provide financial statements as well as the other accountabilities that are required to be good stewards of the resources?
And then finally one of the areas that historically we haven't done a good job on is training and working on our workforce's ability to handle these complex issues. So we have a major initiative now of providing not only training for people to be able to do their day-to-day work, but prepare them for leadership roles and prepare them for supervisory roles going forward.
I think those are three major areas that kind of capture, on a day to day basis, the challenges that I'm dealing with and my management team also trying to do.
Ms. Carrington: Great. So we've talked about the FBI organization. Let's talk a little bit more about you and your kind of career path. Can you talk a little bit about how you began your career and what brought you to your current leadership position?
Mr. Haley: Well my background starts out, I was a military intelligence officer. I find a lot of common threads between being an intelligence officer doing analytical work and what I do today as a CFO and then coming up through the financial side in terms of the analytics and the forecasting and the projecting where we're headed.
But after I got out of military, went back, got a Masters of Public Administration. I came into the federal government through the Presidential Management Intern program, now the Presidential Management Fellow program.
I was fortunate to end up at the Immigration Naturalization Service, had no training or any background, really, in immigration. But I was drawn to the organization by the financial management team that they had in place, if looked like a challenging organization. And I was given a lot of opportunities at INS in terms of being able to not only get engaged but to take on complex issues. And I think a lot of where I'm at today, to that team that was in place at INS that gave me those chances to succeed.
From there I went to the Justice Management Division at the Department of Justice, oversaw all the FBI account from the outside which gave me a lot of perspective and understanding of the organization that I would eventually come over to be the Chief Financial Officer for.
Following that I went to the Department of Commerce where I worked for NOAA, National Oceanic Atmospheric Administration working on financial matters there. And again, that gave me additional insight into how other organizations do their financial management where you pick up best practices as well as pick up things that you see where, across government, improvements are needed.
And then went back to Justice Management Division where I oversaw all the law enforcement components at Justice. So it gave me the opportunity to see not only the FBI, but Drug Enforcement Administration and a number of the other administrations like the Bureau of Prison.
And when I actually came over to the FBI which was back in 2005, I'll be there for five years this February. I think all of those experiences and those opportunities have allowed me to achieve a position on end, perhaps nothing more important than the mentoring. I've been very fortunate in each of those organizations to have the opportunity to work with super people that gave me the chance, not only to succeed, but when I did fail, allowed me the chance to pick myself up or move forward with an additional solution.
Mr. Keegan: Rich, given your experience, what makes an effective leader and how has your previous experience influenced your leadership style?
Mr. Haley: I think it's to be willing to hand off some of those issues. And this month's Fortune Magazine there's an article about how CEO's allow their management team to get engaged and to be challenged. And I was given that opportunity and I try to do that every day with my own people.
I think one of the key aspects is to allow staff to participate in decision making discussions where they can see decisions being made, strategy being set. You know, even as the CFO I'm constantly telling people that work for me, "I don't have all the answers, I don't have the solutions." And being willing to acknowledge that and have your people around you mobilize and try to come up with ideas on their own.
Because there are great ideas out there and I think often times as leaders, trying to find a solution so quickly that we forget that there are other perspectives and other ideas around us that can actually add value. And being able to tap into that and help implement that. So it's being somewhat humble in terms of the way you go about it.
The other thing is that one of the challenges that we're going through, again, I mentioned earlier, is you've got to give as much emphasis to training and to development of individuals as you do to achieving the mission. And if you're not balancing those two aspects you can be spending all your time trying to get the mission accomplished and what you're really doing, is long-term, I think jeopardizing your team's ability to do that on a consistent basis going forward.
Mr. Keegan: Wonderful perspective. How is the FBI using financial data to inform its decision making? We will ask Rich Haley, Chief Financial Officer at the FBI to share with us when our conversation continues on The Business of Government Hour.
Mr. Keegan: Welcome back to The Business of Government Hour, I'm your host, Michael Keegan and today's conversation is with Rich Haley, Chief Financial Officer at the FBI. Also joining us from IBM is Angela Carrington.
Rich, guiding the development of FBI's budget strategy are six enterprise-wise capabilities that FBI needs in order to perform its various missions. First, would you outline those end-state capabilities, but more importantly, would you elaborate on the extent to which the FBI links its budget, planning process, to its strategic vision to ensure investments are made correctly?
Mr. Haley: Sure. And I think this is probably when I go around and talk about the FBI and how we've evolved and some might call it more revolutionary change with the events following 9/11. I think this is one of the areas where corporately we're very proud of.
If you look at the FBI, we're 101 years old. We celebrated our 100th anniversary last year, pretty cool to be part of that, an organization that started out with a handful of agents doing land fraud and anti-trust evolving forward to the bootlegging. It was done in the G-man days of gangsters and up through World War II where you had espionage cases and then civil rights, counter intelligence during the Cold War, counter terrorism cases with the domestic terrorism on something like Oklahoma City as well as the first World Trade Center bombing, up to 9/11. You have the director taking over the organization just a week before the 9/11 events occur, and the transformation of that where we really have had to focus on national security terrorism being our top area of priority.
And out of that, and especially over the last seven or eight years, we've had to address the issue of we're not a series of stove pipes where your criminal activities and your counter terrorism activities and your counter intelligence activities can stand on their own, and how do you link that together?
And I have what I call our "Olympic rings," which you've referred to as our end-state capabilities and it's the six areas that are all somewhat dependent, the first one being what we call domain and operations. And this is the thread that goes through everything is for each of our field divisions to know their domain, know what's going on in their domain. And that's our intelligence activities and it's all of those operational things that are required and how do we support those through the budget process in terms of where we need to go. You can't exclusively look at national security at the expense of the criminal divisions or else you have a lop-sided organization.
Beyond that the other end-states for us are surveillance. What the FBI does and what an intelligence organization does has a lot to do with where we're getting our information. And for an organization like ours, it's through court-ordered wire-taps, it's through physical surveillances that we do.
And when the world changed from what was within the Cold War where we were doing a lot of activity with finite targets, it's a very asymmetrical world now where we're out there having to look at a lot of different type of targets for a lot of different thread areas. And surveillance is a huge initiative of us and for an end-state it's what resources do we need over a period of time? We can't have them all today. We couldn't absorb them if we got them. But what are those resources over a period of time that we need to integrate? And with that we can establish what risks go along with that.
And the other one's partnerships. I think one of things that came out of 9/11 is the information sharing and the coordination with our federal, state, and local partners as well as our international partners. That's a key initiative that we track in terms of end-state capabilities to make sure we're putting the right resources towards partnerships.
Another big one for us is leveraging technology, whether it's on cybercrime or technologies that we would put in place to do different technical operations. But also we do fingerprints for the country, we do name checks. And those systems that allow us to provide those to our customers are critical in the technology area.
And then just as important as those operational ones and some of the operational support ones are the workforce. And workforce is a key end-state for us in terms of training, in terms of bringing on specialty type of positions like linguists. Having a linguist that can do multiple and different languages that we encounter is critical.
And finally, infrastructure. Because whether or not you have all the agents that you need or all the surveillance resources, if you don't have the infrastructure, the computer systems, the facilities, and when you have over 400 facilities around the country you can imagine the different issues that may come up in terms of the security for those facilities, the utilities for those facilities and all of those type of activities.
The FBI, I like to tell people that it wasn't too long ago that we were an organization that was made up of different locations with gray desks and gray file cabinets and you may have had a telephone in the room. But today with our computer systems and our need to be able to communicate and not with just ourselves but with other organizations, that infrastructure is a key part of that and those end-state capabilities are at the heart of that.
Mr. Keegan: How has the Bureau extended the use of financial data to inform its decision making? And more importantly, how have you used your office as a driving force in that regard?
Mr. Haley: It has a lot to do with the partnerships that have been forged within the Federal Bureau of Investigation. We have a sister organization called our Resource Planning Office that oversees strategy, corporate strategy.
We work very closely with them and several years ago the director implemented a balance scorecard. Our balance scorecard is called the strategic management system. We have a corporate scorecard and it has all the key requirements, initiatives, if you will, we have to address to be successful.
And then under the corporate model, each of our decisions has a strategy map that tie up to the corporate map. What we've done is align all of our resources within the FBI to the strategy map. So we can look at, if you look at collections, for example, how many resources are going towards our overall collection activities? Not just in one division but across all of the different organizations?
Working closely with our planning office we've aligned what those resources are for each of those categories, and then we go through what I call spend plans. We do approximately 24 of these with our headquarters' divisions. And at the heart of that is something we call the baseball card. And the baseball card is quite frankly that. It's a set of metrics for each of our divisions and we put the picture of the executive management from that division and their name and that creates an ownership. And oftentimes when you have that ownership you get more attention to the metrics that are coming out of that.
And from these cards we then have, for each of these divisions, about two and a half hours of discussion in terms of are they aligning to priorities? Are there different initiatives tracking to the overall director priorities and the strategy? Are we executing our resources effectively? We look at those acquisitions and accounting metrics as well to make sure that we are being good stewards to the resources.
And that has given us a lot of viability back to the operational side of the house. It's not enough to just track the finances, it's how do you put that back into a way where our special agents, our executive management, ultimately the director and our deputy and actually use that or leverage that to make decisions across the organization.
Ms. Carrington: Rich, the FBI's adopted a multi-year budgeting cycle. Could you tell us how this enhances business planning and analysis of out-year impacts of current budget decisions? Also, how does this approach improve your ability to coordinate with the Director of National Intelligence and the other intelligence agencies?
Mr. Haley: Well, as a civilian agency within the federal government, we, like most of our counter parts, brethren agencies, use an annual budgeting process. We've done this for years. And when you're going through transformations such as we have over the last seven or eight years where you're getting a large influx of resources, some of those are capital expenditures. It's very hard on an annual process to determine, you know, this year we might have to do some architectural work on a facility, the next year we may need to first tranche (phonetic) a funds to start building, but that may be a three or four year process in terms of getting all the resources and actually being able to move forward with a complex facility construction or even an IT system.
The Intel community, the Department of Defense for a number of years, have used multiyear, five year budgeting. And we incorporated -- this will be our fourth year using a multiyear budgeting approach which is geared towards us not only looking at the threats today, but trying to better anticipate what threats or what risk mitigation we need to be putting in place today to be prepared for activities in the future.
I think the economic crisis is a good example of that. If you just look in terms of how quickly what happened in the mortgage fraud area and what happened in some of the financial crime situations that we're dealing with today, those came up quickly. But our ability to try to forecast and get in front of those, so we have those resources in place. Right now we're trying to bring on the resources, many of which had been redirected towards national security over the last seven or eight years and had reduced our ability to do criminal cases, white-collar crime cases, we're having to build back those resources.
And by using a multiyear budgeting approach, not only as you said, allows us to better communicate with our Intel partners because it's a similar model that they're using, but it also allows us to look for those next potential crime waves or threats that we may be facing so we can be building for them today.
Ms. Carrington: So moving on from talking about budgeting to talking about financial statements, I understand that the FBI has received an unqualified opinion on its principal financial statements which demonstrates a clear pattern of financial accountability. So can you kind of talk about what the significance is of obtaining a clean opinion and what you think the keys are to successfully achieving a timely and clean opinion?
Mr. Haley: I very much appreciate you asking that question. I'm very proud of my guys in terms of our efforts this year. We've had an unqualified opinion for a number of years. What's significant for us this year is it's the first time, after 14 actual unqualified opinions, where we not only have an unqualified opinion, we have new material weaknesses which are very high-level problems that have been identified by independent auditors. But we also have no significant deficiencies.
So in other words, we have an unqualified opinion, which in the accounting world is important to show that you're being good stewards and you're being accountable for all your resources. It's a huge significance, especially when you take into account that we have a 30-year-old financial system. I think it would be very easy for us to basically "ride out" until we get a new financial system in place saying it's just too hard to achieve those type of results.
I think it's a tribute to the staff I have but it's more than just the finance division. A lot of times people think that because they're financial statements it's the finance division that's exclusively dealing with it. We have a lot of other partners within the FBI, our facilities office, our human resource division, our CIO's office, that contribute to the success of that.
And I think if you put it in context to again, the financial investigations that we do as an organization and the white-collar crime activities, us being the ones that are responsible, the lead agency to investigate those type of crimes, you want the organization that's doing that, outward, to have as clean of an opinion as possible and in terms of our ability to have pulled that off with the current conditions has been a phenomenal activity.
And as we go forward I think that our ability to kind of wave the flag to some extent in terms of us being good stewards also goes a long way with our external partners that you know, if you do put resources into the FBI, we're going to make sure that they're accounted for and we're going to ensure that there isn't waste, fraud, and abuse going on with those resources.
Ms. Carrington: Congratulations on that. That is a significant achievement. And speaking of external sources, OMB, the Office of Management and Budget has indicated that the federal government made $98 billion in improper payments this fiscal year. So obviously reducing improper payments is critical.
First, what are improper payments, could you talk about that a little bit? And then talk about how you successfully has successfully and managed and reduced improper payments within the FBI?
Mr. Haley: So this is one of our main areas within my responsibilities on the accounting side that we watch very closely.
Improper payments, for us, could be anything from an erroneous payment, you're paying the wrong vendor, you're paying a vendor the wrong amount. Having a manual system where we're still using carbon copies for a number of our invoices and accounting functions and our acquisition functions, often times for us it's as simple as you may have a payment of $535,000 and you get the numbers twisted up and it's $353,000.
They are 100 percent support, the efforts that Director Orszag and OMB are taking in terms of highlighting this. Our portion of that $98 billion is less than three-one hundredths of a percent. We're talking several million dollars out of three and a half billion dollars that we execute.
But even with that, the processes that we've put in place, the internal control mechanisms, even if an improper payment -- and again, for us it's usually where numbers have been misinterpreted when they've been keyed in from a manually filled out form or something like that -- we will continue to follow-up.
And last year, for example, out of several million dollars that were identified as improper payments, we have chased each of those down in terms of reconciling that. So it is a zero-sum game for us but I think we're very much ahead of where organizations of our size are often at.
In addition to improper payment, you know one of the other areas or several of the areas that I also track in that same metric or proper payment penalties. And these are penalties that you pay just like it was own bills where you don't pay the bill on time you incur an interest payment. For three and a half billion dollars our entire payment penalty in 2009 was about $294,000.
Another area in terms of that same focus that OMB has put on that is our inventory. I mentioned we have over 500,000 pieces of equipment. When I got to the FBI it was about 96 percent that we were accountable for. That meant we were losing or having stolen about four percent of our inventory. Today it's up to 99.8 percent which has a lot to do with the top-down approach from the director and our executive management across the organization in terms of being able to achieve those type of results which we think are again, critical in order for us to effectively say that we're being good stewards of our resources.
