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|Originally Broadcast August 30, 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 this center by visiting us on the web at businessofgovernment.org. And now .
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.
Today, our nation's ability to sustain a growing economy and a rising standard of living depends in part on continued advances in science and technology. With one of the richest and most diverse missions in the federal government, the U.S. Department of Energy also represents the single largest supporter of research in the physical sciences. To successfully meet its varied and complex missions, DOE must manage its resources efficiently and foster physical discipline.
With us this morning to discuss DOE's efforts in this area is our very special guest, Owen Barwell, Deputy Chief Financial Officer at the U.S. Department of Energy.
Good morning, Owen. Good to see you again.
Mr. Barwell: Good morning, Al. Good to be here.
Mr. Morales: Also joining us in our studio is Dennis Kaizer, partner in IBM's Federal Civilian Practice.
Good morning, Dennis.
Mr. Morales: Owen, I always like to start off by providing our listeners with some context around the organization, in this case, the Department of Energy. Can you take a few minutes to give us an overview of Energy's history and mission?
Mr. Barwell: Yes, of course. The Department has its roots in the Manhattan Project, originally started in 1942, where we really did invest in the technology that created the nuclear weapons programs that really won the Second World War, and also the Cold War in the late '50s, '60s, and '70s.
Today, the Department is very much broader than that. The Department itself was formed in 1977 to address the emerging energy crisis at that time. Today, we really have four major areas that we focus on in the Department. Firstly, energy security. And it's really about promoting America's energy security through reliable, clean, and affordable energy. It covers our nuclear generation capabilities, energy efficiency, our fossil programs.
A second area is in nuclear security, where we really do focus on ensuring America's nuclear security and the safety and maintenance of our nuclear weapons stockpile.
You mentioned the scientific part of our organization. We are really focused on scientific discovery and innovation. Through our national labs, we strengthen the U.S.' scientific discovery, economic competitiveness, and improve the quality of life through innovations in science and technology.
And finally, we have a significant role to play in environmental responsibility. We invest very heavily in protecting the environment, and provide a responsible resolution to the environmental legacy of our nuclear weapons program in the past.
Mr. Morales: You talk a little bit about these four broad areas, but can you give us a sense of the scale of operations over at DOE? And perhaps you could tell us a bit more about how it's organized, the overall budget, perhaps the number of employees?
Mr. Barwell: Yes, of course. We are a large organization; our budget is approaching $24 billion. We're quite highly leveraged in terms of the number of people that are associated with the Department, and we have 15,000 federal employees, but just over a 100,000 contractors supporting the Department of Energy's mission.
Mr. Morales: That is a very highly leveraged ratio.
Mr. Kaizer: Owen, now that you've given us the broader overview of the Department, perhaps you could tell us more about your specific role and your department, such as what are your specific responsibilities as a Deputy Chief Financial Officer, and what type of organization is under your purview, your budget and your staff?
Mr. Barwell: That's a good question, Dennis, thank you. The Deputy CFO role is defined in the CFO Act of 1990, and I won't dull you with the details of the Act, but it creates two positions. The CFO of the organization, which is a political role, it's a Presidentially-nominated, Senate-confirmed position, and provides the political oversight as well as the financial management oversight within a particular organization.
The Deputy CFO position is a civil servant position. It's a federal employee, and the role there primarily is to provide continuity between political transitions; plays a very important role during that time.
In my organization -- I have roughly 250 people at the headquarters operations in both D.C. and also in Forestville. There -- I have a number of organizational units in my organization, from financial management accounting to budgeting to running the corporate business systems within the organization. We also have an analytic capability within our organization, a new cost analysis department , program analysis and evaluation, and finally, an operations organization that supports the size of our organization in very basic things like human capital, procurement, et cetera.
Mr. Kaizer: It sounds like the Deputy CFO office itself is a large and complex organization. So within the context of that, what would you consider your top challenges, and what have you done to address those challenges?
Mr. Barwell: Well, again in my short time at the Department, I think my challenges are in a couple of areas. Firstly, just the personal challenge of coming into an organization like the Department of Energy at this level and being able to get up to speed very quickly in terms of what we do as a CFO organization, as well as what we do as a department.
I think it's imperative for effective financial management oversight control that we go beyond just the numbers and really understand what an organization does. So it's been very challenging for me to get up to speed very quickly as to what my organization does, as well as what the mission of the Department of Energy is, too.
I think the second piece to that is what I have quickly discovered is a human capital crisis. Although when I arrived, we had 196 staff in my organization, we needed to staff up to about 250. And though we've been relatively successful in meeting that target, when I actually look at the profile of my organization across the Department, out of the 860 or so finance professionals in our organization, we estimate that in five years' time, a third of my employees will actually be retiring. So this represents a pretty significant work force shortfall in a very short period of time.
So the challenges are twofold. Me just getting up to speed, getting to understand my organization and the Department, but very quickly realizing that in order to get financial management done in the Department, we really have to address some pretty significant human capital challenges.
Mr. Morales: Owen, along with a previous stint at NASA, I understand that you came to DOE more immediately from the private sector. Could you tell us a bit about your career path? How did you get started, and what brought you to your current position at DOE?
Mr. Barwell: Of course. You can probably tell from my accent that I'm not born and raised in Huntsville, Alabama. I arrived in the U.S. in November of '97. I came on a detail with Coopers & Lybrand Consulting, which eventually became Pricewaterhouse Consulting, with the merger with Pricewaterhouse
I was in the consulting business here in the D.C. area for about five years. And in my last year, I actually had NASA as a client, undertaking a couple of pretty interesting studies at the time. And NASA experienced a change in leadership; I was asked if I was willing to come on board and actually implement some of the things that I was recommending.
And I was made an offer I could not refuse, which turned out to be less money, longer working hours, and I had to wear a suit pretty much all of the time, too. Nevertheless, the 3-1/2 years I was at NASA were quite fascinating for someone that was born and raised in the middle of England, to be able to have the chance to work in an organization like NASA and see what NASA did upfront very close was really quite a privilege.
And then went back into the private sector with an organization called Anser, also known as Analytic Services. And I was with them for about a couple of years. And I was approached and recruited to see if I was interested in coming back into the public sector as the Deputy CFO at the Department of Energy, which -- I went through the usual competitive hoops and ended up joining them in November in the last year.
Mr. Morales: That's fantastic. Owen, as you sort of reflect back to your years in consulting, your first opportunity with NASA, back to consulting, and now back to the government, how have these experiences shaped your management and leadership style? And what lessons have you learned along the way that you perhaps are beginning to roll out in your current role at DOE?
Mr. Barwell: That's a great question. And it's something that I asked myself both joining NASA and also the Department of Energy. It's easier to define what I am not. And my predecessor Jim Campbell had an over 30-year career with the Department of Energy. And clearly, I'm not going to bring that level of depth and understanding to something I'm not going to be able to compete with, but as I look back in my career, I actually jotted down all of the organizations I've worked for or consulted to in a significant capacity, and that number totals about 30 organizations.
So what I can bring is a different perspective of organizations, whether that's working here in the U.S. or in Europe and the U.K, in more strategic work, whether it's the tactical side of implementing business systems. What I think I can bring and draw upon is that different perspective, the experiences that I've gained in different organizations across different industry sectors, in different continents, and recognize quite clearly that I'm not a 30-year veteran of the Department of Energy.
What I really like about public service is the degree -- the high level of personal responsibility that it brings. Instead of advising to organizations when you actually have the personal responsibility to get stuff done, it really is quite thrilling, quite enthralling to be able to enjoy that.
Mr. Morales: That's great.
How is the Department of Energy improving its financial performance? We will ask Owen Barwell, Deputy Chief Financial Officer, to share with us when we return 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 Owen Barwell, Deputy Chief Financial Officer at the U.S. Department of Energy.
Also joining us from IBM is Dennis Kaizer.
Owen, in the last OMB score card, almost half of the rated federal agencies received either a yellow or a red rating in improving financial performance. What has your organization done to progress and improve over the last year to gain a green rating in progress? And can you tell us from your perspective why this is such a challenging area for many federal agencies?
Mr. Barwell: Al, what I'd like to do is recognize the performance of my staff in this area. As I mentioned, I started at the Department in November of last year. In fact, my first day, I got to take a trip up to our offices in Germantown and celebrate with our financial management staff there the success of regaining our clean audit opinion.
I think, Al, this spans more than just the efforts of last year. In FY05, mostly due to the implementing a new financial management system, plus many other reasons, we lost our clean audit opinion. We were able to work very hard and get a qualified audit opinion in FY06, and finally for FY07, get a clean audit opinion. Implementing new systems -- that task is very, very difficult. And it took us three years, the best part of three years to get out of that situation and actually get into a routine where we can actually get our clean audit opinion back.
The emphasis this year has really been on trying to sustain that clean audit opinion for both financial management and performance improvement. We've been green and green for most the quarters, if not all of the quarters so far this year. For other federal agencies, again, I think it's important to recognize that as we have made a huge investment as a community in new finance systems, that this job is actually very, very difficult. The systems expose problems with data integrity; they require different organizations, skills, and competencies to be able to operate them, and new business processes, too.
In organizations as complex and of the size of departments and agencies, it really is a challenge to get these business systems and programs implemented and underway in a very sustainable way.
Mr. Morales: Touching on this point of the unqualified opinion, Owen, can you tell us what's the significance of this clean opinion, and what are the keys to successfully achieving a timely and a clean opinion?
Mr. Barwell: I think it depends on the organization, but those that I have been involved with -- NASA, and more recently the Department of Energy -- it is of I think a high degree of significance to get a clean opinion. It's certainly a very clear and visible measure of financial management and the integrity of financial data within an organization, within a CFO Council, amongst my peers, and also within the Department of Energy, too.
When we lost our clean opinion, this event actually attracted the attention of the Secretary, and it was something that he, given his private sector background, was very keen to be able to fix. So I think it is very significant to get a clean audit opinion, as it is a very clear and demonstrable measure of success of running finance systems and financial management generally.
I think from how an organization manages itself, it provides another aspect, too. And that is by getting a clean opinion, it provides a degree of integrity that the programmatic community can actually rely on the data, too. And without a clean opinion -- and I've been in an organization without one -- it's very difficult to convince the programmatic community to use and rely on the underlying finance data. And so getting that external check, that external validation of financial integrity of the underlying data is I think very, very important, both visibly externally, but also internally, in how an organization actually runs itself.
As to the keys, there's time enough for another interview on that one. It is -- again, I think, it's linked to how you implement new finance systems, as I think -- that's where we, most of us in the CFO Council community have made investments. The keys are really about understanding just the magnitude of efforts like that, to make sure that data is cleaned up, that systems are implemented in a way that people understand how to operate them, and to keep a clear executive management focus on operating these systems and business processes as they're rolled out. It's really got to be upfront and personal with the executives and managers within an organization. It's got to be important within that organization.
Mr. Kaizer: Owen, along the lines of performance management and improvement, I understand that your department participated in OMB's Performance and Accountability Report pilot. Could you tell us more about the purpose of this pilot called PAR? Specifically, to what extent does it actually reduce reporting and process burden? And how did it enable your department to better integrate its reporting and reduce those redundant processes?
Mr. Barwell: That's a good question. You're right, we did participate in that PAR pilot. I think fundamentally, the pilot has challenged the purpose of financial statements and other annual reports that we produce across the government. For us, the advantage was absolutely, did we cut back on reporting requirements and burdens? Yes we did, but I think what we ended up publishing is a set of documents that really does address the end stakeholders a little more. We're by no means perfect in this.
But I think as an organization, we did really sit down and think about our external stakeholders and their needs in understanding what the Department does, how we measure and report our successes and areas that we need to improve in, and at the same time release some of that burden of producing reports that quite frankly are not read or enacted upon.