Mr. Keegan: Rich, picking up on the good steward concept, tracking cost and managing cost is essential to being a good steward. What steps has the Bureau taken to track and manage costs, such as the cost of investigations?
Mr. Haley: That is a huge effort, as you can imagine, very complex because even if you can track something like the amount of time we're spending for agents to do a case. So let's say we have a personnel cost, all of the other costs that go along with that. The cost of operating the case, the infrastructure cost, the CIO or the IT costs that go along with that. It's very hard to get our arms around that.
The approach that we've taken on that over the last 10, 15 years, we've used activity-based costing with our user fees. Our user fees are revenue sources that we receive for the fingerprint operation that we run as well as our name-check operation. And we've used activity-based costing to give us a total cost of those activities.
And we've recently expanded that activity-based costing focus to several of our other entities, training division for us in terms of how much does it cost? It's always been a question of how much does it cost to train an agent at our Quantico FBI Academy or an Intel analyst that's going through training.
We've taken this activity-based costing model which does capture these total costs and we've implemented a model for the first time that gives us a very good understanding of what it costs to train an agent, train an intelligence analysts, our training division initiated that. And now we're going the next step of taking that activity-based costing approach, implementing it into all of our support functions as well as our operational division.
So when you look at something like a cybercrime case, what is it, on average that it does require us to do a case like that, and how do we align resources and have some forecasting ability to say if we do 10 cases it's going to cost approximately this much? And it will give, I think, another factor in terms of executive management, making decisions in terms of how to prioritize and where to put resources by going forward with that.
The baseball cards I mentioned earlier, are also another area where I think we've identified in terms of pulling out, teasing out if you will, the cost of doing business. We show all of the programs within each of our divisions and then we rank each of those programs corporately in terms of how much funding each program's taking, we can then compare, not only counter-terrorism cases to other national security cases but we can compare them to our criminal cases, we compare them to all of our other support functions.
And it gives us a mechanism where we can provide to the director and provide to executive management, what it's costing to run the organization. And that then creates a whole set of policy and procedural discussions in terms of are we putting all of our resources to our highest priorities or are there things that we can shift around to try to make as effective use as possible of our base resources before we go out and ask for additional enhancements.
Mr. Keegan: Terrific. What are some of key procurement challenges facing the FBI? We will ask Rich Haley, Chief Financial Officer at the FBI to share with us when our conversation continues on The Business of Government Hour.
Mr. Keegan: Welcome back to The Business of Government Hour, I'm your host, Michael Keegan and today's conversation is with Rich Haley, Chief Financial Officer at the FBI. Also joining us from IBM is Angela Carrington.
Rich, the FBI procures three billion in goods and services annually, largely IT and other high-end equipment. Since the acquisition management function falls under your purview, what are some of the key procurement challenges you folks are facing?
Mr. Haley: Yeah, I think you've identified our number one challenge going forward. Ironically the procurement staff, the contract officers that the FBI has today are less than the number we had back in 2000, 2001. So we've actually grown the budget by several billion dollars on the non-personnel side and we have less people procuring our acquiring assets and that has a lot to do with pay-raise absorptions and decisions that were taken over that period of time.
But I think that the challenge for us is how do you ensure that you're getting the most effective -- that's cost effective – contracts? That you're looking at these at a corporate level and not doing the same type of contracts in 56 different field offices. One of the things that I think we're dealing with is that there's probably all kinds of best practices out there that other organizations are using.
And historically the FBI has, similar to our financial system, we've developed in-house, we've always been an organization that looks for in-house solutions. And I think that one of the things that we've done is to say: what are other practices that have already been invented that are being used out there effectively? And a key component for us has been a relationship with the National Academy of Public Administration where we've brought in former executive experts from the Office of Management and Budget and other agencies and departments across town to form a team to help assist us in terms of putting together an acquisition team for the future.
We have a lot of great contract officers we just don't have enough of them to do all the work. We did over 19,000 acquisition efforts last year within that three billion, three and a half billion that we execute. And there's tremendous amount of efficiencies that I think we can put in place still to ensure that we're getting the best value.
There's a lot of focus from the Office of Management and Budget now in terms of acquisitions, transparency issues as well as ensuring that we're in-sourcing as much as possible and also ensuring that we're trying to save resources. Often times I call them "avoid cost" as opposed to "saving cost" because there's usually not as much as a savings as much as there is in terms of trying to be just more efficient in how those resources are being put out.
You mentioned the IT side. Between our CIO's office, which are the traditional IT technology, computers and servers and mainframes, we also have our science and technology side which is everything from how we do wire taps to how we do some of our unique systems that do fingerprints, name checks. And all of that requires complex acquisitions and having the trained staff as well as the capacity to execute those type of procurements.
And I think a long time ago I had actually a mentor that I worked for that left me with a saying that stayed with me all these years and it's that, "Finance spells backwards spells everything." There's a lot of truth in that when you talk about acquisitions because you can't successfully complete, whether it's the operational mission or it's the service support mission, without having a strong acquisition process in place.
So we take it very seriously, we're doing a lot of things right now in terms of trying to put what will hopefully be, in the next several years, one of the best practices in the government in terms of acquisition management.
Ms. Carrington: The Department of Justice is currently pursuing an overhaul of its core financial management system and I understand that the FBI's preparing to participate in the migration to this Unified Financial Management System. Rich, could you tell us a little more about the Unified Financial Management System or UFMS and how it will shape your future financial management strategy? You talked a little bit about your current system being 30 years old. How will UFMS change kind of your daily operations within the organization?
Mr. Haley: Yeah, I use the allegory, the cave analogy here of that in many ways we are sitting in a situation where we're seeing shapes on the wall. And to get out and actually see the real trees and the real animals is where UFMS will take us.
I have to say in terms of what we've been able to accomplish with our existing financial system is a tribute to those individuals 30 years ago that put together this Cobalt system that we're continuing to use and their vision and ability to put something together that would be able to transcend as the FBI transformed itself.
But with that said, where UFMS will really make a difference for us is in terms of being able to report more accurately, more timely, be able to interface with other systems that the FBI, IT systems that we've developed over the last few years. Something like our case management system that we're developing which we call Sentinel where we'll be able to interface and share case data on a real-time basis between what's being executed by our agents in the field and what's in our financial system.
It will be an ability for us to more accurately forecast in terms of how we're expending resources and drill down into programs which we currently can't do, to look for additional efficiencies and additional ways of either avoiding cost or to be more effective in how we're spending those resources.
So it's a tremendous bump for us. I think one of things that's lost on financial systems though is that when you go to a new financial system that you're going to be able to reduce personnel or that it's going to be cheaper to operate and I think that's one of the things that we don't believe will happen. I think it will change the workforce and we'll go from a lot of data entry and vouchering type of activities to again, more forecasting, analytical type of functions.
What UFMS also means in addition to kind of what I'll call a more nirvana state for us to get to a higher level of accountability, it also means that we need to prepare our workforce to be able to work with this system as we go forward.
Ms. Carrington: You talked about FBI and the 56 field offices, obviously a very decentralized environment. And UFMS will have to be configured for a very large number of users. So a system this large, surely there's going to be lots of obstacles, whether it be what I call "people process" or technology issues. So can you tell us some of the challenges you anticipate and how you intend to mitigate some of those?
Mr. Haley: You know, one of the things that we currently have with the issue we have now is a lot of our workflows have been designed not because they're the most efficient workflows but because they align to the financial system. So we've, in some ways, configured ourselves to working in this current environment. And as we go through a series of process engineering, I think we see opportunities with the new system to be able to put some of those into place.
But I think the opposite side of that is that changing any process, not only in terms of what that means for the work force to kind of reconfigure all your policies and procedures, your internal controls, financial statement, unqualified opinion, all of that is potentially put at risk unless you go deliberately and plan it out ahead of time.
And so I think that many of the procedures that we still have in place today are 25, 30 years old, back when the FBI was executing less than a billion dollars a year compared to what we're doing today.
And I think being able to stay on top of those policies and process reengineering. And then when you look at implementing a system like this, most of these modern systems are using like an Oracle database which is not what our current data is in. So it's transitioning or taking the data we currently have and bringing it into a modern IT language that can be incorporated into our financial system.
Cleaning our data up. One of our major initiatives as we prepare for UFMS is looking at data cleansing. And we don't want to take over bad data so we want to look at that and be sure we're prepared to do those type of complex issues.
Ms. Carrington: So you talked about some of the planning activity such as data clean up. Are there any other kind of pre-planning activities that you're taking on and what have you learned from some of those activities?
Mr. Haley: I think the most important it goes to effective partnership within the Department and also with our other partners in the Intel community. We've spent a lot of time, the Drug Enforcement Administration, who has successfully implemented UFMS, have been very generous, allowing us to be involved with their transformation to UFMS. So we've had members of my staff that have actually been able to sit in and learn from their experiences as well as talking to some of our intelligence community partners that have similar type of systems.
And I think coming out of that for us is first of all, the impact it's going to have on the staff. And what we can do ahead of time to prepare for that. And one of the things that we're doing with our current environment is putting what we call a GUI frontend which is more of a Windows kind of a point-and-click environment versus having to put in all these funky codes that for the most part I can't do myself because you're on this green screen, ancient technology.
So by giving them an environment that will look and feel -- at least on the front end -- is still going to have the legacy system on the back side, but to be able to work in an environment that is going to be more Window's based I think is one of those efforts.
The other thing is one of things our ancestors did for us when they created the current system was not to use standard government accounting codes. So things like what we call object classes which are as simple as buckets for putting equipment or supplies or services for contracts, there's a standard across the government. FBI doesn't use that standard. So it's not a matter of us being able to take these buckets from the legacy system, the existing system, and move them over.
So we're going through an entire process now of trying to -- in the current system -- move to these standard codes and being able to account for it the way the rest of government does it. And these are huge initiatives.
And probably most importantly -- and it's the one that I think has focused me in terms of how challenging this is going to be -- we have a number of different programs that didn't exist when we put our financial system in place 25, 30 years ago. So we're moving to a program, a sub-program organization, we call it a chart of accounts. Tremendous effort to be able to align our resources right now, before we move to UFMS, to a format that's relevant operationally and to our divisions in terms of how they really manage their resources.
And I think these are some of the initiatives that if we're going to be successful at UFMS, if we're going to be successful at transitioning into a new financial system and maintain our own qualified statement which is the expectation, doing these preliminary efforts and getting the workforce ready and getting the data ready and preparing for it, I think those are key aspects.
Mr. Keegan: Rich, given your perspective, how has the role of the government CFO evolved over the last decade, and more importantly, what does that mean for promoting the efficient management of government resources?
Mr. Haley: I think that's a great question. I sit on a number of different groups and organizations made up of CFO's and this question comes up a lot.
I think for me, the one thing that I see is that there isn't any breakpoint anymore. It seemed years ago when I was working in budgeting that you would have these cycles. You'd prepare for your department's submissions, your OMB submissions, your hill submissions.
It's now constant. And you're in an environment where you have accounting challenges, acquisition challenges, the budget process, an appropriation process, and this consistency through the year, where at any given time you may have two or three crisis going on, it really requires CFO's to prioritize.
I have a saying for my staff, I call the "the glass balls." It's those things that we're doing that we absolutely can't drop. Things like getting an unqualified on our financial statement or putting the budget submission in on time to the Department of OMB with the right level of detail information. And how you manage what falls into this glass ball category versus those other things that you're still responsible for. And sometimes those are going to fall. You're going to try to prevent them at all cost.
But if you've got to protect a certain bandwidth that you can maintain, it's making sure you don't drop these glass balls. And I think that's gotten more intense as I talk to my fellow CFO's, a number of colleagues, that we talk about this. I think that's the number one.
Number two, I think that for me, looking internally at the FBI, I think the relevance of financial information for our executive management has become more important. And I think there is an acknowledgment the director down that to make sound operational decisions you have to have an understanding of those financial pieces of information.
And so what that means from my lane is I have to provide that product. I've been able to get, I guess, an invite to the party. But now that I'm there I have to be kind of an interesting guest. And it's not enough that you take the financial statement which is not, quite frankly, all that exciting of a read, but it's taking that information and taking that data and putting it into a format that's relevant to our operational side of the house. That they can understand it and that they can use that within their lines of business.
Mr. Keegan: Wonderful. What does the future hold for the FBI? We will ask Rich Haley, Chief Financial Officer at the FBI to share with us when our conversation continues on The Business of Government Hour.
Mr. Keegan: Welcome back to The Business of Government Hour, I'm your host, Michael Keegan and today's conversation is with Rich Haley, Chief Financial Officer at the FBI. Also joining us from IBM is Angela Carrington.
Rich, I'd like to transition now to the future. Would you give us a sense of some of the key issues that may impact the CFO and budget offices government wide over say the next two to three years?
Mr. Haley: Yeah, I think one of the things that I see, even for an intelligence organization like the FBI, is that there's more and more emphasis on transparency. And I think transparency -- and this is not only being good stewards and saying we're being good steward's -- but it's showing how we're being good stewards of the resources with the American public.
This is everything from publicizing acquisitions online to being more visible in terms of how we're putting our resources to specific programs. And that is a challenge in an Intel agency because some of the stuff we do, obviously, is classified. But I think that transparency.
And I think the challenge is that many times the acquisitions for one project, may be five or six acquisitions and if you only look at one piece of that you don't really get the sense of what the organization's doing. So I mean this in a positive way, there's a storytelling that goes along with it that it's not just a matter of putting this data out, but it's being able to put a message around it to say this is making you safer because we're doing X, Y, or Z. Or here's the logic, to some extent, behind what our efforts are for.
And I think what I see is continual evolution to, on one side, being accountable for the resources, making sure that we're passing our financial statements, implementing new financial systems. And while all that's going on, is ensuring that we're actually integrating that data in terms of being more efficient with the resources, looking at our base resources. Always it's the little Jack Welch of looking at your lower priorities and you know, eliminating ten percent or whatever of your lower priorities each year in terms of putting that towards your highest requirements. And I think those challenges within the CFO community are going to be there for all of us.
The other thing I see, especially here in Washington is we're all trying to recruit and hire the same type of people. So you have a recently publicized Department of Defense's effort to hire new contract officers or bring on contract officers. Likewise, some of the other large agencies bringing in significant numbers. Those are the same type of people that I'm trying to bring in. And how, in this limited market, do we do that?
And I think for us -- and it goes in terms of our continuation of government, what we call our "coup planning," that is if an emergency occurs or if a crisis occurs, how do we ensure that we can continue to operate?
When you're in an organization that has over 400 locations across the country, there's opportunity there that you don't necessarily need to be in D.C. which means a decentralized finance division for me, and how do you work in that type of environment? So we've already started in several instances where we have finance division people that aren't located in our headquarters building, they're across the country.
And I think being able to work in that decentralized type of environment is going to be beneficial, especially in terms of these key human resource areas that many agencies are all kind of focused on trying to bring on the same type of people.
And then finally I think the economic situation that we've gone through in the last few years is, for us, a trend in terms of what growth we have seen over the last seven or eight years is not necessarily going to continue at that same pace. So it's a more scrutiny in terms of our prioritization, in terms of the ability to mitigate risk and how do we make sure that we're putting resources to the highest risk levels. And if we have projects or programs that aren't being as effective as they possibly could, that we either address that or remove those resources to higher priorities.
And I think CFO's are going to have to be more engaged in that. I know that I am in terms of us going forward.
Ms. Carrington: Now that the private sector has worked closely with federal government to assist in improving financial systems and processes by conducting financial statements, audits, and even in some cases performing financial operations, what do you think the private sector can do better to help improve the efficiency and effectiveness of government financial management?
Mr. Haley: You know what? We have a great relationship, and I think there is this initiative effort to move and look at in-sourcing in terms of what government-inherent functions we do ourselves.
But I think from our relationship with our private sector partners, we have a good relationship. Everything from our internal control processes, which are our A-123 processes, to some of the financial system implementations that we're doing, the partners that we're working with in terms of putting the mission requirements and providing a better financial service within the FBI are working out very well.
If you look at the broader private sector I think that in terms of some of the incorporation of Sarbanes-Oxley into our internal control process, I've attended a number of these seminars or sessions at some of the business schools where they're looking at how do corporations become more efficient and effective. I see a lot of similarity here. Our former CFO actually, that hired me, used to compare the FBI to a General Electric or a Proctor and Gamble. If you look at all of the different business lines we have, there's a lot of common similarities.
We have a special advisory program which we hire, recruit, from the top business schools across the country. I have several MBA's that work within the financial division that report directly to me who's full mission is to look at business process reengineering and to look at the different things that we currently do and how can we do them better? And they're charged with trying to break it, and let's see if we can put it back together better than it was.
So I think there's a lot of common issues and challenges that we face. So whether it's the contractors that we work with directly to help put out a better financial product, some of which require technical skills, auditing skills that we don't necessarily have in-house, to compliment our own inherent governmental functions or if it's just trying to look at the ways in which the private sector are doing things or us trying to emulate or pull from their best practices. I think that's not only important but I think that we've done a lot to try to stay relevant in that area.
Ms. Carrington: So you've talked a lot about hiring folks and kind of a little bit about that process. Do you use any sort of flexible compensation strategies to really attract and retain quality employees who have those critical competencies that you need? Or what other strategies do you use for kind of attracting and retaining people?
Mr. Haley: So I mentioned our special advisor program which is a corporate initiative where senior executives like myself will go around to the MBA programs to recruit special advisors. We have, within the finance division and several of our partner divisions, have done the same thing at the undergrad level.
And what we're looking at is a balance. We have a number of very talented individuals within the finance division that have been within the finance division for anywhere from 5, 10, 15, 20, sometimes 30 years. And what we're looking at is what a lot of agencies have going, which is a number of people retiring from key positions over the next five years.
So we've heavily recruited from a number of undergrad programs. This initiative now has taken on a corporate focus where our human resource division is now doing that for all the divisions in terms of focused hiring of undergrads. And we've been tremendously impressed with the talent and with the energy that these individuals bring in.
So it's bringing in those recruits either right out of college or right out of Master's program and balancing that with trying to attract more senior or more experienced level of individuals as well that may have acquisition background or accounting background into the FBI. And we do use, for our undergrads, we use incentives to move them either to D.C. or in some cases student loan repayments which we use quite a bit. You know, taking advantage of rehired annuitant authorities and things like that to bring together the best workforce that we possibly can.
Mr. Keegan: Rich, you are a recent Presidential Distinguished Executive Rank Award winner. Given this recognition and your range of public sector experience, what advice would you give to that person and who is considering a career in public service?
Mr. Haley: I can't emphasize enough how rewarding it is. I have a number of friends that have been in the federal government, have left and it's not that they didn't find the work they were doing rewarding or that they weren't necessarily happy with their decisions, but a number of them have come back to federal government.
And especially in an organization like the FBI which is very much mission-driven which is, for me, very easy to get up in the morning with a mission such that the FBI has with the director, and the leadership he provides, that you get something from federal service in terms of the cause and the service back to the country that I think is hard to find in other places. And I would highly encourage individuals to consider it.
With the Presidential Distinguished Rank Award, I was honored to receive that. Quite frankly, there are a number of people within the organization that equally could've been recipients and so it was an honor that The Executive Management and the organization, you know in terms of nominating me for that.
But I think that there's a tremendous -- in all different segments, whether it's the financial aspects, whether it's our operational side, our information technology side -- a number of opportunities and I think having been in four, five, different federal agencies, I've seen across the board where it doesn't really matter which organization, there's a lot of really great efforts being done on areas that, quite frankly, in many cases, can't be done by the private sector or that the profit pieces aren't there. So the federal government has to do it. And to be a part of that and to be a part of the solution to these complex challenges is I think is rewarding for any of us that do this stuff. And I have all intentions of staying in federal government for a number of years to come.
Mr. Keegan: That's terrific advice. I want to thank you for your time, but more importantly, Angela and I would like to thank you for your dedicated service to our country.
Mr. Haley: Thank you. It's been a pleasure being here. I appreciate your time.
Mr. Keegan: This has been The Business of Government Hour featuring a conversation with Rich Haley, Assistant Director of the Finance Division and Chief Financial Officer at the FBI. My co-host has been Angela Carrington, partner in IBM's Federal Financial Management Practice.
Be sure to join us next week for another informative, insightful and in-depth conversation on improving government effectiveness. For The Business of Government Hour, I'm Michael Keegan. Thanks for listening.
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Originally Broadcast June 21, 2008
Announcer: Welcome to The Business of Government Hour, a conversation about management with a government executive who is changing the way government does business. The Business of Government Hour is produced by The IBM Center for The Business of Government, which was created in 1998 to encourage discussion and research into new approaches to improving government effectiveness. You can find out more about The Center by visiting us on the web at businessofgovernment.org. And now The Business of Government Hour.
Mr. Morales: Good morning. I'm Albert Morales, your host and managing partner of The IBM Center for The Business of Government.
Bank failures, more so than any other corporate collapse, directly undermines the stability and public confidence in the nation's financial system. As a result, preventing and mitigating bank failures is major public policy concern and goes right to the core of the mission of the Federal Deposit Insurance Corporation, the FDIC.
Through its various programs, the FDIC seeks to mitigate and limit the ripple-effect bank failures have on the U.S. economy while maintaining the stability and public confidence in our national financial system.
With us this morning to discuss his office's effort in this area is our special guest, Mr. Mitchell Glassman, director of the Division of Resolutions and Receiverships at Federal Deposit Insurance Corporation.
Good morning, Mitchell.
Mr. Glassman: Morning.
Mr. Morales: Also joining us in our conversation, from IBM, is Dennis Kaizer, partner in IBM's federal civilian programs.
Good Morning, Dennis.
Mr. Kaizer: Good morning, Al.
Mr. Morales: Mitchell, we all see the FDIC moniker on the doors, teller windows and ATM machines across the country, but perhaps you can set some context by starting with the history and the mission of the FDIC.
Can you tell us when it was created and a bit about its mission today?
Mr. Glassman: The Federal Deposit Insurance Corporation was organized and created in 1933, so we are having our 75th anniversary this year. Its function and its creation was based on maintaining stability and public confidence in the nation's financial system, and we do that really in three different ways, and that mission is still the same as it was back in 1933, it's by insuring deposits in the institutions that belong to the FDIC through our examination function, but also in managing receiverships.
Mr. Morales: So with that mission, can you tell us a bit about how the FDIC is organized, perhaps tell us a little bit about the budget, number of employees, and how you're organized across the country?
Mr. Glassman: The FDIC is not a very large organization, but it does have 4,500 employees. We're organized really in three major driver divisions. This is our Supervision and Consumer Protection, our insurance and research and the division that I'm over, in Resolutions and Receiverships.
We do have other divisions and offices that supply vital services whether it's in information technology, or administration, finance, legal and we have a corporate university which provides the, you know, the amount of our training that is necessary.
We're located not only in Washington, but we also have six regional offices -- but also we have 85 offices throughout the country, where our examiners also reside; and our budget right now is, you know, approximately $1.1 billion.
Mr. Kaizer: Mitchell, now that you've provided us a sense of the larger organization, perhaps you can give us some more specifics about your division and your role as a director there?
Mr. Glassman: Well, as director, I wear multiple hats. As I was saying before, I'm also the chief claim agent. In other words, as institutions become insolvent, we're very much concerned about the payment of insured deposits back to those particular depositors, but also as we manage the bank's receiverships, we also manage those receiverships.
So we're basically serving as the deposit insurer, but also in the liquidation of the bank for the benefit of the claimants, including that of the FDIC's.
Mr. Kaizer: So regarding your specific duties, can you tell me what you're, maybe, top three challenges might be in your role, and how you're addressing those?
Mr. Glassman: Well, my number one priority is readiness. One thing that the FDIC has to be prepared is to handle any particular institution, insured institution that may have its charter removed by the primary regulator.
That requires me to be not only to be on standby, but to have teams of people ready to move at a moment's notice. For us that is absolutely critical, that we meet the needs of the depositor, but also get into those communities as quickly as possible.
My second priority is that in our management of the receiverships, we want to use the best business judgment, but in particular, we're very much interested in customer service. You know, we believe that providing good customer service is also something that is a depositor not only deserves, but also the creditors who we may have to deal with.
And I would say the third, which is not as -- is part of the top three and could be considered the number one, is employee development. One of the things we work through is our people, and we're very robust in not only in developing our people, but also making sure we have a succession.
You know, as many agencies, you know, we do have an aging workforce. We want to make sure we got well-trained people ready to take over and to continue the function of the FDIC for the next 75 years.
Mr. Morales: Mitchell, I wanted to just go back for a moment about something you said earlier, about the 4,500 employees. Roughly, about how many of those employees reside within your organization?
Mr. Glassman: Well, I'm very -- leveraged quite a bit. I have approximately 250 currently, but you know, we're going to be adding some additional resources. We really try not to get a very large number because we're more of a think-tank kind of organization, you know, one that organizes resources, so that's all we have as now, but we have the ability to expand our resources on an as-needed basis, either through contracting or through, you know, leveraging bank employees if we need them.
Mr. Morales: Great, so you mentioned the 75th anniversary of the FDIC. I also understand that you've now spent some 35 years in the business, and with this organization. Could you describe your career path for our listeners? How did you get started?
Mr. Glassman: Well, I can honestly say my family got me started. My mother was a career banker. My wife's family owned the bank, so I got started off with banking in my blood. I actually worked at a community bank, not my family's, where I really got the taste of what banking is all about, and just what a great career path.
Eventually I did get recruited by the FDIC. At the time I was the youngest employee to have been recruited at the time, and actually joined what used to be called the Division of Liquidation, which is now the division, you know, we're running and that we're calling Resolutions and Receiverships.
So from that aspect, I have moved to various management and leadership jobs throughout the country, and basically whenever there was a crisis, I was able to move in and to be able to organize around it. So eventually they asked me to come to Washington, D.C., and I'm here before you now.
Mr. Morales: That's great. So, Mitchell, as you reflect upon these experiences both in the industry and now on the government side, how have these experiences in various roles prepared you for your current leadership role and have they sort of shaped your leadership style?
Mr. Glassman: Well, I learned early on, just the way we operated that you know, you have to work in a team environment. You have to work where cooperation was of the essence. You had to work in a way that was smart.
You had to work in a way that if there was technology you needed to leverage that technology but also to be absolutely open and honest and to be certain that -- that you were taking certain actions with your employees that they would trust, because when you're operating in a very stressed environment, which a lot of us we do, you're very dependent on your employees, and you have to have a trusting relationship with them.
So over time, I tried to view not only my employees but you know, really the rest of my colleagues at the FDIC as family, and just like in family, you need to communicate, you need to be able to give them responsibility, but also be able to criticize in such a way that it adds value, not takes away.
Mr. Morales: It's interesting you use the word trust. This obviously also gets to the core of your business. It's about trust and the trust that people have in the financial system and the banking system of this country.
What happens when a bank fails and goes into receivership? We will ask Mitchell Glassman, director of the Division of Resolutions and Receiverships at the FDIC to share with us, when the conversation about management continues on The Business of Government Hour.
Mr. Morales: Welcome back to The Business of Government Hour. I'm your host Albert Morales, and this morning's conversation is with Mitchell Glassman, director of the Division of Resolutions and Receiverships at the FDIC.
Also joining us in our conversation from IBM is Dennis Kaizer.
Mitchell, the FDIC examines and supervises more than half of the institutions in the U.S. banking system, if I have my facts correct. Could you tell us a bit more about the characteristics of banks or depository institutions insured by the FDIC?
But more specifically, what's the composition of, say, regional versus large national banks and institutions and how do these insured institutions typically belong to the Federal Reserve System?
Mr. Glassman: Well, first of all there, you know, insured institutions have to be chartered and it could be under a state charter, it could be chartered by our Office of the Comptroller of the Currency or the Office of Thrift Supervision.
Currently there's about 8,500 insured depository institutions. There's about 7,200 that are commercial banks and approximately 1,200 that are what you would consider thrifts. Of that number, you know, the FDIC regulates 5,100 of them and the banks that we regulate are state non-member banks of the Federal Reserve System.
As far as size, you know, you could have a large regional bank that may cover a multi-state area, or you can have a very, very large bank that may be the top three or four in the country.
But overall, we have about approximately a 160 banks that are over $2 billion. That only represents about 2 percent of the total banks. The vast majority of the banks that the FDIC insure are small community banks, so you know the numbers aren't -- are more in the favor of the community banks.
As far as the Federal Reserve System, if the charter is the national bank, and it automatically becomes under the Federal Reserve System. State banks have a choice, either they are state member banks, in other words, state charters who belong to the Federal Reserve System and they are regulated by the Federal Reserve.