Mr. Kaizer: So staying with the theme of program performance, what are some other ways in which your office engages in program evaluation to ensure that Energy's programs are meeting their intended objectives?
Mr. Barwell: I think this, Dennis, comes back to the role of the CFO within an organization. And I see the role of the CFO having a very much an evolving footprint. I think if you look at the more traditional role of a CFO and a CFO organization, it's very much focused on transaction processing, making sure that we're reporting our finances, some degree of internal control, and very, very little to actually support the decisions that are made in an organization.
I think in both the pubic sector and the private sector, that footprint is evolving. It's advancing to spend less time through the use of e-business systems, business processes, different skills and competencies, less time on transaction processing.
We for example have outsourced our payroll activities to the Defense Finance and Accounting Service. We have invested a lot in internal controls through our A-123 program, and improved I think performance in that area. We are using technologies to enable financial reporting, and this I think is freeing up a good deal more time, resource, and effort to be able to support the major decisions that are made in the Department. So we're trying to build capability, skills and competencies and actually using that data, turning that into information that ultimately will enable the decisions, the major decisions that are made in the Department.
So our organization is actually very -- I think in that role quite new. But we have created an associate CFO position that will oversee our Office of Budget, our Program Analysis and Evaluation Office, and also a new office that we have stood up, our cost analysis group.
So the role of the CFO as I see it is changing. And we are getting a lot more involved in moving away from more of the compliance activities into really getting to understand the performance of our programs in the Department.
Mr. Morales: Owen, there's been a fair amount of discussion around the need for revisions to financial reporting models, to better address the unique needs of the federal government. Can you discuss the existing challenges in financial reporting, and any initiatives underway to address those challenges?
Mr. Barwell: Thanks, Al. Yes. I think there is an emerging conversation about financial reporting within the U.S. government, and really challenging the way that we do things at the moment. It's clear to me that the CFO Act of 1990 really did lay the foundations for some very good things. We all implemented financial management systems that made sense. We produced financial statements in an auditable form, and it really has introduced a discipline within the financial management community.
However, we have adopted what I would consider a private sector model in how we produce our financial statements, how we report our finances in the government. The private sector produces financial statements that are audited -- primarily, if you think about it -- for raising capital, and we are not in the business of raising capital as the public sector. We should produce financial statements that give our key constituents, the U.S. taxpayers, some confidence that we have actually spent our money on how we've been enacted to spend that money, and we've done that in a very efficient and effective manner.
So I think there is an emerging conversation amongst the CFO community about the future of financial statements. This actually is one of the biggest hiccups for some of the departments and agencies that do not have a clean audit opinion, in that when you actually peel back and understand why they have not qualified or they don't have clean opinions on their financial statements, it really does come down to a very technical issue from an accounting perspective, one that doesn't really, even that issue is resolved, give any more comfort that of the financial integrity of the organization anyway.
So I think this is a scenario that I think we'll see a lot more conversation on, and a lot more questioning about the purpose of financial statements in the U.S. government.
Mr. Morales: So that's really new territory. Great. Owen, you mentioned earlier cost analysis. What steps has Energy taken to track and manage its costs and link it back to performance? And what about efforts to implement an activity-based costing/ management system?
Mr. Barwell: Al, I think we are at the very early stages of looking at that. I mentioned the evolving footprint of the CFO. I think we have as an organization been very focused on playing the traditional role of a CFO. We've run a lot of transactions; we've reported out our financials, we've got some degree of internal controls in place. But I think over the last three to five years, with our iManage program, as well as some external drivers like the equivalent of Sarbanes-Oxley for the government, the A-123 program, we've invested heavily in an organization to try to actually free up the resources to focus more on -- to support the decisions that are made in the Department.
I think we're at a very early stage of that. We've invested heavily in our business systems infrastructure to actually to give us the data, and I think we're about to embark on the next phase of our investments in the Department, and that is to actually use that data, convert it into information, and actually give us some insight into what's going on in the organization. I think that is very much in line with the evolving footprint of the CFO.
Mr. Morales: Owen, over the last seven years, there's been much focus on management reform and accountability through the PMA, the President's Management Agenda. How do you see this agenda evolving with the transition to a new administration?
Mr. Barwell: It's a good question, Al. It's a similar sort of question that's being amongst the CFO community. I think I'll go back to when the PMA, the President's Management Agenda, was actually launched. And I remember at the time talking to some of the authors of the President's Management Agenda about a year or two after it was implemented, and I think even they were surprised at this success of the PMA and how it had actually taken amongst the departments and agencies that were required to report against it
The purpose of the PMA, it really set out some expectations, what the political community actually wanted out of the folks managing departments and agencies. And I think the managers and the executives of the departments and agencies at the time actually appreciated that. For once, it was actually clear what those expectations were.
This score-carding provided, even though very simple red, yellow, green, a way to hold organizations accountable and provide some visibility into their performance. And to their credit, OMB actually recognized where people were in terms of their scores, but also the level of effort they were putting into trying to solve some of their management challenges as well.
If you think about the PMA and what it has been trying to achieve, that is setting very clear expectations about management performance, providing a degree of accountability and visibility by scoring departments and agencies and publishing those scores, I don't think that that is going to go away. I think that sort of framework, that construct, is with us whether we like it or not. In fact, it would be very, very difficult to argue against having those expectations, accountability, and visibility of performance. Even though the name may change with a political transition, I think fundamentally, that framework is with us to stay.
Mr. Morales: That's great.
How is the Department of Energy transforming its financial management system? We will ask Owen Barwell, Deputy Chief Financial Officer, 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 Owen Barwell, Deputy Chief Financial Officer of the U.S. Department of Energy.
Also joining in our studios from IBM is Dennis Kaizer.
Owen, given your perspective, how has the role of the government CFO changed over the last decade, and to what extent has this change enabled government CFOs to provide leadership in promoting efficient management in government resources and assets?
Mr. Barwell: Al, that's a great question, and I think I've already touched on what I call the evolving footprint of the Office of the CFO, or the CFO itself. And it has changed, and I think it will continue to change as we move away from large organizations that focus on transaction processing and financial reporting and fiscal controls and very, very little on decision-support. I think the changing role of the CFO is to be an organization where we actually use technology, new business processes, different skill-sets, capabilities, and focus less on the transaction processing, either through outsourcing, or actually using technology to automate a lot of our work.
We use financial reporting tools that are already available to us. In fact, we should all recognize that we are able to generate quarterly financial statements and our annual financial statements within 15 days of closing our books, which is for an organization of our size, in fact, a tremendous capability. Again, it's something that should not go unrecognized in any way.
We've invested heavily in our fiscal controls, relying on commercial off-the-shelf business systems as well as investing heavily in our A-123 Program to implement Sarbanes-Oxley-like internal controls in our organization.
The role of the CFO is not only taking care of those particular activities, but now are actually using the data that we generate to turn that into information to help us in supporting the significant and key decisions that are made in the Department.
So I see the role of the government CFO, it definitely has changed and I think it will continue to change and evolve as we continue our investments in new ways of working. And not to be disingenuous to bean counters, but we really are moving from being a bean counter to really one of a business partner in the organization.
Mr. Morales: That's great, that's great. Owen, this obviously brings up IMANAGE. Can you talk a little bit about what this is, and how does it seek to achieve improved financial and business efficiencies?
Mr. Barwell: Yes. IMANAGE is, for want of a better term, our business transformation program. It's has been around for several years now. In fact, we implemented the PeopleSoft HR human resources solution in 1999. We also implemented Oracle Financials, our accounting system, in April of 2005, and we continued with the program implementing our procurement solution, it's the Compusearch PRISM product. We're rolling that out right now and we're also in the design phase of implementing a new budget system using Cognotes and document amidst the software platform to enable that new system.
But it's more than just implementing systems. What I'm really looking for in iManage is not only implementing those systems successfully, but really thinking about how we do business and changing our business processes to be more effective and efficient, and making sure that we have the right organization in place to be able to operate those business systems and the business processes that go with it.
Mr. Morales: So as a follow-up, given the complexity and the magnitude of the iManage program, could you highlight for us some of the key lessons that you've learned so far from this effort?
Mr. Barwell: Yes. I draw upon my experience at NASA, too, where I was in their business transformation program for just over three years. I think the key thing is not to just focus on implementing systems. You really got to look at the business processes that you're changing, take advantage of new systems implementations to re-engineer those processes to be more efficient, more effective, and last but not least, you really have to look at the people-side of things.
I think you can invest heavily in business systems and the systems architecture to make sure whether these systems are not going to fail. Inherent within these business systems come business processes that you have a degree of flexibility to operate, but not much.
But what makes these systems, these types of programs successful, are the people. If you actually look at statistically in terms of the population of people adopting new technology, typically, half the people will be with you and half of you will be very, very late to adopt this.
So employing effective change management strategies to make sure that you really do have executive sponsorship, that you have sponsorship at the middle management level, and you invest in your people to be able to operate these new systems and business processes; that really, really is quite critical. And very often, the easy thing to do is invest in IT, hardware and software and not invest in the training in the organizational development types of activities that you need to be able to operate these programs successfully.
Mr. Kaizer: As you know, the private sectors work closely with the federal government to assist in improving financial systems and processes, through conducting financial statement audits and even performing financial operations, but in your view, what can the private sector do to better improve efficiency and effectiveness of our government's financial management?
Mr. Barwell: Dennis, I think it's really about innovation, and I look at that in two ways. One is to really understand the needs of the federal government and also to try and apply best practices that have been derived, understood, and applied in the private sector also. So it's really about innovation, bringing new ideas, thoughts, methods, tools, systems into the federal government to really help us get those efficiencies and try and be effective in our financial management operations.
Mr. Kaizer: I'd like to switch gears a little bit here. Could you tell us about cfojobs.gov? What are some of its key features, and to what extent does it actually provide a one-stop shop for folks seeking federal financial management opportunities?
Mr. Barwell: Yeah, this is a project of ours that we're running at the Department of Energy, but it's really -- our sponsor is the CFO Council, and we are working with the Office of Personnel Management and the folks at the usajobs.gov, too, in this effort.
If you think about what I've already talked about my organization, across the Department of Energy, we have about 860 finance professionals and we forecast that in five years, we'll lose about a third of those people through retirements. I think the number is around 59,000 -- I think that is the number of financial management professionals across the government -- 59,000. If you imagine the same sort of work force profile, we're going to be losing a third of those folks, too. So just making sure that we have -- we can use new technology, new ways of working, re-engineered processes to allow us - to enable us to be able to do more with less, but we are going to have to recruit to fill some of that gap, that shortage, very clearly.
And cfojobs is a very early attempt to build a community around financial management, to be able to attract talent into financial management within the U.S. government. We have a beta site available at the moment, it's at www.cfojobs.gov. We will be improving the existing site over time to introduce commonly-referred-to Web2.0 types of technologies.
So we're trying to generate a buzz and interest in financial management in the government, to attract talent into financial management in the U.S. government. And this we see as a useful tool to enable us to be able to do that. It's not going to solve the issue entirely, but if we can actually build a sense of community around financial management in the government, I think this will go a long way to be able to help.
Mr. Kaizer: You spoke a little bit about innovation and performance management. However, there seems to be a growing perception that some federal finance and budgeting organizations are becoming more compliance-oriented as opposed to actually providing analysis to policymakers and program managers. So given your perspective, is there any validity to such perception? And if there is, what can be done to move beyond the trend?
Mr. Barwell: Well, I think reality is perception. I think we are labored by further compliance-oriented requirements in our organization, but I don't think that is anything new, and nor is it likely to change, I don't think. In fact, one of my assumptions when I look at my work force profile -- I may be losing a third to retirement but I'm also recognizing that in five years, that we're actually going to get more and more work to do. So the actual work force gap is bigger than that third. It's more like 40 or 50 percent of potential workload.