If they are non-members, as I was mentioning before, then the FDIC would be the primary insurer, then you have the Federal Thrifts and those are also not members of the Federal Reserve System, but they are you know, regulated by the Office of Thrift Supervision.
Mr. Morales: So there's really different flavors of banks out there depending on who charters them, size, those are a couple of different dimensions of how you would categorize banks or depository institutions?
Mr. Glassman: That's correct. It provides great diversity in the financial system and that's probably one of the, you know, one of the best things about our current -- not only our current regulatory system but also the strength of our financial system.
Mr. Morales: So, Mitchell, we've been using the term bank failure. What constitutes a bank failure, and could you give us a historical perspective on the history and trends of bank failures in the U.S., since the inception of the FDIC program 75 years ago?
Mr. Glassman: Well, first of all the FDIC never closes a bank. It's usually -- it is the primary regulator that actually has the ability to pull the charter. But by law, if the charter is pulled, then the FDIC becomes the receiver and as receiver we have multiple functions, but one of the primary roles we have is the deposit insurer.
That's one of our first priorities, it is to take care of depositors. We have to do a determination of the liability side of the balance sheet which is where the depositors accounting is and then determine who is insured and who is uninsured and make sure that that money is provided to the depositors as quickly as possible, whether through another assuming bank or through what we call a payoff.
We also have the role of receiver, which is also very important and this is very unique. No other country in the world has this role as receiver -- what we basically control the liability side of the balance sheet, but also the asset side of the balance sheet.
It's the role where we have to be not only be very careful, but also the way we handle the receivership has to be where it's not only fair and equitable but that we also do it in a least-cost manner. One thing we want to do is very business-like, very customer-service like, but also try to get the best dollars out of the remaining assets, not only for the benefit of the FDIC but for all other creditors that are doing owing.
So it's a huge responsibility, it's very unique and one that we always take very seriously. So we use all means that we can to be able to accomplish that task. So that is something we're very, very crucial and as far as the number of failures, you know, it -- there's peaks and balances with failures.
You know, during tough economic items, you know, failures can go up; you know, in recent history, during the savings and loan crisis during the last, you know, economic disruption, there were thousands of banks that closed, you know, with very large dollar amounts.
But that is sort of an anomaly. On average, from really since the time of the FDIC's existence, there's only been an average of maybe 3 to 12 banks that have actually have failed.
There are some years in past history here where we have no failures. So it's one of those things that depending on the economy, depending upon what would happen at the banks, sometimes failures do not occur because of loan losses, there maybe fraud, so those also would trigger potential failures.
But overall, you know, there's really no magic number, but the idea is the FDIC needs to be prepared whether there's one failure or multiple failures.
Mr. Morales: And this goes back to your point about readiness, that was one of your key concerns?
Mr. Glassman: Readiness is a key concern.
Mr. Kaizer: So Mitchell, you kind of walked us through what happens, you know, after closing and it goes into receivership at a high level. Can you actually maybe provide a little bit more detail?
So I understand the FDIC doesn't actually close the bank, but what happens? How does the FDIC get notified and then what steps do you take to mobilize for managing all those activities in your receivership?
Mr. Glassman: Well, we work pretty closely with our examiners, with our division of supervision and consumer compliance. And then we also have relationships with the office of the comptroller and OTS.
As a mater of fact, both the Comptroller of the Currency, and the director of our Office of Thrift Supervision are actually board members. We also have a very, very strong relationship with the Federal Reserve System, so we basically work very closely together to share information. But in particular, the FDIC collects a lot of information on bank performances.
We also have a very robust examination function so that we have examiners going in including the other regulators. So as information is gathered, as we start to see certain trends, it may be become evident that a bank may be having problems, whether it's loan losses that deplete capital to a certain point, or where they may have a liquidity issue.
When it reaches a certain point, we would be notified, you know, by the primary regulator that they have some deep concerns about a particular institution. We try to get hopefully at least 90 days notice that there is an issue, but there are occasions where we may only get one day's notice.
But regardless of whether it's 90 days or one day, I'm in the role where we have to be able to react quickly, efficiently, and that we're going to try to accomplish the same task whether we had 90 days to prepare versus one day.
So we have five teams of people standing by. I created what they call a "watch commander program," where basically every week somebody is on call. I've got a model where I only make one phone call and we can mobilize a lot of people.
If the bank is large and we need to react quickly our division of supervision and consumer compliance works with us very closely, we can get bank examiners actually to come in and take control while our teams gathers and then gets to the geographic location.
So it's very difficult what we have to do but it's something that we take great pride that if we get notified regardless of where the insured institution is geographically and we're also talking about insured banks in Puerto Rico, and Guam and the Virgin Islands, we handle those as though, you know, they were next door to us.
Mr. Kaizer: So banks through some supervision by one of the regulators ends up on a troubled list, if you will; does getting onto to this list mean that the failure of that institution and subsequent receivership is imminent?
Mr. Glassman: No, far from it. If anything, very few of those banks actually would lead to failure, and historically it's always been less than 10 percent. Being on the list actually means that it's getting more regulatory scrutiny.
I would tell you the majority of those banks that are on the list actually get recapitalized, they get merged, they get handled by the open market where the FDIC does not have to get involved.
But again, we treat any bank that's on this list as ones that we need to pay attention more closely on, but again whether it's on the list or I have to deal with an institution because there was a fraud in the bank, you know, the reaction's the same.
Mr. Kaizer: As I understand it part of the receivership role is to manage and sell the failed institution's assets. Can you tell us a little bit more about what you and your organization does to sell those assets, the strategies you have in place for that, the types of tools you might use?
Mr. Glassman: That is something that -- again, we use our business judgment, but that is something that in order for our insurance fund to stay solvent and also to return money back to the creditors as quickly as possible, we try to market the assets very quickly.
We are a division and an organization that believes in marketing, to try to return the assets, both the good and the problems to the marketplace as quickly as possible. One of the strategies that we use is that lot of times, if a new bank wants to purchase the institution's deposits, we give them options to buy portfolios from the FDIC.
Naturally, those portfolios match up sometimes with the deposits so that they can remain in the community. We also -- if indeed the assuming bank, if we have one, does not want the portfolios that we have, then we very aggressively go out and offer those portfolios to other outside investors.
One of the tools that we've got that I've been very proud of and actually won a presidential award on, was VUC (?) commerce, where very much we practice the idea that placing information on a secured website using the Internet is one of the best ways for us to develop a market and we have been very successful.
We have been doing this since the year 2000, and I always brag to my staff and anybody who'd listen to me, is the fact sometimes I think e-Bay took our idea. I just --
Mr. Glassman: I was just not able to get it franchised fast enough.
Mr. Morales: That's great. It strikes me today, Mitchell, that as we talk about, you know, banks and these large institutions, I mean, these could be very, very complex organizations and I would imagine that this presents a growing challenge for you as you look to prepare for a potential large-bank insurance determination process.
Could you elaborate on perhaps some of the improvements that you're pursuing in this area and how might these changes enable you to better handle or prepare for one of these types of failures?
Mr. Glassman: You know, Al, you're absolutely right. You know, large institutions are a lot more complex, not only what they do in the capital markets, how they deploy their IT strategies to reach out to their customers, but also in particular on the type of systems that they use that we have to draw upon.
One of the things that we try to do is gather as much of information from that institution and that's very critical for us. We currently have a policy out that we hope to make into a regulation where we're asking the very large banks, particularly you know, the top 160 to provide us with a standard data set so that we can quickly deploy that into our own systems to be able to do that deposit insurance determination.
In addition, the ability to place what we call "provisional holds." This is basically a device where a bank automatically can put holds on those depositors that we know have uninsured dollar amounts, but it does allow us to get the bank reopened very quickly, but at least give the depositors with the insured money access to their money very quickly.
And then also to release those holds that if indeed we find they are insured, you know, that we can do it on an automated basis. So we're trying to use the bank's own way of doing business using what I think is a very innovative approach for us to do these determinations using automation versus a lot of staff, and that allows us to be able to do determination, get the bank reopened, but also that's all part of our safe -- not only our safety and soundness, but our confidence in the banking system.
So whether it's a small community bank or one of the largest banks in the country, the ability to get that bank reopened quickly is one of our main mandates and using and leveraging IT systems and the new regulation is I think one of the ways that I think we're going to able to accomplish that.
Mr. Morales: Now the FDIC has an absolutely crystal-clear reputation, but it strikes me that with some of the complexities that you describe in terms of the types of institutions, the complexity of the process that you manage -- and you talked about this earlier as one of your priorities -- how do you ensure that the FDIC has the right number of people with the right qualifications to manage this process?
Specifically, could you tell us a little bit more about initiatives that I understand you manage, such as the Corporate Employee Program and the Resolutions and Receiverships Commissioning Program that assist you in this area?
Mr. Glassman: Yes. You know, we recognized very early first of all, you know, if you were to look at the FDIC budget like many agencies in other companies, you know, human resources is probably one of the largest single items that you would have.
And we are very fortunate at the FDIC that we have a very highly educated and very motivated staff who are very familiar with bank operations.
When you take a look at what I do, we also are involved in bank operations and bank assets. So the way the FDIC is operating is that if we can train -- cross-train our bank examiners and other like staff into how we handle claims and how we handle receivership matters that help us with the actual closing, what that allows us to do is leverage.
The best -- where -- place to start doing this training is when we have new employees come in through the program, is to educate them not just on their primary duties as bank examiners but also to give them the functional training that maybe necessary for them to help us during those peak times where we made a draw upon those resources.
But I tell you the reverse is also true, because I had employees who are in receiverships and claims, who have gone out on bank exams. So in a way from our FDIC board, and from our chairman, you know, basically everybody at the FDIC is prepared to handle bank failures, but then again where bank examination may need help, we're able to swing those resources elsewhere.
So it's a holistic approach to the management of human resources and one that we've been very beneficial. As far as our commissioning, this is something that I have been desiring for some time.
The -- you know, we have commissioning for our bank examiners, it's a highly regarded commissioning. Bank examiners are very proud of it, but I felt in order for knowledge management and for the ability to pass on the unique knowledge that we have in handling what we do which is unique that we credit our own commissioning for the role of resolutions and/or receiverships.
This is a way for me to pass on my knowledge and my experience to the next generation and to also to have a commissioning where they also would be just as prideful of the work that they do in that area, as much as a bank examiner does with their commissioning.
Mr. Morales: So this is a type of a certification type program?
Mr. Glassman: It -- commissioning is little bit more than a certification. We do have certifications for individual functions like what we call franchise and asset marketing. We have certifications for claims, you know, to handle claims determinations and for asset marketing.
But a commissioning is basically a specialist who can handle all parts of the organization and actually go out and run a receivership -- a small receivership on their own without a lot of supervision.
Mr. Morales: So Mitchell, you clearly have this model where at any point in time you can summon vast parts of the organizations to various crises because you've cross-trained people across a variety of different tasks.
But with so few failures in any given year, how do you actually provide the knowledge and the real-world experience of how to manage this process?
Mr. Glassman: Well, I -- there's multiple things that we're doing. First of all, we've highly documented all of our activities, so we have the typical manuals. But we've gone one step further. We have also have created what I call web-based training, what I would call training that you know, if you get called upon and you were going to a particular failure and you had a particular duty you would be able to pull down a CD-ROM or go to a website and be able to get that just in time training.
We also at the FDIC and particularly in our division, we've done a lot of simulations. The fact is that we put people through what would happen and what you would be doing.
We also have -- whenever we do have failures, we allow people to shadow so they not can witness it, but they can also be participatory. And last but not least, we have a very dedicated program with our corporate university, that is finding all different ways to cross-train through people's career on not only our functions but also the functions that, you know, they would need for, you know, their corporate life to make them successful.
Mr. Morales: That's great. How has the subprime mortgage crisis and the resulting credit crunch impacted the FDIC? We will ask Mitchell Glassman, director of the Division of Resolutions and Receiverships at the FDIC to share with us, when the conversation about management continues on The Business of Government Hour.
Mr. Morales: Welcome back to The Business of Government Hour. I'm your host Albert Morales, and this morning's conversation is with Mitchell Glassman, director of the Division of Resolutions & Receiverships at the Federal Deposit Insurance Corporation. Also joining us in our conversation from IBM is Dennis Kaizer.
Mitchell, you can't pick up a newspaper today without seeing that the home foreclosure rate has nearly doubled in the past 2 years. I also read that an estimated 1.7 million homeowner-occupied subprime hybrid-adjustable mortgages -- that's sort of a mouthful -- are set to reschedule over the next couple of years. Now, the combination of declining home prices and scarce refinancing options may result in even more foreclosures.
So, how has the subprime mortgage crisis and the resulting credit crunch impacted the FDIC, and what role does the FDIC play in working with the market to develop solutions that might help prevent unnecessary foreclosures and keep homeowners in their home?
Mr. Glassman: Obviously, the FDIC, as we talked about before, has to maintain confidence in the banking system. And one of the things that we have done not only through our chairman but through our board, is to work with the institutions not only for those who have these type of loan products on their books that to be not only cautious, but to be very careful about how they handle them. But also that this is a consumer issue that has, you know, a wide net that it seems to be carrying.
So for the financial institutions that we ensure, you know, we want them to be careful, we want them to do the right thing. But you know, if indeed they need to get more capital, you know, we try to work with them to get more capital to -- also to, you know, handle their servicing in a way that allows borrowers to try to recast their loan so they do not have to go through foreclosure. I would tell you that we're also -- been very proactive in financial literacy and in working with outside groups to try to work with the consumer.
We have a very, very strong belief that foreclosure is not a good option for the banks. We feel working with the borrowers in recasting their loans is the better way to minimize lawsuits and also keep the home prices stable, because foreclosures are not good for the country, they're not going to be good for the banks.
Mr. Morales: So -- we talked earlier about the number of bank failures and enclosures per year. I understand that there were, I think, three FDI-insured banks that failed last year. I'm sure that all three of these pose their unique set of challenges for you. But I understand that one of them was particularly challenging in that it was an Internet bank which did not have any physical branch offices. How do you deal with this, and to what extent did closing such a large Internet bank require you to modify and rethink your receivership processes?
Mr. Glassman: That's a good question. The -- you know, any insured institution we have to be prepared for. And when you speak of an Internet bank, for your listeners who may not know what an Internet bank -- but this is basically an institution where the customer basically deals with that bank either through an Internet portal or through some other means, whether it's an ATM, they do not have a physical branch in many cases, and they do not have a main bank to be able to transact business.
So we're basically dealing with a core base of customers in a virtual world. These type of institutions have a lot of technology that they're deploying sometimes on multiple platforms, sometimes in different locations. And for us to be able to handle that -- and again, this was our preparation, you know, because we had dealt with something similar that we wanted to be certain that we're able to still do our deposit insurance determination, get the money in the hands of depositors.
But we're also very fortunate in the sense that ING Direct, you know, which is also another Internet provider, was able to purchase those particular customers, which then left us with the receivership. But for us to plan such a very difficult type closings, we had to be in the right place with the right people. We had to be certain that a) if you shut down the Internet portal, you know, we had it up and running within 2 hours, and gave access to money to people very, very quickly.
So whether it's a community bank or a virtual bank like this Internet bank, you know, we move very quickly. But you have to plan for it. You cannot just walk in and say, oops, where do I go?
Mr. Kaizer: Mitchell, while the number of bank failures has been quite low in recent years, there's certainly some speculation that the number of failures is going to increase potentially in the relatively near future. Can you tell us what you may be doing to prepare for an increase in bank failures?
Mr. Glassman: Well, Dennis, you know, I have to tell you that, you know, that question comes up quite frequently. But, you know, I sort of ignored, you know, the idea of whether there is one bank or a hundred banks -- it really doesn't matter. You know, the FDIC is going to be ready. It doesn't matter what size, what location. So even though there is a deep concern about the financial health of the industry, I think one thing the consumers and depositors can be reassured they shouldn't worry.
You know, the fact is the FDIC is going to stand by those deposits, they're going to efficiently handle the receiverships, and that we're prepared to go to any lengths to be able to, you know, make sure that we meet our obligations. So, you know, I'm not concerned, and I don't think anybody else should be.
Mr. Kaizer: Great. You know, we've heard you talk about how the FDIC places a high priority rate on getting the deposits back in the consumers' hands in a timely manner. Can you tell us what first are some of the critical reasons that it's so important to get those deposits back into the person's hands so quickly, and then maybe some examples of how by doing that you are supporting that local economy and those depositors and the impact that that has?
Mr. Glassman: The way our financial system works, to be able to have deposits available -- if you think about it, you pay your mortgage, you have to go to the drugstore, you go to the grocery store, you have to pay your doctors, all of this is through the handling of either checks or through cash.
And if you take away the ability of depositors or customers to transact business or to issue checks where they not -- may not be accepted by the merchant or vendor, it starts to create a lack of confidence, because all of a sudden your -- this bank and this community may have failed, but what about my bank down the street?
So our ability to get insured deposits back to consumers is so important, because we want to be able to demonstrate not only to that community, but everybody else that's in that community and throughout the country who have their deposits at banks, that should be the least of their concerns that they're not going to have access. I would tell you that in certain countries, you know, that does not always happen.
I would tell you before the FDIC it took years for people to get their money back. So that is one of the main things that we do is to be able to get money back in their hands so they can be utilized within the local economy.
Mr. Kaizer: So Mitchell, you've talked about how a consumer would get their ensured deposits back in a timely manner. So is there a scenario that you can talk to us about where depositors might not get all of their money back because that's not all an insured deposit?
Mr. Glassman: Unfortunately, that does happen. We do have depositors that have placed money into the institution that was beyond our FDIC insurance limit. You know, currently it's $100,000. There are certain accounts that are, you know, that are retirement accounts that are up to $250,000. But if the customer has excess funds, then what ends up happening they become uninsured depositors, and they would share in the proceeds of any collections that we have out of the receivership.
So we would pay -- later on as we liquidate the assets, we would pay them a dividend for their uninsured portion. For instance, if somebody had $110,000 we would pay them 100,000, we would give them a receiver certificate for 10,000. But because of the efficiency we try to deploy, and you know, the value of the assets, we may be able to return 80 percent of that portion. So we may be able to pay them $8,000 over the time of the receivership. So net net they did lose, but it would be $2,000, not the full 10,000.
Mr. Kaizer: So you're always trying to drive to make people as whole as possible, but folk should realize that there are some limitations.
Mr. Glassman: That's absolutely correct. And that's something that I would encourage, you know, your listeners and anybody else that, you know, that has deposits, that they do check on their insurability. They can check on the FDIC's website -- wwwfdic.gov, and they will be able to get help in getting -- answering their questions on -- about insured deposits.
Mr. Kaizer: Great.
Mr. Morales: Mitchell, in the past few years, we've seen a range of natural disasters within our country. Would you tell us about the role FDIC might play in the response to a natural disaster? What about the regulatory relief that FDIC may provide to insured financial institutions in the event they sustain significant damage as a result of a natural disaster, or that may service those affected areas by such an event?
Mr. Glassman: You know, Al, that's probably one that I'm probably the proudest about even though, you know, it's not involving bank failures or supervision. But the fact is the FDIC, because of its experience -- I will give you an example -- during Hurricane Katrina, you know, the FDIC was one of the first to provide call center support for the people who wanted to know if their banks were opened and where they would be able to find an ATM or able to call, you know, the FDIC and actually get people to answer, and to actually direct them to where they can get help.
I would tell you there are supervision people. We're also very much in there. They basically make sure banks were able to reopen, that they had their backup systems, make sure that they had the help. They actually help the banks partner with other banks that had to share lobbies. But also that if there was some kind of relief that needed to be made for the borrowers, you know, we also send out, you know, notices to say, you know, if indeed a borrower has been harmed, that there are certain things that the banks would be allowed to do to work with those borrowers.
So we have a multiple approach, but I think when it comes to disaster, the FDIC has a very good track record of consumer protection, but also being very sensitive to the needs of the bank to get open as quickly as possible. Again, it all stems from our confidence in the banking system that we feel that we are very major players in that.
Mr. Morales: That's great. That's a very significant issue here in our country. So we spent a fair amount of time talking about the financial system here within the U.S. Could you elaborate on perhaps an increasing leadership role that the FDIC is playing on a global scale? To what extent are foreign governments looking to the FDIC as a model for either establishing or strengthening their own system of a deposit insurance and bank supervision?
Mr. Glassman: The FDIC has taken a very, very strong leadership role -- the foreign countries are trying to get their own banking system up and running, because they know that's very much intricately part of their own economic wellbeing. And they look to the FDIC not only to develop their own deposit insurance system, but also our way of regulation but also the way we handle bank failures. We have been very much active in the International Association of Deposit Insurers -- we call it IADI.
Matter of fact, our vice chairman, Marty Gruenberg, is the chairman of this committee. So we do training, we provide folks to help them with -- write -- drafting their own legislation. We help -- actually teach them some of the functions that go along with this activity, and have a lot of what I call "open communication" that goes on constantly. So we're very proud of the fact that we feel that also helping these countries develop their banking system is also good for United States and also for the global economy.
Mr. Morales: That's fantastic. What does the future hold for the FDIC's Division of Resolutions & Receiverships? We will ask Mitchell Glassman, director of the Division of Resolutions and Receiverships at the FDIC to share with us when the conversation about management continues on The Business of Government Hour.
Mr. Morales: Welcome back to our final segment of The Business of Government Hour. I am your host Albert Morales and this morning's conversation is with Mitchell Glassman, director of the Division of Resolutions & Receiverships at the Federal Deposit Insurance Corporation. Also joining us in our conversation from IBM is Dennis Kaizer.
Mitchell, given the interconnected and interdependent nature of the financial systems as we've discussed, could you tell us about the kinds of partnerships you are developing to improve operations or outcomes to sustain the system and how might these partnership change over time?
Mr. Glassman: Well, partnership is very important. Not only do we form partnerships with the other regulatory communities, but also with the banks themselves. You know, we need to stay in-tune with what the banks are doing and how they are operating. I would say that we actually have partnerships with the consumers themselves, you know, reaching out and listening to what's on their minds in some of their issues with local, state, and federal governments are also part of our partnerships.
And then in particular with major companies and contractors, who have inside knowledge and expertise that we may not have, we call them partners. Anything that helps us do our jobs and to do it better, we will enter into the partnership. But also being a partner means also we share, and that we also provide insight.
So we kind of feel like this is a good way of doing business. It's one that keeps us abreast of the issues, but also gets us prepared that if we need to change the way, our thinking, or the way we operate, or possibly to help mitigate risk, this is a good way for us to practice what we do, and partnership, I think, is a good business practice.
Mr. Morales: So it sounds like you also try to operate as open a system as you can?
Mr. Glassman: I firmly believe that that's the way we need to operate. You know, that's one thing, I think, that the FDIC prides is that we have the ability to reach out and touch, but we also want people to reach out and touch us. We have a very active call center.
You know, our website is something that people can derive a lot of information on, whether it's about their FDIC insurance, whether they, you know, through a program we call, "ED." If they want knowledge about how can I better educate myself, my kids, or myself through adult literacy, we have this money smart program that you can download, and look at. We actually have our FDIC employees go out and actually teach it.
Then also the fact is that we are going to let people know who we are. You know, we are going to have our 75-year celebration, where we are going to go out into the communities, and let people know just how important their FDIC insurance is. But in particularly what the role of banking as in our economy, and why they should look to their banks is a place to, you know, conduct their financial affairs.
Mr. Morales: It's perfect timing for that.
Mr. Kaizer: Mitchell, you've mentioned, you know, the Internet and some of the things that you have under, a couple of times now. I believe a Brown University research study released in 2007 ranked the FDIC's website 8th in the federal government, which is just great. Can you tell us a little bit more about how maybe your division actually uses that website or that Internet in an actual bank closing?
Mr. Glassman: Yes, we use it for multiple purposes, you know, one not only to provide information to all of our constituencies to who may have to deal with this. We may have buyers that come looking for real estate or looking for information on how they would be able to connect with us. We also after receivership, after bank failures we post everything that we know about that transaction, but also what is going on in that receivership.
So if you are a creditor, you would have the information readily available to you. One of the things we practice is that if we can answer as many of people's concerns or questions, or provide documents, that's -- and saves them from having to call us, or to write a letter, then we want to do it. So we are always constantly keeping it updated. We are constantly always looking for different kinds of technology to be able to help the customer, but the use of the Internet, I think, is probably one of the best vehicles for communicating with the public.
But also that as things change we can also make sure that information gets there very quickly so that the customer themselves would be able to react to it quickly.
Mr. Kaizer: Speaking of change, I'd like to transition now to talking about the future. You know, as financial institutions grow in both size and complexity, the FDIC is likely to face, you know, some challenges, if one or more might fail simultaneously. Can you give us a sense of maybe some of the key issues that will affect the FDIC, and in particular your division, maybe, over the next few years and how you envision your office might need to evolve in light of these challenges.
Mr. Glassman: It is always something that we constantly keep in our radar. You know, you are correct, the institutions are getting large. They are always merging, they are acquiring, even at the community bank level there's a lot of changes. One thing we try to do is look ahead, where is the industry going, and whether or not our current processes and procedures really match up to what we are going to be doing.
I'll give you a case in point, you know, when we come into a large institution or any institution, they now have the ability of customers to pay bills online. It is very important, so when we come into an institution, we might want to make sure we maintain that type of relationship. We also are very interested in making sure we maintain the core value of the franchise, whether it's the core deposits, the type of loans, the type of technology platforms.
As banks become much larger they also get involved in capital markets-type approaches. Where they get their funding becomes a little bit more diverse. So our ability to understand how the banks operate, and how they are dealing with their customers because what we are trying to do is capture that value, and actually through a merger-acquisition process be able to move it to a new institution, so that the same continuity of services that the customers expect will just flow to the new customer.
So in a way, we have to be prepared to move quickly to understand what's on the balance sheet of the bank, but how does it relates to the FDIC on a least cost manner, but also ultimately to the consumer. And in order to do that you will always have to look ahead. You always have to see what's out there. You have to kind of figure out, a) How am I going to deal with this particular situation?
Example is a lot of the institutions are now getting involved with what they call reverse mortgages. Well, that is something that is very important to the consumer. And we are, you know, working very hard to say, what if we were to receive a portfolio like this, how would we react, or if there is multiple platforms that the bank is working on, for instance, they may have offshore platforms, how would we handle that.
What if certain things weren't to happen, how would we deal with it? So the banks become large, they also become complex and we try to foreshadow what we need to do, and be certain that we are operating in a way that gets us the best results. The least cost result.
Mr. Morales: So this is actually a very critical point here. So it's really more than just insuring the deposits. It's also about preserving the services, that that institution was providing within that community, so that, the consumers to a certain extent will see sort of a seamless transition, should one of these events takes place.
Mr. Glassman: That is very critical for us. But I would also tell you that I am in the business of selling banks. You know, if I can obtain a premium for that franchised value that is in the best interest, not only the FDIC, but all the creditors that may be involved. So by understanding the nature of the bank, its customer base, how it was operating, allows me to be able to transfer that value, and hopefully through an auction process, through a bidding process, we are able to get more value from it, and actually receive more dollars for the benefit of everybody.
That's one thing, that we do have, is we have $52 billion in our insurance fund, and it is not taxpayer driven. Our funds come from the industry, so we have a very strong desire to be certain that we try to minimize the cost not only to the consumers, but ultimately to protect our taxpayers.
Mr. Morales: That's great. We talk a lot to our guests about the pending government retirement wave, which is a big issue for many organizations here in the federal government. How are you handling this issue within your organization, and what are you doing to ensure that you have the right staff mix to meet any of these future challenges?
Mr. Glassman: That is something that we at the FDIC are also facing, we have this bell curve where we've got a lot of new folks that we are bringing in, we've got a lot of people who have the ability to leave under voluntary retirement, and that's like a big bubble right in the middle. So we have got different strategies, as we discussed earlier, we have our Corporate Employee Program, where a lot of the newer folks who are coming in, getting across, you know, understanding of the organization.
But we also have brought back what I consider mid-career hire employees, people who have experience to be able to fill the gap, who in their careers are able to join us. We brought back retirees in certain cases to help, you know, meet the bubble. And last but not least, we are always looking that if indeed we loose certain knowledge, certain key people, who would be in our succession.
So we've developed a program through our corporate university where we identify who are high potentials. We have got a very aggressive leadership program, and I might want to add that I am also dean of the College of Leadership Development, so I am very much into what we are doing organizationally, you know, to provide succession. But what really counts is that it's the knowledge that the folks retained, and you'll be able to pass it on, so that the next generation not only has the ability to provide management and leadership, but also has the technical skill sets that do it successfully.
Mr. Morales: So let's talk about this future generation. As you reflect on your 35 years of experience in the industry and in public service, what advice might you perhaps give a person, who is out there considering a career in the public sector?