But again, I come back to what I see as our evolving footprint. We are not going to get away from any of these compliance-oriented activities, but I think there will be even more demand to provide that informed analysis. We are trying to establish a culture where we are professionals, that we work hard and play hard, we try to meet the high expectations of our customers, but that we're also smart money, and we are more than just the numbers. We go beyond the numbers, we're curious, we're dogged with our analysis, we provide the truth. We are striving to be sought out as an independent arbiter and adviser. We run all of our business systems within the Department, so we are expecting be asked to have a seat at the table when many of the major decisions are being made.
So we are not quite there yet, and I think we are recognizing that our footprint is evolving, and we need to create a new culture to be able to reflect that. But I don't think we're going to get away from the compliance work. It's a way of life with the CFO.
Mr. Morales: Owen, earlier, you used the term "enablers." To what extent do you see the increasing use of social networking technologies such as blogs and wikis as tools in communicating the importance of accountability and progress in performance?
Mr. Barwell: It's a good question, Al. In fact, I have an interest in these kinds of technologies. At the Department, I've initiated and sponsored the development and soon-to-be-rolled-out portal. This portal encompasses some of the technologies that you talked about in terms of blogs and wikis, and a valuable tool in communicating across our financial management community.
For me, the problem that we're trying to solve here is that we have actually invested very heavily in business systems. And now it's our job to try and integrate the data amongst those business systems, and really trying to turn that data into information to enable the decisions that are being made in the Department. So again, this is a way that I think we can use these sorts of technologies to enable our evolving footprint in the culture that we're trying to create in the organization.
Mr. Morales: What does the future hold for the U.S. Department of Energy? We will ask Owen Barwell, Deputy Chief Financial Officer, to share with us when we return on The Business of Government Hour.
Mr. Morales: Welcome back to our final segment of The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Owen Barwell, Deputy Chief Financial Officer at the U.S. Department of Energy.
Also joining us in our studios from IBM is Dennis Kaizer.
Owen, I talk with many of my guests around the topic of collaboration. What kinds of partnerships are you developing now to improve operations or outcomes at Energy, and how may these partnerships change over time?
Mr. Barwell: I think, Al, I'll answer this question by looking at what we're doing externally as well as what we're doing internally. As I've already mentioned, I'm a relatively new recruit into the Department of Energy. But I think it's important for our office to be playing a role within the U.S. government at that level. So we are very active in the CFO Council. Myself and my boss, the CFO Steve Isakowitz, I think play a pretty strong role within the CFO Council. Steve chairs the Human Capital taskforce as part of the Council, for example. So we're trying to get more and more exposure of our office across the U.S. government.
I'm also interested in making sure we are linked into the private sector as well. You asked about how the private sector can play a role in partnering with the public sector, and again tapping into innovation and new ideas, different ways of working in the private sector is an important piece of that. And I've been encouraging the Corporate Executive Board to take some of their knowledge, their learning, their experience of the CFO Roundtable that they run and being able to apply that to the public sector also.
So we're trying to get a little more exposure, a little more visibility outside of the Department itself and play a role at the U.S. government level, in both the established organizations like the CFO Council, but also trying to establish partnerships with other organizations like the Corporate Executive Board. Within our organization, we've done a few things to promote collaboration. For the first time in five or six years in May this year, we ran our own CFO conference. We had 150 people from around the country descend on Denver, where we spent two or three days understanding what was going on in the CFO organization as a whole.
In fact, it was successful on a few fronts. Firstly, we were able for the first time to share knowledge and experience across that community. Secondly, I heard a number of people actually appreciate getting to meet people for the first time face-to-face, having spent several years e-mailing or talking to each other on the phone, so really a big win for the community to get people introduced to each other. And finally, at conferences like this, I'm usually one of the last out of the bar in the evening. And when I was leaving to go to bed, there were still plenty of people in the bar.
So I think it helped us a good deal to get together as a community and get to know each other professionally and socially, too. We talked about the portal that I'm sponsoring and investing in, making sure we're using latest technology to promote collaboration across the Department. And we're also focusing on communications, too. Very simple things like a monthly newsletter, which we publish to all of our financial management professionals across the Department. So I think we're doing a lot in the collaboration space, whether externally with new organizations, established organizations, but also internally, too, and really focusing on collaborating as a community across the Department.
Mr. Kaizer: Owen, you mentioned the Chief Financial Officers Council, but I'd like to you to tell us a little bit more about that. Specifically, can you tell us about the financial system's FSIO Oversight Transformation Team, which I understand you lead for the Council?
Mr. Barwell: Indeed I do, and perhaps it's -- I don't know whether being the newest Deputy CFO in that community, it's that person that gets tasked and labored with chairing the transformation team. It's a role that I was actually very flattered to be asked to get involved with and very happy to do so and try and shape the agenda of the financial management line of business too.
Very simply, I think there has been some history with the financial management line of business. And I think we're at a point where we are thinking about the future of this line of business. I think we all believe in standardization, financial management across the government. We should consolidate operations wherever possible, where we can either reduce cost, improve service or both, optimize our investments in the systems, and the new ways of working that we've adopted.
What I'm trying to do in that group is introduce the concept of a calculated choice. I think rather than go for a cookie-cutter one-size-fits-all solution for financial management in the government, we've really got as departments and agencies to think about how do we actually adopt the principles of standardization, consolidation, and optimization, and do that in a way that it makes sense for the individual department or agency.
And we're working through that. I think what you'll see from that community in the next 12 months or so is defining financial management business processes, data requirements and structures, and working with the software vendors to make sure that we get those requirements in a standard configuration for software that will be developed by them and be implemented by us in the very near future.
Mr. Morales: Owen, I'd like to transition out to the future. Can you give us a sense of some of the key issues and trends that will affect CFOs government-wide over the next few years?
Mr. Barwell: Absolutely. Number one is human capital. I talked about our work force profile, and I think we can make the assumption safely that that profile is similar across other departments and agencies, too. So when you're faced with the retirement wave that is coming our way -- in fact, there are some examples of -- in some areas that it's already upon us at the Department -- this is going to be the number one issue that we're going to have to focus our time and attention on.
The way we solve it is through effective recruitment, being able to attract talent, and hire talent in an efficient manner, but also leveraging the investment that we made in our business systems. Our iManage program, for example, I see as an enabler to in part help us do more with less. And that will plug some of the human capital gap that will be coming our way.
Mr. Morales: So as you sort of reflect on some of these challenges, how do you envision your office will need to evolve over the next couple of years?
Mr. Barwell: Again, Al, I think it's human capital. If we are to continue our evolution, our evolving footprint, if we really do want to play the role of helping and enabling the important decisions that are made in the Department, we are going to have to have the right skills, the right people, the right competencies in place to enable that to happen. I think we've done a lot in terms of business systems, in terms of business processes. But I think the next emphasis is really going to be on our organization and our people, making sure we have the right talent in the right places to achieve that footprint. It's not going to happen overnight, absolutely not, but I think if we take advantage of the retirement wave, I think we can shape our organization to really fit that evolving footprint in the future.
Mr. Morales: It's interesting, given all the technologies that we have, that at the end of the day, it really is still a people business.
Mr. Barwell: Absolutely.
Mr. Morales: Owen, given your recent transition back to the federal government, what advice might you give to a person who is out there considering a career in public service, perhaps with a focus on financial management?
Mr. Barwell: That's a great question, Al, and I don't want to repeat the fact -- the offer that I was made in NASA, which was actually less money, longer hours, and I had to wear a suit pretty much most of the time. But I will say that working in public service, working for the federal government does actually provide some very, very unique opportunities. We do things that the private sector cannot.
I enjoy, I believe, a level of personal responsibility that I would not be able to achieve in the private sector either. It is an environment, too, that is not driven by the bottom line. It's a clear distinction between the public sector and the private sector. And as a result, it's a very different work environment. And I've worked in both the public sector and the private sector, and it's actually quite refreshing not to be driven by the bottom line from time to time.
I'm a recent U.S. citizen. For me, it's a chance to give back to the country. I encourage everyone that really is thinking about a career in public service to pursue it. I think what we are not going to see these days are folks that are coming into federal service, public service and build a career that lasts 30-plus years. I think what we will see is the next generation of federal employees will be in here for three to five years, maybe 10 years, with experience in both the public and private sector.
So I do encourage people to take a look at it. I think again there are some unique opportunities to pursue. You get a lot of responsibility early and it's a different environment to work in when you're not driven by the bottom line. And most importantly, it's the way to give back and contribute to the country. It really is a treat to be able to serve in this role.
Mr. Morales: That's great, thank you.
Owen, unfortunately, we have reached the end of the time now. I do want to thank you for fitting us into your busy schedule. But more importantly, Dennis and I would like to thank you for your dedicated service to our country across your roles at NASA and now the Department of Energy.
Mr. Barwell: Thanks, Al. And it's been my pleasure to sit and talk to both yourself and Dennis. If I might, a quick plug -- as you can imagine my conversation here on human capital, that we are hiring -- so any one that is interested in joining the Department, please feel free to contact me at firstname.lastname@example.org.
A lot of the work that I've talked about here, I can take very, very little credit for and really do have to apply the credit to the team that has made -- all that has been made possible today. They really are a good bunch of people, and it's a pleasure to be able to work with them. And finally, if you want to learn more about the Department of Energy, please feel free to visit our website at www.energy.gov.
Mr. Morales: Great, thank you.
This has been The Business of Government Hour, featuring a conversation with Owen Barwell, Deputy Chief Financial Officer at the U.S. Department of Energy. 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'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.
Announcer: 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.
Announcer: 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 13, 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.
Throughout its history, the U.S. Department of Housing and Urban Development, commonly known as HUD, has sought to increase homeownership, support community development, and increase access to affordable housing. Today, more Americans have achieved the dream of homeownership than at any time in this nation's history.
It has also become evident that government best serves the taxpayer when it is performing well and producing sound results. Over the past several years, HUD has taken many notable steps to improve its management and performance in fulfilling its mission.
With us this morning to discuss HUD's efforts in this area is our special guest, John Cox, chief financial officer at the U.S. Department of Housing and Urban Development.
Good morning, John.
Mr. Cox: Good morning.
Mr. Morales: Also joining us in our conversation from IBM is Pete Boyer, director of federal civilian programs.
Good morning, Pete.
Mr. Boyer: Good morning.
Mr. Morales: John, perhaps you could share with us a sense of the history and mission of the U.S. Department of Housing and Urban Development, or HUD. Can you tell us when was it created, and what is its mission today?
Mr. Cox: Certainly. The origins of HUD actually go back to the 1930s, to a couple of key pieces of legislation. The Federal Housing Administration, commonly known as FHA, was created in 1934 as a result of the Great Depression. At that time, there were actually very few 30-year mortgages, which we're obviously very familiar with today. But at that time, that was a not a common concept. So FHA was created to help guarantee loans for low- and moderate-income people. The other key piece of legislation that originated HUD was the U.S. Housing Act of 1937, which again provided and recognized the need in the United States for decent, safe, and sanitary dwellings. The final piece of legislation that I think is key, and obviously, in a department our size, there are many, many pieces of legislation, but the final key piece was in 1965, HUD was actually recognized as a Cabinet-level agency.
The mission of the Department has not changed significantly over the years. Many of the programs have adjusted and been adapted to meet the current needs today. And it's really about increasing homeownership opportunities, providing affordable housing in the rental markets, strengthening communities through our primary program there, which is Community Development Block Grants, and increasing and improving equal opportunity in housing.