Mr. Glassman: Well, I would tell you it wasn't my plan to stay in the public sector more than 5 years, but I have to tell you when you are in the role of helping people, making a difference, and being part of something bigger than you are, it is very easy to catch some passion for it. And I do have a passion for what I do, because I have been in West Kansas, and parts of Iowa, and parts of Texas, where I have met people, who depended upon the FDIC, depended upon their government, to step up and do the right thing.
And I think that gives you a certain amount of satisfaction, so I would encourage anybody, who is seeking a career in the federal sector, in the federal space that is a good career, it is something they can get a lot of satisfaction, and whether they stay one year, or they stay like me 35 years, they are going to gain. It's going to be value added to not only to their own career, but I would also tell something that in lot of families they'll take pride in the fact that they are out helping the public in a service that's desperately needed.
Mr. Morales: That's a great perspective. Thank you. Unfortunately, we have come to the end of our time, so I want to thank you for fitting us into your busy schedule. But importantly, Dennis and I would like to thank you, for your dedicated service to our country across the various roles that you have held at the FDIC.
Mr. Glassman: Well, I'd like to thank you for being invited and sharing. One thing, the FDIC is going to be here for 75 years, it's going to be here for a long time, but I think that's one thing that's consistent that, you know, that we will always try to do the best we can, and frankly take leadership role in all of the federal services, and again we thank you for inviting us to share.
Mr. Morales: Great, thank you.
This has been The Business of Government Hour, featuring a conversation with Mitchell Glassman, director of the Division of Resolutions & Receiverships at the Federal Deposit Insurance Corporation. My co-host has been Dennis Kaizer, partner in IBM's federal civilian practice.
As you enjoy the rest of your day please take time to remember the men and women of our armed and civil services abroad who may not be able to hear this morning show on how we are improving their government, and who deserve our unconditional respect and support.
For The Business of Government Hour, I'm Albert Morales. Thank you for listening.
Speaker: This has been The Business of Government Hour. Be sure to join us every Saturday at 9:00 a.m. and visit us on the web at businessofgovernment.org. There you can learn more about our programs and get a transcript of today's conversation. Until next week, it's businessofgovernment.org.
Originally Broadcast October 17, 2007
Welcome to The Business of Government Hour, a conversation about management with a government executive who is changing the way government does business. The Business of Government Hour is produced by The IBM Center for The Business of Government, which was created in 1998 to encourage discussion and research into new approaches to improving government effectiveness. You can find out more about The Center by visiting us on the web at businessofgovernment.org.
And now, The Business of Government Hour.
Mr. Morales: Good morning. I'm Albert Morales, your host, and managing partner of The IBM Center for The Business of Government.
Good government, a government fiscally responsible to its people, must have as one of its core purposes the achievement of results for its citizens. In doing so, it must also act as an effective steward of the taxpayers' money. Every year, over $2.7 trillion of taxpayers' money flows through the accounts of the U.S. Federal Government. Managing these funds requires at a minimum keeping the books straight and ensuring that funds are not misspent, but it also means going beyond the fundamentals to improve financial management government-wide.
With us this morning to discuss his efforts in this area is our special guest, Danny Werfel, Acting Controller of the Office of Federal Financial Management within the U.S. Office of Management and Budget.
Good morning, Danny.
Mr. Werfel: Good morning.
Mr. Morales: And joining us in our conversation is Debra Cammer-Hines, vice president and practice leader for IBM's public sector financial management practice.
Good morning, Debra.
Ms. Cammer-Hines: Good morning, Al.
Mr. Morales: Danny, let's begin by talking about the Office of Management and Budget, or OMB. Could you tell us about OMB, what its mission is, how it's organized and give us a sense of scale such as its size, number of employees?
Mr. Werfel: Well, I like this question because OMB is a difficult organization to describe. Not a lot of people understand all the different facets that we get into. But essentially, the primary thing that we are involved with is producing the President's budget each year. That budget is produced in a time frame between essentially August and February, and it's submitted in the first week of February to Congress. And it involves about 200 to 300 examiners reviewing agency requests for funding for new programs or existing programs. The examiners evaluate the requests that come in from all the different agencies, whether it be the Department of Commerce, the Department of State; every agency submits a budget request to OMB.
And we review them and make recommendations to the director of OMB about what the President's budget should look like, and this process is a very deliberative one, a lot of analysis goes into it. There are a tremendous amount of challenging questions that must be answered, a lot of priorities to balance.
We also have roles beyond just producing the President's budget. Sticking with the budget examiners and the budget side of OMB, they are required to become subject matter experts on all these various programs, so they can not only make good recommendations about funding these programs or reforming these programs, how to fix these programs, but they also look at elements of how the programs are managed, suggestions or requirements we can provide to agencies to improve the management of the programs -- basically everything that goes into executing these programs once Congress enacts the law that creates them.
Beyond the budget side -- and I like to remind people that there are two letters in the Office of Management and Budget, "M" and "B." There is the "M" side, or the management side, and on the management side of the house, which is smaller than the budget side of the house, we have the responsibility -- and I say "we" because I primarily sit on the management side of the house -- we have the responsibility to establish different requirements and different initiatives that are targeted at improving management initiatives for the government.
This includes areas such as financial management and accounting, and I think we're going to talk mostly about that today. But there are other areas that we are -- again, establishing requirements that all federal agencies must follow, and in addition to that, establishing initiatives to improve management, and those areas include procurement and information technology, for example.
And one other area of OMB that I think is worth mentioning is the Office of Information and Regulatory Affairs, and that office reviews federal regulations that come in. No agency goes out and regulates to the public without getting an OMB approval first.
So there's 500 total people at OMB, and I think one of the great benefits of being at OMB is that you do get to see every part of the policy process.
Mr. Morales: Well, it's certainly a very broad overview. I believe you said that the management side was slightly smaller than the budget side. Can you just give us a sense for that? Is that a two-thirds/one-third or three-quarters/one-quarter?
Mr. Werfel: Yeah, it's about 300 to 200 or 350 to 150, around that in approximation. My office, the Office of Federal Financial Management, which deals with accounting and financial management issues, has approximately 18 people in it. The Homeland Security branch within OMB has about 12 people. So you see that the branches are pretty big comparatively to our office. We deal with a whole government-wide issue. They're just dealing with the homeland. So you do see more people on the budget side than on the management side.
Ms. Cammer-Hines: Now that you have given us a good overview of the organization, could you spend a little time talking more about your role within OMB, your specific responsibilities and duties as the Acting Controller, and how it supports OMB's mission?
Mr. Werfel: Certainly. The Office of Federal Financial Management is responsible for serving as the government's controller. A controller establishes requirements related to financial management, internal controls, accounting; establish those requirements and oversee the parts of our organization, the larger organization, the federal government, their efforts to implement and meet all these various requirements.
So what we sometimes refer to as a set of core activities that federal agencies are doing to improve stewardship, to mitigate the risk of fraud and error and waste, to make sure that they're accounting appropriately for federal taxpayer dollars. We have a whole series of requirements that we issue through bulletins, or sometimes they're called circulars, and they establish what the agencies must have in place from a people-process-technology standpoint to make sure that the accounting is strong and the controls are strong. And so those core activities, we are responsible for publishing them, developing them, maintaining them. We answer a lot of questions about them, and we look to see where they might need to be improved.
And that takes me to the next responsibility of the controller and the controller's office, is to look at initiatives to improve management to improve management beyond just those core activities, get better results from a financial management standpoint.
So beyond core activities, we've established what we sometimes refer to as a reform agenda. Now we are developing new tools, new requirements, new approaches -- in our reform agenda are areas like improper payments agencies are changing and improving the way they track payment errors. We are looking at our real estate that the government owns and trying to improve our inventory of that real estate so that we know where the properties are that are in need of repair or that are surplus. We're looking at grants management. So that basically, between those core activities and the reform agenda, that keeps us pretty busy.
Ms. Cammer-Hines: You have a broad set of responsibilities and duties and a lot of challenges in front of you. How would you describe your top three challenges that you face in your position, and how you've started to address those challenges?
Mr. Werfel: This is a tough question, because I think narrowing the challenges that we have in government financial management to three is very difficult. The government is so complex, I struggle to comprehend all the different complexities, but we have a myriad of different programs that each have unique requirements.
These unique requirements create complexity to the transactions that we are undertaking. We have programs that are designed to improve world peace and those that are designed to provide school lunches to children. And with each of these different diverse missions and diverse localities and diverse approaches, all of that results in financial transactions that need to be tracked very closely so that we have reliable and valid information on what's going on.
So that's an introduction into what I would say the first challenge that we have is in such a complex environment and a growingly complex environment, how can we do what we do better? How can we be more efficient? Do we have the right human resources to get the job done? And my sense from the financial community is that government is becoming more complex to look at from a financial management standpoint.
I would say the second area is related to the first, and it's how we help the chief financial officer and the government today move beyond the compliance exercises that take so much of their time to a place where they are acting more as financial managers rather than "compliance officers." So as I described, it's a very complex environment that the CFO community is operating in. They have a very short period of time to gather all the data and produce their financial statements.
But what's also important for the chief financial officer is to move beyond that and to be a strategic leader within their organization.
I often get asked what is the full vision of a CFO in the future beyond just clean audits and financial statements. It's an individual who works for the organization who can identify the critical risks, financial risks and the critical business goals that that agency has. And once those risks and business goals are identified, the chief financial officer can turn around and implement a data strategy to inform on those goals and risks. And that's going to involve tapping all the different data sources within the organization and working across an organization to figure out what are the relevant pieces of information to help agency leaders and managers at all levels to make smart decisions that help mitigate those risks and help meet those business goals.
And right now, what we don't have is a clear path forward for how to get the chief financial officer beyond the clean audits, which are fundamentally important. We have to be very focused on the controls, but we also have this objective, this larger objective to help the agency manage its risks more proactively and more strategically.
And so another challenge: how do we move beyond compliance when we still have a lot of work to get done?
And the third area I would describe is to dedicate resources to program integrity. Let me give you an example: in the area of real property, we can do $7 million in repairs now, or are we going to wait till that roof is about to fall down and invest $70 million? And the goal that we have in financial management and in my world is to help the agencies and help us build the case and build stronger analytics to show where our activities have these types of impacts from a cost avoidance or from a return on investment standpoint.
So I take it upon our office to help build a framework for getting these types of funds more -- a higher priority on Capitol Hill, and making sure that everyone understands that by not funding these activities, there are longer-term bigger impact costs that the government faces that directly impact the taxpayer.
Mr. Morales: Danny, I have only about a minute left, but I'm curious, you've had a sort of a very interesting career path. Could you describe your career path for our listeners, and how has this background prepared you for your current role and informed your leadership style?
Mr. Werfel: I never would have guessed that I would have ended up in financial management particularly. I started at OMB -- started my career over a decade ago in the Office of Information and Regulatory Affairs, where I was reviewing regulations, and got myself into a niche in civil rights. I was reviewing a lot of civil rights regulations, got pretty interested in it and moved over to the Justice Department. I'm a lawyer by background, and so I was able to have the unique experience of helping to develop and review civil rights regulations, and then a couple of months later, to enforce them in courtrooms by litigating defendants who had allegedly violated civil rights regulations and laws.
I tried the litigation thing for a couple of years, but realized that my home and my heart was at OMB, so I begged some of my prior colleagues to have me back, and I went back to OMB and was a budget examiner in the education branch.. That's when, after I did that for a few years, I got the call from Financial Management to see if I wanted to come over, and I really did like the management stuff. Every time I worked on a management issue, I like to say that I was throwing right-handed because it really seemed to come naturally to me and something I could get very passionate about. So I gladly moved over to the "M" side of OMB, and have been there ever since.
Mr. Morales: That's fantastic.
What about OMB's framework for improving government financial performance? We will ask OMB Acting Controller Danny Werfel to share with us when the conversation about management continues on The Business of Government Hour.
Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Danny Werfel, Acting Controller of the Office of Federal Financial Management at OMB.
Also joining us in our conversation is Debra Cammer-Hines.
Danny, the President's Management Agenda, or PMA, focuses on five government-wide initiatives, including improving financial performance. Can you tell us about the PMA's objectives for improving financial management and the results they've achieved to date? And how does OMB define and measure financial management success among federal agencies?
Mr. Werfel: Albert, as we discussed earlier, there are billions of dollars moving in and out of federal agencies, sometimes on a daily basis. And what the President's Management Agenda recognizes is that you have to start with a strong foundation of good internal controls and good accounting. You have to ensure that you have the right people, the right process, the right technology to account for the tremendous volume of funds that are moving in and out of the government in a variety of different complex transactions.
So what the PMA or the President's Management Agenda does is it says in order to elevate from the red score, which is the worst score you can get, to a yellow score, which is the middle score, and obviously green score is the top, we hold agencies to demonstrate that they have that strong foundation. Well, how do you now that an agency has a strong foundation of good accounting, good internal controls, good people?
So what we do is we've established indicators, things that we can look at to give us an indication that the pieces are there, and those things are things like did the agency get a clean audit opinion on its financial statements; are they reporting their financial statements within the tight deadlines that we've provided; are they eliminating their material weaknesses, which are findings that the auditor provides that says these problems force us or cause us to call into question the reliability of some of what's being reported; are they being compliant with laws and regulations?
This is the objective criteria that we are going to use to say the foundation is there.
And then what we say in the President's Management Agenda for Financial Management is you get to green based on what you build on that foundation. So a green agency is the one that demonstrates that all of the compliance elements are met, that they understand where their key risks and business goals are in the organization, and that they are using data -- timely, reliable data to inform on those business risks and business goals.
And we've made tremendous progress in this area. We have hundreds of agencies, but 24 major ones make up the bulk of all federal expenditures, and these 24 agencies also happen to be the 24 agencies that are listed in the Chief Financial Officers Act which first established the requirement to do audited financial statement.
Of the 24 agencies, as we sit here today, we have 19 with clean audit opinions. Since 2001, we've seen a significant reduction in the number of material weaknesses that auditors identify. We had 62 government-wide material weaknesses in 2001, and we have 41 today. That's approximately a 35 percent decrease.
So in terms of this foundation piece, we see a lot of agencies getting to where they need to be. We have 15 of the 24 agencies are either yellow or green, which means that they've done what they need to do to meet all these various compliance requirements, 12 of those agencies are also demonstrating that they are using information to drive decision-making.
Mr. Morales: Danny, there are still several federal agencies that are receiving a red rating in financial management. From your perspective, the way you describe it, why is it so challenging for federal agencies to get beyond the red?
Mr. Werfel: Well, for the first point, we have very tough standards to get to yellow. We don't just require a clean audit opinion, which is in and of itself, as I described, very challenging for a federal agency. Many of our federal agencies -- you think about an agency like the Defense Department, the Department of Homeland Security, these agencies have thousands and thousands of employees, myriad of different programs, many different missions, many different information technology systems. Just a huge amount of data that needs to be accumulated and aggregated accurately and timely.
But our yellow standard says not only do you have to get clean audit opinion, you have to get down to only one material weakness, which is challenging also for the agencies, and all the compliance elements, too. So the first thing is that is a very high bar to move off red, especially for agencies that are of the size and magnitude -- now, not that they don't work very hard at the National Science Foundation; they do, they are a great team, but they are a $5-billion agency which sounds big, but in government terms it's a relatively small agency, with a relatively straightforward line of business of providing grants.
Agriculture Department, a $40-, $50-billion agency. So many different missions, so many different types of lines of businesses, and for them to get a clean audit opinion is very challenging, and to eliminate those material weaknesses again very challenging.
The other thing is that the financial leaders today are inheriting old systems and old processes and data that isn't always as clean and as pure as you would want it to be. It's a very difficult thing, we've learned time and time again that the status quo is hard to overcome in government.
You can look at it half-full, you can look at it half-empty. We started the PMA in 2001, and we had one green agency, the National Science Foundation. Now we have 12, and 3 additional ones that have met that foundation that I described of good internal controls and accounting.
So I like to look at the glass as half-full, and clearly we have a lot of work to do. But for those 11 remaining red agencies, some of them are getting very close.
Ms. Cammer-Hines: In addition to the improving financial performance initiative, the President has also established additional PMA initiatives such as eliminating improper payments, and right-sizing the federal government's real estate. Could you tell us more about the improper payments initiative? How are the federal agencies doing in this area, and what still needs to be done in order to achieve the fiscal year 2011 target of eliminating $20 billion in improper payments?
Mr. Werfel: The improper payments initiative I think is one of the more important things that we are doing, not just because it has a direct impact on the Treasury and how much money we have and -- but for me and for my office, we look at what we do as trying to build trust in government, that at the end of the day, everything that we're involved in -- improved accounting, improved controls, smarter decisionmaking, it's so that the taxpayer and the citizen can feel more comfortable and have more reliability that the government is acting as an effective steward of their dollars.
I would venture to guess that people outside the Beltway might not know about clean audit opinions, even though that's fundamentally important to us; it might not resonate with them. But what will certainly resonate with them is if John Smith got a $10,000 payment and should have only gotten a $3,000 payment. When we make mistakes like that when the process fails, and we issue checks that we shouldn't, pay for services twice that were only given once, that is something that compromises trust in government.
And so the improper payments initiative is designed to let the American people and let the public, let Congress know what the extent of the problem is, and describe the steps we're taking to improve on the problem. Now, the initiative works like this -- we basically take every outlay in government. We have $2.7 trillion leaves the government each year and goes to a nonfederal entity, whether it's an individual, a university, a company. And what we do is we ask the agencies to put those outlays or those payments into two buckets: a high-risk bucket and a low-risk bucket.
And we give them some guidance on what kind of factors to look into. Whether the program's very complex, the amount of outlays that go out. How many times the money hits a different party, so every time that money touches someone else, there is a risk of an error being made. So those are the types of things that we would ask an agency to look at, to put in high risk and low risk.
And we take that high-risk bucket and we do statistical sampling. We sample payments and we evaluate what the errors were in the sample that we took, and then we extrapolate that out to the universe. So we might take 200 samples, say we found 17 errors, and then at the end of the day we extrapolate that out and we say this is our improper payment amount. Then what we learn from that, we try to identify why were these mistakes made, so that when we go in and we sample that same program the following year, we hope to see an improvement.
Just to give you an extent, from the ones we measured, and we measured the hugest bulk of them in 2004, we identified $45 billion in improper payments total. Those same programs measured last year in 2006 measured $36.3 billion. So we had a precipitous drop of about $9 billion We're trending in the right direction, and a lot of agencies are hitting their targets to try to reduce improper payments. In the coming years, some of the programs out there that are big-ticket programs that we need a measurement on and don't have -- for example, Medicaid and School Lunch and Temporary Assistance for Needy Families, all of those programs are planned to have improper payment measurements made public in the next year or two.
Ms. Cammer-Hines: The federal government also owns hundreds of billions of dollars in real property assets, so improving the management of these assets is important to ensuring that taxpayer dollars are spent wisely and efficiently. Would you tell us more about the federal real property asset management initiative?
Mr. Werfel: I think real property is my favorite topic to talk about, because we've had such amazing success in this initiative. I think it's really a poster child of success for the President's Management Agenda, and for me and OMB, this interagency initiative worked very well, and we really need to look at what went right to see if we can mimic it in other interagency efforts.
But the way I think about the real estate initiative is we knew there was a problem. We had a lot of surplus and excess property that we didn't need, that we had property that we did need not in the right condition, that we we're operating properties at inappropriately high costs. So what we set out to do was to get for the first time a comprehensive inventory of every property the federal government owns, every building, every structure, every road. And we've done that. It was a lot of blood, sweat, and tears, but we did it.
But not only did we find out where all this property was and report it, we did a very smart thing, I think. We also required the agencies when they report their properties to give us some very significant facts about each property, and those facts are, is the property mission-critical or mission-dependent for your organization? What condition is the property in? Is the property fully utilized? And at what cost are you managing the property?
What that allows us to do today is to tier our properties, and we have a system now where we can run a query basically and say show me all the properties that are not mission-critical, that are underutilized, that are in poor condition and that are running at a high cost. It goes back to kind of that risk management concept. Now you have this set of assets that you can target to do something about. We know exactly what the universe of assets are that we have a problem with.
Since 2004, the federal government has eliminated $4-1/2 billion worth of surplus and excess property. And we've set very aggressive goals for ourselves. It's almost a billion a year. You know, my boss likes to say 9 by '09, 9 billion by 2009 in terms of getting rid of those assets.
Ms. Cammer-Hines: Can we move onto shared services and the Financial Management Line of Business initiative, which has been designed to improve cost, quality, and performance of financial management systems by leveraging shared service solutions? We're interested in hearing about your vision for the FMLoB, and how has it progressed to date, and changes you expect to see over the next five to ten years?
Mr. Werfel: We're in a complex environment. And I say that one of the biggest challenges we have is figuring out how to handle all this and do it more efficiently than we're doing today, because we're always in a tight resource environment.
The Financial Management Line of Business essentially is a strategy for how we can help make government financial management more efficient. And it involves leveraging the private sector or leveraging the public sector where necessary to look at a kind of "buy once use many" philosophy where, rather than have every agency operating their own financial management system and developing their own infrastructure to do all the transaction processing, is it possible that we can essentially pool these efforts and get some economies of scale, and this new term we have come up with, economies of skill, to help us get the job done more effectively?
We're trying to foster a limited number of stable and high-performing shared service providers that offer lower risk and lower cost options for agencies that are modernizing their financial system. Essentially, you have co-located financial systems. You have places that you can go, like if it's a public sector solution, for example, the Department of Treasury's Bureau of Public Debt, or the General Services Administration, where they're saying we're not only going to house our own financial system, we're going to also house your financial system. We'll help you get the work done. Or we have private sector shared service providers as well that are hosting and can host multiple agencies at the same time. And what that does is, it takes a key headache away from the CFO. It's just a lot of the grit work that goes on is being done by somebody else. And now you're more in an oversight role. You want to make sure that they are doing the work effectively, that they are meeting certain performance targets that you're setting for them, a very different role than you actually having to manage improvements, enhancements, changes to the system.
The thought here is that by co-locating some of these functions in places that that's their business, managing multiple financial systems, that's going to be a win-win.
Mr. Morales: Danny, this model sounds very intuitive, yet shared services has made fewer inroads into the federal government despite the benefits that you described. Do you have a sense why this is the case, and how can this paradigm shift?
Mr. Werfel: Well, it's a very good question, Al. The basic challenge that we have is, if you take an agency that has a very unique approach to financial management, they do accounts payable their own way, and have for years. The thought of moving to a new platform can be very daunting, because, again, it goes back to change management. The government doesn't change very easily. And even something that sounds as mundane as accounts payable takes a long time and lot of concerted effort and a lot of cultural change within the organization to get them to change their processes.
And that's the rub with shared services, is that you've got to transition. It's almost like a market barrier. The problem is the travel costs. It's getting there. They can see the great solution on the horizon, but they are not exactly sure how to get there. And so we came together and realized that what we needed to do was to standardize government financial management more than it is today.
And so what we've set out to do, and what we're in the middle of doing, is issuing standardization requirements for all of our core financial management activities. This starts with the basic fundamental accounting code or accounting string that all agencies capture information on. We have diversity in our accounting codes and now we're moving to a standard accounting code government-wide.
We're looking to standardize things like accounts payable and accounts receivable and other types of basic financial management fundamentals. What we're asking agencies to do is over time. as they look to re-engineer their processes, as they look to consolidate change and gain efficiencies in how they do financial management, here's the standard federal template, here is what you should move to, it's the default.
And these are being published right now. Some of them are out for public comments. So this is a long-term effort. I will say that we are seeing some success and interest in movement to shared service providers. We have seven agencies that are currently on shared service providers, four of them are shared service providers themselves. And we have four agencies that are actively in procurements to get to a shared service provider. There's a take-up rate here. I would envision that 10 years from now, you will see a dramatic shift in the number of agencies on shared service providers. And what we're doing today is making that shift more fluid by making the path very familiar to them.
Mr. Morales: What can the private sector do better to help improve the efficiency and effectiveness of our government's financial management?
We will ask OMB Acting Controller Danny Werfel to share with us when the conversation about management continues on The Business of Government Hour.
Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Danny Werfel, Acting Controller of the Office of Federal Financial Management at OMB.
Also joining us in our conversation is Debra Cammer-Hines, vice president and practice leader of IBM's public sector financial management practice.
Danny, what is the Chief Financial Officers Council, and what is your role in this Council? And if I may, how does the Council inform and shape federal financial management policy and procedures?
Mr. Werfel: The Chief Financial Officers Council was created in the Chief Financial Officers Act, which really started this whole process of requiring audit and financial statements and requiring -- the Act itself actually created the position of chief financial officer at each agency. And what it also said, the Act, is that a council will be formed, and all the chief financial officers and the deputy chief financial officers from the major agencies will come together and provide a forum where they can discuss common challenges, share knowledge, work on initiatives together. It's really an important process to make sure that we are acting as one government. OMB's role is to chair the Council, and we help manage and lead the Council activities.
And the Council activities are as diverse as I just described. We do a lot of best practice, we share common challenges, we get together once a month and we will talk about what's going on in our agencies, what's going right, what's going wrong. We'll also break into teams and committees and tackle new challenges, new requirements. I like to say that at OMB in the Office of Federal Financial Management, we don't establish requirements in an office with no window. We make it an open process, so we leverage the Chief Financial Officers Council to help us.
We bring the Council together and we talk about, okay, what does the road map look like? What are our objectives, what does success look like; it's a big question we like to ask ourselves. And once we define success and define where we are going, what's the critical path, what are the steps we need to take. And the Council can help us answer our questions, like what's going to be challenging and expensive for the agencies that's going to force them to take on resources that they might not be prepared to, versus what are steps that are easier to do that can leverage existing technologies or solutions they have in their organization?
So I can't imagine a world without the Council. I think we would end up having requirements that are not appropriately right-sized to what we need to do, and would have difficulty getting buy-in from the community, and the Council plays a critical role in that type of coordination.
Ms. Cammer-Hines: Danny, you talked earlier about the need for revisions to the financial reporting model to better address the unique needs of the federal government. More specifically, you discussed the needed revisions with respect to public reporting, internal controls, and decision support. Can you discuss the existing challenges of financial reporting, and initiatives underway to address those challenges?
Mr. Werfel: Absolutely. November 15th, an important day. It's the day that all the financial reports are due. We have a very quick turnaround for our financial reports. This fiscal year closes September 30th, and our financial reports are due on November 15th, which is 45 days, but November 15th has other meaning. On November 15th, 1990, President George H.W. Bush signed the CFO Act into law, so we're coming up on the 17-year anniversary, and members of the community, both on the audit side and the preparer side, as we like to say, or the chief financial officer side, have begun to express interest in looking at what the next 17 years are going to look like.
There's a variety of different reasons for taking a close look at the Act itself, and thinking about what we might want to improve or change going forward. The first reason is that it's been 17 years, and so certainly, we are due to take a look at what's going right and what's going wrong. The other big reason to act now and to look at this question is the Defense Department. The Defense Department, which is basically half the government's balance sheet, is getting ready to launch into its major audit readiness and clean audit plan.
They're still on the cusp of a lot of activities that are going to take place and a lot of resources that will be expended. Shame on us if we don't look at the examples of the last 17 years. The examples of the other agencies who are out-of-head, sort of like the lead blocker for the Defense Department -- let's look at the last 17 years and see if we can fix it before DoD -- or address any improvements that are needed before DoD moves too far down the path.
There's a lot of chatter out there in both the public and private sectors about financial reporting. In the private sector, are we bogging down our companies with too many compliance requirements and reducing their competitiveness? And you see similar types of questions being asked with respect to government.
We've come together, a small group of thought leaders, to think about these questions, and we've come to the conclusion that we needed to start figuring out why do we come to work every day, what's financial management all about. And what we came up with was three basic things: transparency in the nature of the government's finances, in the sustainability of all the different operations and the cost of operations that are going on, and in the cost effectiveness of government programs.
So mission number one, transparency to the public on our finances. Mission number two is internal controls. We're putting in disciplines and rigors to make sure that we're accounting for taxpayer money in a low-risk environment. The process of going through audited financial statements is so challenging, but at the same time, it requires such discipline and rigor that you are dramatically reducing the risk of fraud and error and waste in government.
And finally, we've talked about it, decision support. We want financial information to be available to decisionmakers and leaders to make smarter decisions.
We figured out the three things that make us tick and why we come to work, and then we started asking ourselves how are we doing in each area? How are we doing in making our finances transparent to the public? How are we doing on internal controls? Are they aligned well to the financial risks that the government faces, and how are we doing in decision support? Are we identifying those critical business goals and critical financial risks that an agency faces, and are we getting the data that's necessary to manage those risks and achieve those goals? And what we found, which is not surprising, is we have a lot of work to do.
We can empower our CFOs better than we have today to develop these data strategies so that they are providing leaders with critical and timely information. We have to figure out what does success look like for more transparency, for a more rational internal control process and for better decision-making activities?