Mr. Morales: Now, certainly that mission touches every American out there. Could you give us a sense of the scale of operations within HUD? How is it organized, the size of the budget, number of employees, and your geographic footprint?
Mr. Cox: Certainly. Our annual budget for Fiscal Year 2007 was $36.9 billion. And HUD is organized in about 81 different field offices. We have approximately 9,500 employees, including all our major program areas and Inspector General and OFHEO, our regulatory arm.
We have major program offices -- I would break it down in two or three parts. There is FHA, which is an entity that guarantees mortgages for people in the United States. Then we have Ginnie Mae, which is the arm of HUD that provides securitization of those mortgages; in other words, packaging those mortgages that are guaranteed not only by FHA, but also VA and to a certain extent, Rural Home Loan Program, basically providing an income stream for investors. And the key importance of that is it helps lower mortgage rates by providing a more liquid market. In fact, in today's time, it's probably more important than it ever has been.
And then finally, there are the main programs of HUD. I'd mention three. There are many, but I'll mention three in particular. Public and Indian Housing, which provides rental housing primarily and Section 8 vouchers for many Americans around the country; the Community Development Block Grant Program, or CPD. CPD is the organization, the Community Development Block Grant is the biggest piece of that. The Community Development Block Grant got its start in the '70s in the Nixon Administration as part of revenue sharing, and that fundamental program still exists today. It's based on a formula and is given to states, counties, and municipalities based on a formula, and that's probably our most flexible program. So it can be used to provide affordable housing, but it can also be used to provide infrastructure, water, sewers, libraries, et cetera, anything that provides for economic development, as the name would imply. So those are the major programs within HUD.
We also have obviously offices of policy and research. One of our key goals is equal opportunity, so we have a program office there that helps monitor equal opportunity complaints, in housing particularly. And they've just started a new program to look at lender abuses in the marketplace.
Mr. Boyer: John, now that you've provided us with a sense of the larger organization, perhaps you could tell us more about your area and role within HUD. Specifically, what are your responsibilities and duties as the chief financial officer? And could you tell us about the areas under your purview, how you're organized, the size of your staff and budget?
Mr. Cox: Certainly. The staff that I manage is what I would call a full-service CFO staff. In other words, we have the budget function, which is a critical function for any federal government. We have a financial arm which does the financial statements, the financial accounting. We have a group that provides financial analysis and prepares our performance and accountability report. We have a Systems Division that works with our CIO to provide the systems support; in other words, the accounting general ledger, et cetera, all those feeder systems. And then we have under my purview a group of appropriations attorneys. So all told, that's about 215, 218 people, and they have those full-service roles and provide a variety of support.
In the budget area, we provide comments. We work with OMB constantly. We work with the Hill to provide analysis, data, input. We try to believe we're not just gathering the numbers, but we're hopefully building some value in terms of analysis on the numbers, helping the Hill and OMB understand when we're making budget requests, when we're making proposals for example, the recently passed FHA legislation -- we're trying to do that type of analysis.
Financial statements is what you would expect. It's putting the numbers together, closing the books, making the payments and disbursements, making obligations, working with the various program offices to make sure that all those meet the proper funds control. And then as I mentioned, the financial reporting arm takes those financial statements and turns them into the Performance and Accountability Report, which is really telling all of our constituency groups, the Hill, the various interest groups that we serve as well as the American taxpayer, here are our goals and how do we stack up against those goals.
Mr. Boyer: Now, regarding your responsibilities and duties, what are the top three challenges that you face in your position, and how have you addressed those challenges?
Mr. Cox: Clearly, continuing to be more efficient and effective with the resources that Congress gives us is a key priority. It is a tight budget environment; that's no secret to anyone. So trying to make sure that our resources are allocated appropriately among the program offices, or appropriately between programmatic functions and administrative functions, that's a key challenge for any department, and HUD is no exception.
The second would be in the succession planning area. Many people are aware obviously that there's a looming wave of retirements in the federal government. Many people, HUD in particular given its particular age as a department from the late '60s, there are people now obviously reaching 30 and 40 years' worth of work, and therefore, they're certainly entitled and are going to enjoy a nice retirement. The challenge we have then is to rebuild the staff, sort of build back, if you will, that institutional memory that has many, many years of programmatic knowledge. So we've adopted programs both as a department for succession planning, and we have a lot of good efforts underway there. And then specifically in my office, in addition to the Department-wide efforts, we're looking at bringing on new recruits, some from college, some from other sources. But again, just trying to build that pipeline back up as you would in any organization that's faced with -- I believe our figures are somewhere north of 50 percent of our employees in the next three years are eligible to retire. They won't all retire, but they're eligible to retire. So clearly, there's a need and an effort there to drive that.
Mr. Morales: John, you recently came to HUD from the private sector. Could you describe your career path for our listeners? How did you get started?
Mr. Cox: Sure. I have an accounting degree from Texas A&M University, so I guess you could say I'm a bean counter. I first began my career in public accounting with Ernst & Young, was there for several years, and then I worked for a publicly traded software company in Houston, Texas, before moving to Washington, D.C.
The publicly traded software company, I had a variety of roles. I began as a tax director helping with the tax function. BMC Software was a worldwide company, so we had operations not only across the U.S., but around the world. I took on a variety of roles over the years. I was there approximately 15 years, including chief accounting officer, and finally chief financial officer of that company. So that's a little bit of my background, how I got to D.C.
When I left BMC, I was determining what to do next, and visited with a good friend of mine who suggested public service. I'd always had an interest in that and the timing was right, both from a family standpoint and a career standpoint. And so I began that process and explored it, and ended up at HUD.
Mr. Morales: So how has your previous experience prepared you for your current leadership role, and how has it shaped your management approach and your leadership style?
Mr. Cox: The benefit of working for a large publicly traded software company is that you're used to working within a large organization: HUD obviously -- BMC was approximately 7,000 employees when I left -- HUD is 9,000+ as I mentioned. So from a size perspective and being able to get your hands around not only the organization and its financial information is a challenge, which that prepared me for, but also just being able to work and maneuver in a large organization. You have the added mix, in the federal government obviously, of the political side, which is different than in the private sector. But just being able to work among those different organizations and try to coordinate and have a good effort there to work to get a common purpose I think was very good.
Also, I think my own personal leadership style is one of giving people tasks and expecting them to do it and then holding them accountable. But yet I don't look over their shoulder. I don't call them every day and say have you done this? So I think having a style that's more cooperative and also very accessible, I think that is something that I've developed over time and I think has served me well and I think is appreciated by the staff, at least I hope it is. And I think that's the approach that I like to use to work collaboratively.
And also, particularly in the federal government, I think, it's different in the sense that there are career staff that are obviously there for a long, long time. Politicals come and go, as is the nature of the beast. But I want to recognize the efforts that they've made, respect the efforts and the knowledge that they have, and so I also want to foster an environment where I just don't know what's best or I don't make the decision. I want them to give me the information, and then collectively, we can make the decision.
Obviously, the ultimate responsibility lies with me and I accept that, but I want to make sure that they feel comfortable giving me the best inputs that they have.
Mr. Morales: Fantastic.
How is the Department integrating budget and performance information? We will ask John Cox, chief financial officer at the U.S. Department of Housing and Urban Development, 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 John Cox, chief financial officer at the U.S. Department of Housing and Urban Development.
Also joining us in our conversation from IBM is Pete Boyer.
John, let's move for a moment over to the President's Management Agenda, or the PMA. In the last OMB scorecard, unlike HUD, about half of the federal agencies received a red rating in financial performance. What has your organization done to continue receiving a green rating in progress and status in this area? And second, can you tell us from your perspective why this is such a challenging area for many of the federal agencies?
Mr. Cox: Well, first of all, let me just say that when I came into federal government, I think the concept of a PMA is extremely helpful in terms of accountability. It's out there, it's public. And surprisingly enough, in the private sector, I used a very similar mechanism. I used a red, yellow, green scorecard and reported to the board every quarter. So I think that is -- I was very impressed with that from a federal government perspective, and OMB's management of it.
In terms of getting to green, first, let me give you a little bit of history with HUD. It took HUD a long time to get to green. And I congratulate the efforts of not only my staff in the CFO area, but the program staff as well, because it took a long time to get to that status. One of the final things, kind of final couple of things we had were two material weaknesses that we eliminated with last year, Fiscal 2006's, audit. And then we also got off the GAO high-risk list. And again, both of those items were parallel. And so I think there was a lot of work, and I think that should be recognized, to get to that point.
One of the challenges I think people have are getting the management support inside the organization to tackle these issues. Because many of these issues are either accounting-related or business process-related, not as high on the radar screen, quite frankly, as program delivery, getting the dollars out to the various groups that are impacted. So I think that's one of the challenges. Fortunately, we didn't have that at HUD. The Secretary and Deputy Secretary were very supportive of this effort. It was a multiyear effort to get to green on the President's Management Agenda and improve financial performance, but it would not have happened without their key top-level support. And so I think that's just -- it's a process. It has to involve strong funds control, so you have to work with the program offices to make sure that they're working to improve their funds control processes.
And then finally, it also has a lot to do I think with systems. As we work with the challenges of a tight budget, which all federal agencies are doing, one of the things you have to do is use technology to improve the business processes, which ultimately then improve the controls. And so I think that has proved to be a challenge for a lot of agencies, and again, HUD is no exception there, in getting enough dollars to make those improvements. Because many of our systems, while they have been modernized, many of them are still decades old. And so it takes a lot of money, a lot of time, a lot of planning, a lot of good project management, to be able to implement those, get those requirements, and make the business process changes. And so that I think also is a challenge in getting to green.
You have, for example, many agencies with multiple general ledgers with multiple feeder systems. All the feeder systems don't talk to each other necessarily. So all of those are understandable, but they provide challenges in terms of getting to proper financial management from a federal government perspective, or private sector for that matter.
Mr. Morales: Now, along a similar theme, John, your department has received an unqualified opinion on its principal financial statements for the seventh consecutive year, which clearly demonstrates a pattern of financial accountability within the organization. First, can you tell us what is the significance of a clean opinion? And what do you think are the keys to successfully achieving a timely and clean opinion?
Mr. Cox: First of all, the importance of it is to the oversight bodies: OMB, Congress, et cetera, it tells them and gives them a comfortable level that we are utilizing those funds in accordance with what they were designed to do. In other words, the appropriation law tells us what to do with these funds and that we have in fact done that; that we're using them in an effective and efficient manner for the taxpayer, or the ultimate beneficiary in our case.
Secondly, I think it helps to have -- and this may be somewhat blasphemous for me to say -- but it helps to have a good relationship with your auditors, and with your IG in particular. So what I have tried to do during my tenure is work with my team to provide more openness in working with the IG, because ultimately, in our case, two of the major components are audited by independent firms; the overall HUD audit is audited by our IG. And so you just have to have an open process there and a dialogue with them to you know, you can't just working on the audit in August. In the private sector obviously, you're working constantly because you have quarterly reporting. Here, you have annual reporting in the federal government. So I have initiated a process this year where the corrective action plans, the management letter items from the prior year, we started working on those in December and early January in anticipation of trying to clear those up for this year's audit.
You may be aware -- I don't know if your listeners are aware -- it's a little bit arcane accounting, but some of the rules for what are the definitions of material weaknesses and significant deficiencies have been raised, similar to what you saw in Sarbanes-Oxley in the private sector. So what it takes to get a material weakness, the bar has actually been lowered, meaning we have to do more work to make sure that things don't cross over that threshold. So again, getting that process started early, getting the corrective action plans in place, working with the program offices because obviously, my team doesn't do that alone.
And then finally, I would say again, my hat is off to all the men and women at HUD in both the CFO office as well as the program office, because it doesn't happen -- I just don't wave a wand and you get a clean audit opinion. It takes a lot of hard work, a lot of process improvements, technology improvements, to get this done. And it is a tremendous accomplishment to have seven years in row.
Mr. Boyer: John, again, on a similar vein, budget and performance integration lies at the heart of ensuring both strategic allocation and efficient use of funds. Could you tell us about your department's efforts in budgeting and performance integration? And how has your organization expanded the use of financial data to improve its management decision-making process?
Mr. Cox: Sure, Pete. I'll take the last one first. We have expanded what we call our "data mart," our financial data mart, to assist with areas of management decisions, budget planning, budget execution, spending, project management, contract management, all these different areas. We have increased the amount of data that the programs have to be able to analyze the information that they have and execute on their business. So I think that's an area where we have gradually been implementing improvements there to not only use technology, but also better data so they can get at it. We're not there yet. We have more work to do, including -- we're working on an executive dashboard for the assistant secretaries and general deputy assistant secretaries, to again provide them more information on a more-timely basis. And we're working to get that done literally even as we speak. We've improved the web-based interface to this data mart. So in the past, it was sort of a circuitous route to get to this data. We're trying to make it easy. We're trying to make it web-based.
And so I think fundamentally, you are a better financial person and you have better financial information if you understand the business better. And so we're trying to not only understand the business, in our case the programmatic side of HUD, and getting that information matched with that, so that hopefully we make better decisions and better judgments on how we budget.
The final thing I would say is from a purely budget standpoint and a budget-performance integration standpoint, tying into the President's Management Agenda, my organization has responsibility for working with the programs to set those goals and those targets. And then we're obviously responsible for ultimately reporting on those targets. So, for example, if we have percentages of minority homeownership that FHA needs to meet or that certain organizations need to meet, if we have caseloads in Fair Housing that we need to -- you know, we've set a goal for how many of those cases get resolved in a timely manner, dozens and dozens of metrics that we have in the Department; we're responsible for monitoring those, maybe nudging gently -- as the Secretary says, using our powers of persuasion to improve those metrics, and then obviously, working with the external sources, again OMB and the Hill, to improve the reporting. And hopefully, what that ends up with is not only a document that lets the taxpayer and the constituency groups understand how HUD has performed, but also helps push the organization to make improvements. And I think that's the ultimate goal.
And then the result of that is to, hopefully the next time we submit a budget, which we're shortly to begin the Fiscal Year '09 cycle, that will help us better prioritize where our needs are and where we're going to put our requests for funding.
Mr. Boyer: Agencies are required to annually review programs to identify those susceptible to significant improper payments. These improper payments include payments made in the wrong amount to an ineligible recipient, or improperly used by the recipient. Would you elaborate on initiatives and strategies that the Department has employed to successfully manage and reduce improper payments? And what progress has been made year over year, and how much of a challenge does this effort present for your department?
Mr. Cox: Well, I'm pleased to tell you, Pete, that HUD has a great story in improper payments. We were the first agency to get to green on the President's Management Agenda in reducing improper payments. And we have various areas where we measure improper payments, but the largest one is in our assisted rental housing areas.
Fundamentally, to qualify for rental housing, you are allowed to pay no more than 30 percent of your income. So obviously, a starting point of that is what is your income? And what we found in improper payments is clients and tenants in all cases weren't being forthright with what their income was. And so we developed a process -- and it's a great story of technology, it's a great story of hard work within the Department, and it's a great story of interagency cooperation. Using the HHS, Health and Human Services' current wage and employment data, we were able to set up a secure data point. So obviously privacy was a key issue for the Hill as well as for the Department. And working with that system, we're able now to match on a fairly current basis what the income that's being reported through the HHS system is.
So by doing that, we set a baseline in 2000. We estimated that we had $3.2 billion of gross improper payments. And by implementing that matching system, combined with additional education for those who are actually going through the process of working with the tenants to make sure that that -- so it was education and focus as well as a technology solution, we were able to reduce improper payments in about four or five years by over 70 percent.
And so again, you've heard stories obviously similar to the IRS, Internal Revenue Service, where if your neighbor gets audited, everybody suddenly gets religion. Well, I think a combination of improved education and improved computer matching really was a key to being able to do that. And also working with HHS. I don't underestimate the importance of that. You know, there were privacy concerns. In today's world, there are obviously security concerns. So we were able to develop a system that allows each of the public housing agencies, or the people who are working on their behalf, to match that income and do it in a secure, safe manner, and yet get the information we need to verify the tenant's income.
We have that in the public housing arena. In Fiscal Year 2008, we'll be expanding that to the multifamily project-based assistance program, another key rental program in the Department. And so the bottom line for us is not only to reduce improper payments, but it's to ensure that the right people get the right help, and I think that's what's key. That $2 billion reduction in improper payments means that we have more funds available to help those who really need it.
Mr. Boyer: That's really a great success story.
John, what steps has HUD taken to track and manage its costs? Specifically, could you tell us about your efforts implementing an activity-based costing management system in your department? And what were some of the challenges to pursuing this effort?
Mr. Cox: We are still in the process. I would say that effort is a work in process. We have two products internally: REAP and TEAM. The acronyms aren't important except to tell you that what they're doing is basically time-tracking, and allowing people within the Department to track their time and enter their time so that we can have an estimate of what it takes to do that particular job. And one of the challenges is obviously education, helping people understand that it's important, it's not just an exercise. These are professionals, they don't punch a clock necessarily, but we need this information to help the Department understand what it really takes to get a particular job done. And so we're using that effort in a way to do cost and management data.
We have general ledger programs that help us track that data so we can allocate that among our major strategic goals. So improving fair housing, improving minority homeownership, providing safe, decent, affordable housing in the rental market, all of those goals, we allocate those based on that REAP/TEAM data.
So we've got more work to do. We'll be implementing a new general ledger, we hope, in the next 18 to 24 months on the HUD side. And when we do that, we're hoping to add some additional features that will help us automate that process.
Mr. Morales: Now, John, HUD has obviously made a tremendous amount of progress in the areas of finance and accountability. And to sort of demonstrate your success, this year, your department has received the prestigious Association of Government Accountants, or AGA, Certificate of Excellence in Accountability Reporting, the CEAR Award.
Could you tell us a little bit about this award, its process, and this significant milestone in your organization?
Mr. Cox: That was a significant milestone for the Department. We participate in a couple of those programs, and CEAR being one of those. What the process is is there are, my understanding is, approximately 80 reviewers, approximately 21 of the CFO Act submitted an application for the CEAR Award, and I understand about 11 of the 21 received the awards. And so it's just a process where they go through and they look and review your report to determine if it shows accountability, if it shows transparency, if it shows that you're continuing to look and change your business processes and your reporting and transparency to the taxpayer and to the constituency groups that we serve. And so we were very, very pleased to receive that. And I think it provided us some validation that in fact, we're trying to make improvements.
Now, I will also be honest with you and tell you they gave us several pages of suggested improvements for this year, which we are going through, and so our work is not complete by any stretch of the imagination. There's a lot more we can do to simplify it. The PAR document itself is a very lengthy document. One of the things I've challenged my team in the financial reporting area this year is to hopefully reduce its size and bulk, because I think ultimately, that will actually provide a better document to help taxpayers and constituency groups understand not only how we spend our money and where we spend our money, but are we effective at doing that.
Mr. Morales: So no resting on pass success.
Mr. Cox: Absolutely not.
Mr. Morales: Great.
Mr. Cox: Always what have you done for me lately?
Mr. Morales: How important is collaboration to HUD's current success?
We will ask John Cox, chief financial officer at the U.S. Department of Housing and Urban Development, 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 John Cox, chief financial officer at the U.S. Department of Housing and Urban Development.
Also joining us in our conversation from IBM is Pete Boyer.
John, through the new OMB Credit Management Initiative, agencies are set to strengthen the way they award and service loans, manage portfolios, and collect debts. Could you tell us a little bit about your department's management and strategy for improving its credit management capability? And what has the Department done with respect to credit management?
Mr. Cox: The Department has one large piece of its business that is under credit management and credit reform. We actually don't make loans. As I mentioned earlier, we actually secure and guarantee loans, so FHA has that function. They have approximately $450 billion of mortgages that are outstanding, so it's a big portfolio.
One of the things we've done over the last several years is improve our modeling for loan loss reserves -- obviously a topic that's very timely in today's world. But we have improved -- for example, added FICO scores. This year, we actually added FICO scores down at the individual loan level. So again, that's a bit arcane perhaps, or something an economist would get excited about, but the bottom line is for HUD, it actually is giving us better ability to judge and estimate what our risk is.
We have a couple of other areas that help us manage our risk. We have Appraiser Watch. We have Credit Watch. Those are automated technologies that allow us to when someone is going out to do an appraisal or when someone is actually selling a property that has been foreclosed, and finally someone in the normal process of underwriting HUD/FHA business, we have programs that monitor their scoring, and there's a scoring system. For example, in the appraisal area, we have a system that allows us to track. And so if one appraiser, for example, consistently grades high, we go in and sort of flag that and we'll do a check; or if we have one appraiser who sort of grades it at a medium level and there's a couple of areas and property that he grades high and then it comes back down again, there are all kinds of algorithms there we can run to ensure that they have a good, healthy system, and more importantly, that those appraisals are accurate and appropriately done.
Similarly with Credit Watch, we actually watch the various banks and institutions who are engaging in these loans and underwriting these loans. And so we can look at their default rate, for example. That's an easy one. We can look at particular trends and patterns. And again, that's all designed to help us manage the government's risk.
This portfolio remains very strong. The President recently announced FHA Secure, which is a program to help some of the folks who have been involved in the subprime market, particularly those who have adjustable rate mortgages that have reset. It's interesting to watch where, in the past, as you observe the market in the last several years, FHA had in fact lost market share. Now it's sort of cool to be with FHA again, primarily because a lot of those other funding sources have dried up. And obviously, FHA's goal is not about market share, it's about helping low- and moderate-income people get the housing that they need. And so we're constantly working to improve the credit management of that program.
Mr. Morales: Certainly a very topical issue these days.
We spent some time talking about the challenges of improper payments, but there is another challenge, which is around the transferring of money between agencies. Now, GAO has repeatedly identified intragovernmental transactions as an issue when they perform their annual audits of the federal government finances. As the leader of the CFO Council's Central Reporting Transformation Team, could you tell us more about the government-wide effort to improve its ability to properly account, report, and reconcile these intragovernmental activities?
Mr. Cox: Certainly. I co-chair that Central Reporting Transformation Team with Ken Carfine of Treasury, and we are working in a variety of ways to make improvements to the intragovernmental activity. Fundamentally, I think that the improvements will come in a couple of areas.
Number one is visibility and accountability. We have provided a new watch list to the CFO Council to identify those who have chronic out-of-balance situations with intragovernmental dealing between each other. Secondly, OMB has started a process where they are actually bringing in those particular organizations to work on corrective action plans. How do you solve this? What are the fundamental issues? That's number two.
Number three, I'm leading a team specifically on buy-sell transactions. In other words, when one agency buys a good or a service from another, we're looking at ways to improve the reporting of that, how that happens. But again, as I mentioned, fundamentally it's a business process issue, and so we're looking at various technology solutions.
We're looking at the fundamental issues and why they arise. Some of those issues can be because of accounting differences. Some of those differences can be because one agency treats it a different way from an accounting standpoint. Some of it is just simply it's difficult in large organizations to know who the right person is.
So we have not put forth our proposed solutions, and we look to do that in the spring time frame. But again, I believe it's going to be a combination of improved business processes, improved technology around those business processes, and improved reporting so that people at my level actually realize it's going on. It's not a very sexy topic, to be totally honest with you. It's not something that's going to be at the top of people's radar screen. But as you mentioned, it is a material weakness in the government-wide financial statements, and I believe we can solve this problem.