So when you are that stretched, and you're losing people to the private sector and to retirement and you've got these human resources challenges, and these resource challenges, to start thinking about the future and moving that CFO beyond compliance to results, and thinking about how we strategically can be more transparent in our reports, it's challenging to find the time and the resources for the federal agencies to get involved and chart that path forward, but it's so fundamentally important that we have to make the time. We are starting that process.
Ms. Cammer-Hines: You raised a good point about being a resource constraint on the federal government. I know that the private sector works closely with the federal government to assist in many of these things. You've talked about improving financial systems and processes, conducting financial statement audits, and even performing, in some cases, financial operations. What additional things do you think the private sector can do to better help improve the efficiency and effectiveness of our government's financial management as we go forward?
Mr. Werfel: I think the private sector and the government both have an education gap that we are constantly trying to close, and we need to do a better job in closing it. What I mean by that is from the private sector standpoint, there is an education gap in understanding the unique challenges that the government faces, the unique elements of government that mean that some private sector solutions and many private sector solutions can't be automatically applied in the government environment.
Very different animal, so to speak, and so it's informing the private sector better on those unique challenges so that they can help apply those technology in other private sector solutions in the government context, and then we have an education gap on the government side. We need to understand better what commercial solutions are out there and how they can help us meet our missions. I'm not meaning to imply that we don't leverage the private sector daily; we do. But in looking forward, I don't think we can get anything done that we get done today without the many, many different private sector solutions that we leverage.
I think the private sector can play an important role in helping us with these data strategies. We have a tremendous amount of data in the federal government, and we've done a lot to try to improve the quality and timeliness of that data, but it's using that data and finding our way through all those data bytes to figure out what trends are developing, what areas are developing.
I will give you an example in improper payments.
p> As we move forward on improper payments, one of things that the private sector does better than us is they have models for focusing due diligence in review of their customers to know where they need to take an extra look versus where they can just let something lapse. We don't want to be spending money on individuals or companies that we know are higher risk for either an error being made or fraud occurring, and I think the private sector can help us -- share with us how they do that, and also share with us the techniques they use with their data to build these types of programs that are more right-sized.
Ms. Cammer-Hines: Could you talk a little bit about what is Federal Accounting Standards Advisory Board, FASAB, or would you elaborate on your ongoing involvement with them and its efforts to identify and remedy critical accounting standards issues?
Mr. Werfel: Yes. FASAB is a very important part of government financial management accounting. For reasons which escape me, they're always referred to whenever you read about them in the press as the little-known board, or the board that nobody knows about. But they actually play a critically important role. They're an advisory board that was created by OMB, the Department of Treasury, and the Government Accountability Office, to help us establish accounting standards for the federal government. It's a board made up of 10 people. I'm one of the members. There are four government members: in addition to OMB, Treasury, GAO, and the Congressional Budget Office, CBO is also a member. And then we have six private members: individuals retired from accounting firms or statistics professors, or a former state auditor -- those are the type of individuals that we have on the board.
And the board works very hard and has done an incredible amount of work in a relatively short period of time to establish comprehensive accounting standards for the federal government, and those accounting standards importantly are recognized by the American Institute of Certified Public Accountants, or AICPA, as being generally accepted accounting principles. The analogy used is kind of like certified, it's like USDA choice beef.
David Walker, who's the Comptroller General, talked about the importance of this moniker from the AICPA, of this approval -- he said you used to hear before we had this, well, that's government accounting. And he says you don't hear that anymore, because government accounting is on the same level as all accounting, because the AICPA has provided this generally accepted accounting principles designation. And the FASAB process -- right now, we are at the point with the board where we do have a very comprehensive set of accounting standards, and now we are looking to hone them.
Mr. Morales: Danny, by most measures, federal entitlement programs such as Medicare and Social Security are on an unsustainable fiscal path. Now I only have a minute, but could you tell us how OMB is working with the Treasury Department, the Government Accountability Office and the Federal Accounting Standards Advisory Board to improve and expand on current social insurance reporting, and how are these efforts going to help alert lawmakers and the public to possible fiscal crises?
Mr. Werfel: The number one priority for FASAB or the Accounting Standards Advisory Board right now, and I am in complete agreement that this should be our number one priority, is to figure out better ways that we can report on the sustainability of Medicare, Social Security and the government as a whole. We need to shout it from the rooftops that we are on an unsustainable fiscal path that in the long term is going to create major, major financial crisis for the government and for our citizens and for states.
And we need to alert everyone that can be alerted: Congress, the public -- that this problem exists, and we need good public reporting to explain the nature of the problem, how it gets worse over time, and importantly, give insight into what are some of the triggers, what are some of the things that can be done to help alleviate the problem. And FASAB, working together with OMB, Treasury, GAO and the Congressional Budget Office, are looking to develop a sustainability report, a new financial statement that we would hope would be as relevant, and if not more relevant and important than the balance sheet, to say this is what it's all about.
The sustainability of government operations from a fiscal standpoint. And the picture that this will paint when we publish it is a very bleak one in the long term. The short term, you know, we have a declining budget deficit and a lot of our economic indicators look very good in the short term, but in the long term, due to Medicare, Social Security, and Medicaid, the problem is very significant. It gets worse each year. So I can't think of a more important thing for FASAB to be doing than to elevating this issue and ensuring that the government is reporting a very clear transparent view of the problem, so that more people will know about it and the right action can be taken.
Mr. Morales: Certainly a very critical issue.
What does the future hold for OMB's Office of Federal Financial Management?
We will ask OMB Acting Controller Danny Werfel to share with us when the conversation about management continues on The Business of Government Hour.
Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Danny Werfel, Acting Controller of the Office of Federal Financial Management at OMB.
Also joining us in our conversation is Debra Cammer-Hines, vice president and practice leader for IBM's public sector financial management practice. Danny, we talk with many of our guests about collaboration. What types of partnerships are you developing now to improve operations or outcomes in the future, and how may these partnerships change over time?
Mr. Werfel: Al, one of the most important partnerships that we need to foster in financial management is the partnership between the federal government and the state and local governments. We have many, many of our programs that are managed and implemented at the state level. So we provide the funds, but the state government and the local governments do the day-to-day management of the program. And therefore, they shoulder tremendous responsibility on their program integrity efforts, on the internal controls, on the accounting, on the different measures that are needed to reduce improper payments or to reduce fraud.
What we need to have is a clear delineation -- I think clearer than we have today -- in terms of roles and responsibilities between the federal government and the state governments in terms of who is expected to do what, what are the various requirements, what are the various expectations.
So to improve this communication, and to look for solutions that the federal and the state government can share together and implement together to drive more program integrity, we're working closely -- the Office of Management and Budget is working closely with the Association of Government Accountants to facilitate a new forum on federal-state partnerships.
And we have a group of thought leaders that have been brought together from federal and state government that are starting to chart out a permanent committee, if you will, to make sure that we understand what are the various state-federal issues that need to be on the table with respect to financial management and program integrity, what's expected for a certain program, and what are the expectations of the federal government. I'm hoping that this partnership is both a knowledge-sharing, communications, and a solutions-driven group.
Mr. Morales: Continuing to look towards the future, can you give us a sense of some of the key issues that will affect CFOs and budget offices government-wide over the next few years?
Mr. Werfel: I think some of the hot issues coming up, the first one I would say internal controls in new areas beyond financial management but related to financial management. One of the things that's happening right now is, I like to say that Congress is stepping up their game, so to speak, and they are pointing out different areas of problems that we have in government that we need to do more on, whether it's an area of where we're spending too much money, or excessive spending, or sometimes it happens to do in the area of travel, government travel. There is a lot of problems that we're still working on to fix, to eliminate abuses in federal travel programs.
What we need to do is make sure that agencies are integrating these new areas of focus into their current work, and leveraging their current processes. So as new risk areas are identified by Congress, GAO, and OMB, whether it's the travel and purchase card, or different types of procurement activities, rather than having separate processes in place to say, okay, this is where we study internal controls for financial reporting, this is where we study internal controls for, let's say, information technology, or privacy, or data breaches, this is where we study internal controls for this new risk area, we're going to fall on our own weight if we don't have a more synthesized and strategic approach.
The other area is, in tight budget environments, you see a lot of ideas to improve our cash management and our savings, and one such area that's getting a lot of attention right now on the Hill, and we're seeing a lot of bills moving on this, is offsets and levies to vendors and grantees, but to implement that is very challenging. We got to get the right data to know which grantees and which vendors are delinquent. So this is another area that I've started to talk about with the CFO community, that we need to be prepared for the challenges that lay ahead.
And the last issue I'll mention is a bill that was introduced and enacted last year, which is the Transparency Act as we refer to it, or the Coburn-Obama Bill, which requires that all federal spending is reported and made publicly available on a website in a searchable and readable way. So this is every grant that we make over a certain threshold, but every grant, every loan, every contract payment, we have to put into a database now that's publicly searchable.
Again, the absolute right thing to do, it's going to provide great sunshine and great transparency into what we do. So for example, you will be able to type in on this website, which is going to be fedspending.gov by the way, www.fedspending.gov. You're going to be able to type in Yale University, for example, and then every federal award that Yale University has received will appear on your screen, the amount of the award, what it was for.
Again, it's the right thing to do. It's just a question of changing our reporting mechanisms, our systems infrastructure, to be able to report that information. All this information has to be up on the Web within 30 days of award.
Ms. Cammer-Hines: As we move towards an election cycle, how do you think PMA objectives and the approach to measuring success will extend beyond this administration?
Mr. Werfel: I think they will certainly transcend, because it's all about good government. Nothing that we've talked about today seems to me to cross party lines, so to speak. We're talking about making government more efficient, reducing improper payments, getting rid or surplus and excess real estate, making smarter investments in financial systems, making smarter business decisions, understanding our risks better.
Again, this is all about -- very patriotic -- this is all good for America. I think this administration through the PMA has hit on something very profound. We've learned a tremendous amount of lessons. It hasn't been perfect. But the PMA, the President's Management Agenda, is truly changing the way government does business.
There's a lot of positive lessons learned that I hope the new administration will leverage the accountability of those red, yellow, and green circles, driving agencies to try to do better, the simplicity of the scorecard, focusing on key areas like e-government and financial management and human capital, and not getting it too dispersed into every single area that's possible, having clear definitions of success and clear roadmaps. So I believe these things will sustain for many, many years to come.
Ms. Cammer-Hines: You've just touched on human capital as one of the things that we're being focused on. And the recent annual CFO survey identified human capital as one of the biggest barriers to overcome in order to meet top CFO priorities.
What steps are being taken to attract and maintain a high quality technical and professional workforce, especially at the Deputy CFO level?
Mr. Werfel: This is clearly a huge challenge for us. You know, earlier in the show when I said it was going to be difficult to narrow my challenges to three, this was probably a close fourth to figure out what to do. It's an ongoing and dynamic process where we're losing people that have institutional knowledge that have tremendous productivity. And when we lose those people, it's hard to fill them.
So recruitment and retention has to be the focus; focusing on how do we retain our good people and how do we recruit people behind them. And so we are looking at many different strategies.
Right now, the CFO Council has an initiative underway to expand and improve our training at all levels. We're looking at new and enhanced training programs on all three levels. We're looking at doing more outreach to local colleges and colleges throughout the country. We're looking to improve our intern programs beyond just master's degrees, but into undergraduate degrees, someone even mentioned high school, but I think that's maybe going too far -- I don't know -- and the use of the Web.
We're looking right now at USAJOBS, which is the number one central repository, and we are looking right now to create a separate website just for Financial Management so that if you're interested in financial management, you'll have one-stop shopping for where those jobs are.
So we're definitely being active on this. It is a huge challenge. The more resources you put in it, the better your outcome is, so we have to keep trying in this area.
Mr. Morales: Danny, the breadth and depth of OMB's mission, especially given its relatively small size, is just absolutely mind-boggling. And OMB has a reputation of being a very demanding and stressful place to work. Yet it also achieved the number one ranking in the Partnership for Public Service as a best place to work in the federal government.
What are some of the benefits of working in such an environment, and what advice would you give to a person who perhaps is out there considering a career in public service and possibly interested in joining OMB?
Mr. Werfel: I think I'm going to be a good salesman for OMB, because I love my job and I love the organization. I started my career there over a decade ago, and I feel a tremendous sense of pride and loyalty. I think one of the things is that it's small. I went to a very large college, and my wife went to a very small college. And I'm often jealous of her, because in the small college environment, everyone has this bond that they all went to this small school. And OMB has that feel to it. Because we're only 500 people, everybody over time really gets to know each other. And it's really a place where you can go and feel like you're part of a small dedicated team.
And you don't get lost in the bureaucracy at OMB. There is too much work to do. We have a very flat hierarchy. One of the unique things about OMB is that our entry-level policy analysts that are at the General Schedule 9, right out of policy school, once a year, they come into a meeting with the Director of OMB and present their findings and answer questions about the upcoming budget release. I don't know many agencies where GS-9 policy analysts have an opportunity to meet directly with the head of the organization.
And so that kind of flat hierarchy, that kind of experience, it's nerve-racking. I'll tell you, I was there as a GS-9 doing it, and the walk to that meeting is a very nerve-racking walk. But it's invaluable experience.
And probably the biggest reason is that we have just tremendous impact. When we issue a policy or show up to a meeting or are in the room, a lot of attention is paid to our position and our opinion because of where we sit in government, and it allows you, early in your career in the government, or even as you get older, to impact policy day-in and day-out -- long term, short term, not a day goes by where we don't touch things that change the way government does business.
And that is great. And you're working towards good government, so you go to sleep at night, you're tired -- certainly tired, but you can feel good about the work that you're doing.
Mr. Morales: That's great. Your passion clearly shows.
Danny, unfortunately we have reached the end of our time. I want to thank you for fitting us into your busy schedule today, but more importantly, Debra and I would like to thank you for your dedicated service to our country in helping to lead the President's Management Agenda.
Mr. Werfel: Thank you very much, Al and Debra. It was a pleasure.
Mr. Morales: This has been The Business of Government Hour, featuring a conversation with Danny Werfel, Acting Controller of the Office of Federal Financial Management at OMB.
My co-host for this morning's program has been Debra Cammer-Hines, vice president and practice leader for IBM's public sector financial management practice.
As you enjoy the rest of your day, please take time to remember the men and women of our armed and civil services abroad who can't hear this morning's show on how we're improving their government, but who deserve our unconditional respect and support.
For The Business of Government Hour, I'm Albert Morales.
Thank you for listening.
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