I'm also sensitive from the technology standpoint that I don't think we need to write a multi-hundred-million-dollar program to fix this. There have been a couple of efforts in that vein in the past and they've not succeeded. I think the primary reason they haven't succeeded is we have to have a realization not only of the current budget realities, but also the fact that many of us are going to have legacy systems for a long, long time, either because they work and they're going to continue to work, or because you can't get enough funding, or because -- it could be a variety of reasons why. So I think we have to use today's modern technologies, web-based technologies and process-based technologies, to help us understand when a particular transaction --and let me give you one quick example.
Currently, when agencies are trading with each other, there's a system that Treasury has to do that called the IPAC. IPAC basically is how you access the bank account of the other agency. Today, the way that system works, nothing wrong with it, is the business is if I've bought a service from you and you're going to send me an invoice, you literally go in, pull the money out, and get paid. And certainly, I recognize that agencies need to get paid, but you literally don't have to notify me that you have done that. That's not a great business process. There's nothing wrong with the technology. The fundamental technology is fine. There just needs to be a recognition that I need to understand that when you're coming into my bank account, effectively at Treasury as a federal agency, you need to let me know and you need to let me know what it's for.
So I think that's one example of sort of a first step along that process where there's a notification to the agencies of the back-and-forth nature of these transactions. And obviously when you multiply that times hundreds and hundreds, if not thousands and hundreds of thousands of transactions, it becomes very difficult. And it's understandable why we have the issue we have. It's approximately a 90- or $100 billion out-of-balance problem as of last fiscal year, but we're working to solve it.
I give Ken Carfine at Treasury a lot of credit. They're working on the fiduciary side of this particular problem. "Fiduciary" means I'm holding some assets for someone else, which Treasury obviously does. And they've made some very good progress on this area, and they'll report on that later this year, to reduce that out-of-balance problem. And just simply by tackling it, looking at it, focusing on it, they're able to do that. And then of course, the next step, which we just chatted about recently in a CFO Council meeting, is that's great, reducing the balances, but then how do you make the business improvements and the process improvements so that those balances don't grow in the future?
Mr. Morales: So it's really more about the business rules than it is about technology?
Mr. Cox: That's correct. And obviously, we have published, the CFO Council under its guidance of OMB, have published business rules, intragovernmental business rules. We need to make sure we have the proper mechanisms to enforce that. We need to make sure from the business process that the right people get engaged at the right time to make sure that the programmatic issues that are being focused on, buying X and selling Y, are dealt with. But even the mundane issues of what account, how it's booked, when you're going to book it, how are you -- you know, if it's a service, how are you going to accrue the amount that you've done. Those kind of issues are sort of the blocking and tackling of how you get that done.
So I applaud the great efforts that have gone into developing those business and intragovernmental rules. Shortly, there'll be a dispute resolution committee to help resolve some of those issues. So those are all, I view, fundamental building blocks to ultimately helping us solve this problem.
Mr. Boyer: John, one of the administration's key initiatives is creating a federal government that is accountable, results-oriented, and appropriately aligned with strategic goals. Having worked in both public and private sectors, could you tell us how federal managers can effectively manage an ever-increasing blended workforce composed of contractors and federal workers? And what are the some of the key differences intrinsic to these core groups?
Mr. Cox: Well, I think fundamentally, all organizations, and it's true in the private sector as well as the public sector, there's been a shift towards more contracting. "Outsourcing" is a commonly used word, sometimes pejoratively, but it's a commonly used word. What I think you have to do fundamentally is you have to start, first of all, with a strong contract with clearly defined service level agreements. That's critical. You don't know if you've been successful and the contractor doesn't know if they've actually done what you're supposed to do if you don't have a clearly defined set of service level agreements.
Secondly, I think project management is key. That's a big shift when you're going from someone who's actually doing the work to now someone who's managing someone who's doing the work. And in many cases, that may require a different skill set, because project management is different than doing the work yourself. So I think that's a key that's got to be done.
I think the core staff have to understand -- or the agency staff, the Department staff have to understand the business functions. We talked earlier about succession planning. As people that have that years and years of experience roll off, you've got to develop that younger staff, not younger in age necessarily, younger in time with the agency, that understand what the program and programmatic pieces of the business are.
And then finally, obviously, a distinction you have to deal with is typically, you have unionized workforce and those rules that you have to work with on the agency side, and you may or may not have that on the contractor side. So that just provides a set of issues you have to deal with, not necessarily good or bad, it's just the reality of having to work in that environment.
Mr. Boyer: Now, on a somewhat related topic, can you address the coordination amongst the different C-suite leaders? How important is the coordination and collaboration among the organization's chiefs: the CFO, the CIO, the chief human capital officer? And could you elaborate on your successful collaboration within HUD?
Mr. Cox: Sure. I was fortunate when I joined HUD that the four service areas -- the CFO, the CIO, the chief human capital officer, and the chief acquisition officer -- were meeting on a Monday morning basis. We meet every morning at 8:30. We don't necessarily have a set agenda. And the purpose of those meetings is just to coordinate what's coming up in the week, give people a head's up, work to solve particular issues.
And I'll give you a specific one that we worked on was after the hurricanes in 2005, one of the recommendations that came out of that relief effort was that we really didn't have a nationwide database of apartments. There were many individual pieces, and some particular geographic areas had it, but in that situation where obviously we had a tremendous need for a lot of people to relocate quickly, we had to develop this national locator system. And so we worked together: the CFO to get the funding, the CIO to do the technology, working together with the chief acquisition officer to get that done. We wanted to make sure that we got that done in a quick, timely manner. So that's just one example of how we work together collaboratively. And, fortunately, I was able to walk into a great system that already existed when I came to HUD.
Mr. Morales: John, you mentioned Katrina. And many of our listeners may not recognize the importance of the role that HUD played in responding to natural disasters, especially Katrina. Could you elaborate on HUD's role in such disaster relief efforts, and more specifically, what HUD has done to ensure the proper use of funds during such events?
Mr. Cox: Certainly. We have a major part to play in the recovery of the Gulf. As I mentioned in the beginning, our annual budget is about $36.9 billion. HUD requested, and the states requested, and working at the President's request, Congress provided an additional $16.7 billion to provide one of the largest housing recovery programs in U.S. history. HUD manages those programs through our Community Development Block Grant Program. And as I mentioned earlier, in CPD, that can be for low-income housing, regular housing. It can be for infrastructure, all types of programs. And each of the states that were impacted with Katrina, Rita, and Wilma have presented plans to the Department. Those plans have been approved. We have tried to waive a lot of the regulatory requirements at the request of the President and Congress, to get the money down there and get it working as quickly as we can. So we are involved in a lot of different stages.
We have controls in place. The states have controls in place. The localities have controls in place. We continue to adapt to that and manage to that as time goes on. We created, as part of Katrina and Wilma and Rita, the Disaster Voucher Program to temporarily help house thousands of families who lived in public housing or HUD-assisted housing and were displaced. We recently extended that program, given the pace of recovery in the Gulf area.
And then beginning in November of 2008, HUD will assume responsibility for long-term rental assistance through the Disaster Assistance Housing Program, currently being run by FEMA. FEMA typically obviously is short-term in nature. Given the magnitude of this disaster, this has lasted longer than would be their typical time frame. And so we will again assume responsibility as a department for those long-term housing needs of those folks effective in November of next year.
Mr. Morales: Great.
What does the future hold for the U.S. Department of Housing and Urban Development? We will ask John Cox, chief financial officer at the U.S. Department of Housing and Urban Development, 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 John Cox, chief financial officer at the U.S. Department of Housing and Urban Development.
Also joining us in our conversation from IBM is Pete Boyer.
John, I'd like to transition now to the future. Can you give us a sense of some of the key issues that will affect the CFO and budget offices government-wide over the next, say, three to four years?
Mr. Cox: I would point to two or three. One is continuing to improve and develop Centers of Excellence for budget and financial management line of business. That's a big initiative that OMB has had to develop common processes, common standards. We talked about intragovernmental. One of the ways to tackle that ultimately is to have common accounting codes, common ways that we all deal with each other. So that's going to be a big one, and a multiyear effort, clearly, that's going to happen.
Continuing to enhance -- number two, budget and performance integration. I talked about sort of gently nudging the program offices to do that, and to make sure that we keep raising the bar -- to the extent the bar's necessary to be raised. I think that's a role that we play. From a budget perspective, we sort of see the entire landscape, and so that's one I think that we need to continue to work to improve on. Improving cost accounting, we've talked about already. Succession planning, we've also chatted about briefly, but I think that's a critical one for all federal managers in the future as we face these retirements upcoming.
And then finally, I would say improved internal controls. The Department received a clean opinion on the first year A-123(a) effort. And for your listeners, that's effectively the government equivalent of Sarbanes-Oxley. Last year was the first year that federal agencies had to implement that, and we received reasonable assurance that our controls were good and adequate. We have a lot of work to do. Our IG would remind me of that. So there's still work to do, but there's continual improvement. So I view that, again, as a long-term process to improve the controls of the Department, not only the controls for financial reporting, but for programmatic reporting as well. So those would be the areas that I think any CFO and budget shop would be working on over the next several years.
Mr. Boyer: John, on a broader basis, what are some of the major opportunities and challenges your organization will encounter in the future? And how do you envision your office will evolve over the next five years?
Mr. Cox: I think the fundamental functions of my office will stay the same. You know, every year, we're going to need to do a budget. Every year, we're going to need to do processing the accounting, producing financial statements, producing a PAR. I think the tweaks will come in those areas where you look at how do you make the public documents more accessible, more readable? How do you make them more easy to assimilate internally? So the physical process of pulling them together. We're hopeful in the next 18 to 24 months to have a new general ledger.
The two other components of HUD department, Ginnie Mae and FHA, have already migrated to a commercial available off-the-shelf product. And so we will be sort of making the final stage of that. Both of those implementations were very successful.
And my view is when you make those changes in implementing a new system, that's the time when you're going to make the business improvements. Because you're in there, you're in the guts of the system, you're looking at all the processes, so that's the right time to do it, better integrated systems, not only from an accounting side, but again, also from a programmatic side. So how do we eliminate redundant systems, eliminate -- example, with our general ledger, we estimate in the first phase of it we'll eliminate 14 legacy systems as part of that process. So that's making improvements; hopefully it's ultimately reducing costs; and then, finally, improving our funds control.
Mr. Boyer: Now, what steps are being taken to attract and maintain a high quality technical and professional workforce?
Mr. Cox: We are aggressively recruiting as a department, and particularly my organization as well, in the Partnership for Public Service Recruitment Fairs. We're looking at presidential management fellows. We have a recently implemented internship program within the Department. We've always had interns and summer workers, but we want to formalize that process and have people come in and rotate amongst the various program shops, so not just within CFO, but moving from CFO to Housing to Public and Indian Housing to Community Planning and Development. And by doing that, hopefully get them a better perspective of the programmatic aspects. And whether they land back in my shop or someone else's program area, they'll have a broader perspective.
It's easy in a large organization to sort of get in and have a tunnel vision and you're only dealing with what you know. But if you can be exposed to a broader piece of the organization, hopefully you'll ultimately find a nice fit within the organization and you'll stay with the organization. Because obviously the goal is recruitment, it's succession planning, it's all part and parcel of the same thing. So we're looking at other programs, to tuition reimbursement, loan repayment programs, other incentives that can help us recruit the best and brightest to HUD.
Mr. Morales: Now, John, you've mentioned a couple times now the pending retirement wave. But specifically, how are you handling this pending retirement wave? And what is your organization doing to ensure it has the right staff mix to meet some of the future challenges that you talked about?
Mr. Cox: Well, I think we're doing several things. We have a five-year human capital management plan to address skills gaps in particular. We have made sure that the mission-critical functions are adequately staffed and they're performing. The REAP/TEAM data which I mentioned, which is sort of project-based data analysis, helps us with that process as well. We have recently implemented department-wide training where you have to have individual training plans. So part of identifying those skill gaps says John Cox needs the following skills. How do we go about getting him training to do that? So that's part of this process as well, to get the right skill sets matched up with the right jobs. And then finally, we're looking at attracting new blood into the Department via the internship program, and we're also looking to readjusting the skill sets.
You talked before about a blend of public and private workforce. One of the things you've got to do obviously, as I mentioned, was project management. That is a key skill that you've got to have. You've got to be able to manage not only your internal workforce, but the external contractors that you have working for you. So looking at the Department and looking at individuals, down to the individual level, and assessing their skills and needs for that, and doing that going forward, is a key part of our long-term succession planning and human capital plan.
Mr. Morales: John, you've had obviously a very recent transition from the private sector to the federal government. So I'm curious, what advice would you give to a person who's out there who may be sort of in a similar situation and considering a career in public service?
Mr. Cox: I would encourage them to do it. It's obviously something that was important to me personally to serve the President and to serve with the Secretary, but it's a fun challenge. You know, is every day fun? No, but in no job is every day fun. But I think that it's something that if you have an interest, I would encourage people to do it. But whether you're on the political side of the house, like I am, or whether you're just in the career public service side, it's a good career. You're helping people, particularly in HUD's case, but in all departments. Fundamentally, you have to realize that what you're doing is a good service for the American people and for the people you serve. In our case, low- and moderate-income households in communities, states. We have programs for people with AIDS. We have programs for the homeless. So there are a lot of good programs that HUD has that you can be a part of as a federal worker, and you really can make a difference.
We've made some significant improvements, for example, in the homeless area, by looking at different ways to deliver those services and providing more permanent housing, for example, as opposed to the typical shelter area. And the data has recently come back to show that long term, the recidivism, which means physically going back on the street, actually has been reduced. So that's just one example of how providing those funds can help touch someone's life.
And so I think if you have that particular interest, I would encourage people to do it. It's challenging, it's frustrating, but ultimately, it's been a net positive for me.
Mr. Morales: Good, good. So most of the days are at least fun, right?
Mr. Cox: Absolutely. Absolutely.
Mr. Morales: John, well, thank you very much. Unfortunately, we have reached the end of our time. I want to thank you for fitting us into your busy schedule. But more importantly, Pete and I would like to thank you for the transition that you've made and the dedication that you've had to serving our country.
Mr. Cox: Thank you, Al and Pete both. I appreciate the opportunity to be here today. And let me just close by saying I really want to thank the individuals in the CFO organization, my individual organization, for all their hard work and effort. The improvements that you talked about here of getting to green, getting off the GAO high-risk list wouldn't have happened without their efforts. Similarly, the program individuals as well. They made a big difference in making that happen and improving funds control and improving the plans.
If you need additional information on HUD, check out our website, hud.gov. There's a lot of great information, whether you're looking for employment or whether you're looking for a better understanding of what HUD does and what its mission is, I would encourage your listeners to go and look on that site.
Mr. Morales: Great, thank you.
This has been The Business of Government Hour, featuring a conversation with John Cox, chief financial officer at the U.S. Department of Housing and Urban Development.
My co-host has been Pete Boyer, director of federal civilian programs at IBM.
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 support and respect.
For The Business of Government Hour, I'm Albert Morales. Thank you for listening.
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 Saturday, August 26, 2006
Mr. Morales: Good morning, and welcome to The Business of Government Hour. I am Albert Morales, your host and managing partner of The IBM Center for The Business of Government. We created the center 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.
The Business of Government Radio Hour features a conversation about management with a government executive who is changing the way government does business. Our special guest this morning is Mr. Bradford R. Higgins, Assistant Secretary of State for Resource Management and Chief Financial Officer for the Department of State. Good morning, Brad.
Mr. Higgins: Good Morning, Al.
Mr. Morales: And joining us in our conversation is IBM Project Executive, Bonnie Glick. Good morning, Bonnie.
Ms. Glick: Good morning.
Mr. Morales: Brad, most of our listeners are familiar with the Department of State as the diplomatic arm of the U.S. Government, but listeners may not know that the chief financial officer at the State Department fits within the Bureau of Resource Management and manages a budget of approximately $33.6 billion, which certainly rivals many of the Fortune 500 companies out there. Can we start by talking more about the mission of the State Department's Bureau of Resource Management and its activities?
Mr. Higgins: I will be happy to. Resource Management was set up in 2002, out of Secretary Powell's initiative, and it really focused on his belief in having a real organization -- not just diplomacy -- but how do you support diplomacy. The intent was to integrate policy, planning, and budgeting, and then finally accounting. The mission statement is pretty straightforward: it is to integrate strategic planning, budgeting, and performance, and secure the resources necessary to accomplish the Department of State's mission.
To be perfectly honest though, that mission has expanded dramatically, since 9/11. The demands of what the State Department is doing overseas, and be it Iraq, or literally any other part of the world, has put tremendous demands on financial management and control. Really, I think the question for us is - [for] what we are getting from Congress and the American taxpayers: how are we spending the money they are giving us and for what effect? Now, we live in difficult times and the taxpayer wants to know: what type of results should we be expecting and what type of effects is this funding generating?
Mr. Morales: Can you describe specifically your role as chief financial officer? And what are some of your official responsibilities and how do you support the broader mission of the organization?
Mr. Higgins: Well, let me start off by saying something. I think I have the best financial job in America. Really quite simply: because I have input in almost all the decisions affecting the U.S. overseas. These are, you know, be it Iraq, what we are doing in Afghanistan, what we are doing in a lot of the other countries. These issues will define our generation, so I cannot tell you how much I've enjoyed my time, being able to ask the kind of questions, that just like anybody else, would want answered -- being an outsider. But the specific responsibility as chief financial officer, is again as I mentioned before, the development of the Department's internal planning, budgeting, and accounting functions.
It goes much further than simply putting together a budget. We have embassies in over 170 countries around the world. We develop business plans, or what we call mission performance plans, for every one of them. The individual missions develop [the plans]. We critique [the plans], we meet with at least 60 of the [missions] every year. It is a very interactive process, and for someone like [me], who is new to the government, it's been fascinating, because what you find is no mission is alike.
The challenges that we face overseas are just profound, and they're changing constantly. [The] ability to have men and women on the ground, working with these countries is absolutely critical. Our role is in terms of how do we support them and how do we give them the assets or the resources to help them do their job. This goes to my next area, which is, the Bureau of Resource Management has a number of different areas in addition to just putting together budgets.
As I mentioned before, we've got planning and we've got accounting, but we also are the financial services provider for the -- not simply the State Department, but all U.S. agencies overseas (outside of the Department of Defense). [For example, if the]Department of Commerce has some one, let's say, in Egypt, you know, it's the responsibility of the State Department to provide life support and service for them� through the chief mission. We also handle the salaries of all the foreign service nationals who happen to work for the U.S. Government overseas.
For example, we pay the salaries of about 90,000 Americans, locally engaged staff, and retirees annually. What makes us different, though, from any other organization in the U.S. Government is that, we just don't pay in U.S. dollars. We pay salaries in a 160 different currencies, and we have about 260 different pay plans around the world. So the accounting and the administration functions of this are enormous, and particularly when you realize the State Department staff, you know, a typical assignment and a mission at the State Department is anywhere from one to three years.
So in any given year, you probably have 30 to 40 percent turnover. So you know in every country the pay plans are a little different, because whether it's a hazard pay or just a type of things that, you know, family type of provisions, so that it gets incredibly complicated, just from getting the right pay out. Those are the type of issues that we deal with on a daily basis. The other thing, if I can finish, is outside of the normal accounting business in the financial operations, we also have the mandate for what we call mission assurance.
If something was to happen to the State Department, what are the plans? And we help organize all of the other bureaus in terms of their contingency planning, so it's a basically critical infrastructure planning. This is again, a follow-on to what happened after 9/11. What do you do if something happens? We also have responsibilities for dealing with GAO liaison. We deal with them on a daily basis in terms of their audits. So we have a pretty broad mandate, but again it comes back to financial services and making it as effective as possible for the Secretary.
Ms. Glick: Brad, you have a tremendous range of responsibility within the State Department itself. I'm wondering if you can tell us how your broad range of professional experience, including a successful career in the private sector, as well as your previous stint as the CFO of the Office of the Coalition Provisional Authority in Baghdad, prepared you for your current position? How has such a background influenced your personal management style?
Mr. Higgins: That's a very interesting question. It's hard to say anyone could be prepared for going over to Baghdad. I started my career as a lawyer, and I decided shortly after practicing for about two years to become an investment banker, but I've always had an interest in the public sector. I gravitated toward public finance and I did that for about 20 years on Wall Street at firms like Goldman Sachs and First Boston. I led a number of groups primarily focused in public power and infrastructure.
I specialized [in] large complicated problem projects. When we went into Iraq we used to joke, you know, "Iraq was the mother of all projects." It was something that caught my interest. I also think, for me to go there, was [that] a former colleague of mine was the Chief Financial Officer at the State Department --Chris Burnham. After 9/11, I had wanted to do something to help and get involved, just like thousands of other Americans. I volunteered to be an advisor in Washington for a year.
Well, that lasted about a day and they asked me if I'd be interested in going to Baghdad -- a week later I'm sitting in Baghdad. It was partially my background in terms of trying to analyze problems and ask questions. One of the things that I found incredibly helpful with [a] Wall Street background, and which is really not different from anyone out there in terms of managing their own finances, is that I want to know: why we are spending this or why is it costing so much -- the due diligence aspects of Wall Street, I think, have proven to be very helpful.
You know, I come from not so much a spending perspective, but an investing perspective. When we're looking at things, particularly on foreign assistance, why are we spending this, what's our return, what are we doing to help and quite honestly, what's our exit strategy, so those type of experiences have really proven to be very helpful. I think that if I was to say, "Where did I learn the most?" it was my 13 months in Baghdad.
I did two tours over there and working with, not only the Iraqis, but the Americans. We tend to forget there has been an awful lot of criticism of what's transpired there -- fraud, waste, and mismanagement that I kept on hearing about. Well, I have to tell you, I started off as a CFO for CPA and I worked very hard. I was largely brought over to fix a budget deficit. We were projecting about a $400 million shortfall on an $800 million budget. It took me about three or four weeks with a team of folks, but we ended up not only resolving the shortfall, but we ended up turning over a surplus. It was asking a lot of questions, and that was really my primary focus. I had a chance to see what was going on and I was concerned. When the State Department took over, I asked if I could extend, and they said fine and they made me the Chief of Planning for what was known as the Iraq Reconstruction Management Office better known as IRMO.
We did the first reprogramming and that was really reflecting on how we saw the situation evolving in Iraq. One of the real challenges that we, all of us, whether it's the Hill or the American taxpayer, are wrestling with right now is: how did we get there and what's transpired. When we first went in there, it was really a reconstruction program -- it was what is better known as postwar reconstruction -- and that was one of the real challenges, because it evolved very quickly to a wartime reconstruction.
What I found, as with most businessmen, or people, you are constantly evolving, you are constantly reassessing, so when people say mistakes, well, no, it's re-aiming -- particularly in a war zone, where there are attacks exchanged almost daily. We had to keep learning from our mistakes and lessons. When I came back I remember sitting down with the Secretary upon my arrival, toward my confirmation process, I tried to explain to her: "Look, if you can get something done in Baghdad, you should be able to get something done in Washington." I was welcomed. I was pleased to come back.
In some respects, I think the experience in Baghdad has put me in a very good position, not so much because of all the lessons. The fact of the matter is the men and women, the Americans in the coalition and the Iraqis, what they're going through, having very much of [an on the] ground feeling. It is one thing to sit in Washington and talk about what we have to do and how it's going. It is another thing to be out there, trying to make it happen. When we talk about programs, or budgets, or money, well, I've got a pretty good idea how difficult it is�to ask the kind of question�how exactly are we going to do this?
Mr. Morales: We certainly want to hear more of the stories from Baghdad, because we think there is a lot of learning here. But I want to transition here a little bit and ask you, we understand that the Bureau has received numerous awards from organizations such as the Association of Government Accountants and the League of American Communication Professionals, just to name a few. Can you tell us about some of these awards and accomplishments?
Mr. Higgins: Oh, I'd love to. I only wish I could take credit for them. All these awards were worked on last year. I'd like to say, I hope we can continue doing them, and if we fail, please let it not be on my watch. But I will say, the team that I inherited at the State Department is really second to none. I think I can talk with a certain level of experience, spending almost 30 years in the private sector and in the public sector, and being in management positions for probably 20 of those, so it really is a credit to the team that we have at RM.
Probably the best one to start off with, is the double green score on OMB scorecard for the President's Management Initiative, and I'm sure we will get into that later on, but I think it's something that the listeners should be more aware of that the PMA is one of the real achievements of this administration. That they're, you know, trying to make the government work better and work harder and to justify the taxpayer's dollars. In our area the two that we were responsible for, planning, budget integration, and financial management.
We are proud to say we are double green, for progress and for status. OMB is a demanding boss and they're constantly asking questions. The other areas that I think we are particularly proud of, the last five years we have received the AGA's prestigious Certificate of Excellence in Accounting, on accountability reporting, I should say. And this all goes back to our performance and accountability report. This is something Americans don't really look at enough.
The federal agencies by law are required to do annual reports and they are called PARs, Performance and Accountability Reports. This is really a good area, if you want to find out what is going on in an agency, particularly, the State Department, go to their website, open it up. Or contact us and we will send you a disk. They are long, so we are going to have to send you a disk, rather than a printed copy. But it goes into all our different programs and what our record is. There is a lot of accountability and there is more so today than ever before, because of a lot of the work OMB has done.
Another one, and this goes back to our annual report, the PAR, is the Mercado Center of George Mason University started ranking them, probably seven or eight years ago. We started off in 20th out of 27 agencies. Well, you know, for the last two years we've been ranked second. What's interesting, I think, from the State Department, is that most of the other agencies have effectively one mission and it's whether it be labor, or social security, or commerce, but you know, the State Department handles the foreign relations for the U.S. Government, which is everything.
So the number of programs and the number of initiatives we're involved in is not in the dozens. It's literally in the hundreds. And we have to report on those. So I think it's a real credit to the team at the State Department to have been able to put that into an effective and cohesive manner, so that people can have a better understanding of what we're trying to do.
Mr. Morales: Certainly, a phenomenal accomplishment. What are the goals and priorities for the State Department's Bureau of Resource Management? We will ask Assistant Secretary and Chief Financial Officer, Brad Higgins, 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 Assistant Secretary and Chief Financial Officer, Brad Higgins. Also joining us on our conversation is IBM Project Executive, Bonnie Glick.
Brad, could you highlight some of the Bureau's goals for this current year as well as the goals that look forward into FY 2007?
Mr. Higgins: I'll be happy to. I think the key goal for us is what I call operationalizing Secretary Rice's initiative on transformational diplomacy, which is really a fundamental change in the way we operate at the State Department. Historically, the State Department would be more of a reporting function keeping Washington updated on what was going on. Her vision of the future, which I think is exciting, is much more proactive, actively influencing improvements around the world, be it diplomacy or a democracy, I should say, or economic development and it's really built around self-help. And so part of our job is to sit there, and okay, what kind of resources, what type of changes from a funding perspective or on a program perspective, we're going to need to put into place to effectuate her initiative.
I think that the next priority for me, which really is a driver here, and that's really kind of my background, is the evolution of resource management to more of a financial advisor to the Secretary. One of the things I noticed, the difference between the public sector and the private sector, the private sector is much more focused on results. The public sector, because it does budgets, it is more focused on the process of getting the money, not so much on how we spend it. And that's really one of the things that I am, you know, I may be a little obsessive about the spending, all these years on Wall Street, perhaps even more so, having spent so much time in Iraq, is that I'm very focused on results. What are we trying to do with this? And I think that's something that's very much in line with what the Secretary is pushing for.
And I guess the third thing that's key for RM, resource management, our assistance in increasing the interagency coordination. One of the things I think we've all found on the government side is that we can't do it alone. The State Department can't, the DoD can't. The challenges around the world are immense. We need to act in a cooperative and a coordinated fashion, and it doesn't just stop at the U.S. Government. It goes on to the private sector and really the international side.
I think, again, Iraq is one of those classic places, where as we go through a transition to the Iraqi government, how do we work with the international side. So a lot of this goes back to using some of the resources that we have within resource management to help effectuate these interagency efforts.
Mr. Morales: The theme of collaboration is certainly a very important part of the government's lexicons these days, but I want to get back to something that you said in the first segment around linking budget to performance. How does the Bureau plan to expand the use of financial data to inform its management decision process?
Mr. Higgins: That's a good question. I think you start out with financial management. At the State Department it means knowing where every dollar comes from and where every dollar goes in a timely and accurate manner, and that's really kind of the traditional definition. But I think what we need to do is to move beyond the sort of, the fundamental or, you know, sort of traditional compliance focus to one of more of a results focus. What exactly are we doing? What are the deliverables?
You first need to have a core data and that's really what we spent the last four years doing, building the data systems. Congress has been very supportive. You know, they have given a good amount of funding to upgrade our systems at the State Department, so we can be smarter and we can be more effective, but what do you do with that data, and how do you put it into place? We have a number of mechanisms for identifying metrics. One of them obviously was an audited financial statement, but also our PAR, our performance and accountability report. That's a key area.
We also turn out a quarterly ambassador's report, which summarizes our performance on a number of different areas and it's something we work very closely with OMB. We have a quarterly report to OMB that goes through not only our PMA initiatives, but just about everything else we do at the State Department and they grade us, and they are pretty tough graders. You know, there is a lot of oversight, but there is also I think -- well, my goal is to have even increased internal oversight.
There are a number of things like A-123, but I think it comes back to management and the expectations of the leadership of the State Department, the Undersecretary for Management, Henrietta Fore, puts out about four taskers a day to me about this and that, and if there is someone out there who is dedicated in trying to extract more value about what we do, it's been her.
Ms. Glick: What advice would you share with other government leaders about getting to green in certain presidential management agenda-related initiatives and staying there?
Mr. Higgins: Well, that's actually a good segue. The first advice, it's very important to have high-level executive buy-in. And since Henrietta is a, you know -- I don't think she carries a gun, but she might use it if we went and we stopped being green -- so needless to say, it's a high-level executive support at the State Department. And the other piece of advice, it's very important to have an open and regular dialogue with OMB.
OMB is there to help. It's not quite like the IRS, but they certainly have been very supportive, because again, they work on our budgets. They give us the money needed to make these changes, so if you have an open dialogue, they've been very supportive. I would also think that, you know, as we move toward green and the goal of green, it's not just the goal of green, it's building the basics to justify the green.
And that's again going back to focusing on the blocking and tackling of running a budget and being able to have accounting statements. This is a situation as we see, and particularly at the State Department, nothing is static, everything is constantly changing. And even though we may have a clean audit last year, well, there are probably a half a dozen things will happen in the next 12 months that could take us to a material weakness, so it's the constant tracking and the discipline of maintaining standards.
Ms. Glick: It's my understanding that the Department's Management Control Steering Committee established a subcommittee comprised of the Bureau of Resource Management to report on efforts to comply with the auditor's findings on the Federal Financial Management Improvement Act deficiencies and how to categorize the issues. What are some of the innovative efforts in place to remedy these identified deficiencies?
Mr. Higgins: We actually started something called the Management Control Steering Committee almost 20 years ago, so this is something that's been around the State Department for a while. But it also, you know, helps for us to comply with the -- I have the same problem saying this -- Federal Managers Financial Integrity Act. But at the end of the day it's "How are you running your business?" It really looks at, you know, our financial management systems and so many things, like how we manage our property as well.
It really is the basics of our balance sheet. I'd share that and we meet every quarter and the goal there is -- and this is really an internal audit function or a management function -- is to identify what we think our weakness is. You know, we would probably come up with a longer list than the auditor will, because the job is not to, sort of, gloss it over, it's to identify the problems early on. And if there is any doubt, we put it on the list, and then we try to address it. So that really has been very helpful.
We've also in the last two or three years really started pushing more on managerial cost accounting. This is a little different than what you normally see at the State Department, where it's really budgets. We started off at the mission level, then we go to the bureau, then we go the department levels. How we spend our money. Very specifically, how do we account for it? Now, that's one of the challenges I think in the government today, is for the financial managers to be able to say to the senior leadership, to the Secretary, "Madame Secretary, this is going to cost you X. You've got two or three different options, but we've got to be able to price them out."
This is something we do every day in the private sector. I would say it's long overdue. It's something that's been on everyone's screen in the government, but it's something that the people like myself really have to push on, and to be able to have specific numbers. I'm always amazed by the amount of the dollar figures that get thrown around in the government. You know, it's almost like popcorn at times. And I think, having run a couple of businesses, and not having an annual appropriation, but having to make the bottom-line, you know, this is something I joined the government because I think the, you know, the American taxpayers should expect that.
Mr. Morales: Brad, we only a minute left, but I do want to ask you about the Joint Performance Plan that the State Department and USAID submit jointly. Could you share a bit about this plan and what does this report reveal about your joint performance, and how, if at all, does it relate to the allocation of funding across strategic goals and performance measures?
Mr. Higgins: To me it's one of the real positives in the government. This is not an annual report. It looks back, but it really looks forward, you know, basically saying this is what we intend to do. We need to have Congress look at it closer. Obviously, OMB follows it, but it's something that none of us likes to, you know, draw a line in the sand -- "I'm going to do this and that." Well, this does that and it also reflects on the fact that foreign assistance, USAID, and the State Department are really joined at the hip, that we need to work together. We need to have the kind of integrated approach.
Diplomacy isn't very good if you don't follow it up with foreign assistance and vice versa. So I think this has been a very important opportunity for us to pull that together. A couple of months ago, as some of the listeners may have heard, we created something called the Director of Foreign Assistance, and that was led by Randall Tobias, Ambassador Tobias. He is also the new USAID Administrator, so that jointness is becoming even more pronounced every day, so I think going forward, it's the integration that we talked about earlier that's key to greater effectiveness.
Mr. Morales: Great. How is the State Department integrating budget and performance information? We will ask Assistant Secretary and CFO, Brad Higgins, to share the details 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 am your host, Albert Morales, and this morning's conversation is with Assistant Secretary and Chief Financial Officer, Brad Higgins. Also joining us in our conversation is Bonnie Glick, Project Executive for IBM.
Brad, many agencies are working to implement the budget and performance integration aspects of the PMA. What is the status of the Bureau's plan for this effort?
Mr. Higgins: As I've mentioned earlier, we are at double green for progress and status for a budget and performance integration. This is something that we continue to work very closely with OMB, trying to make it, you know, to take it to the next step. I think one of the challenges that we have is being a double green. What does that do for us? Is it integrated into the other initiatives? So we start looking at the potential of basically a balanced scorecard, looking at the other initiatives and integrating that and, at the end of the day, the budgeting and performance integration really is supposed to describe all the aspects of the State Department because everything's got a funding aspect to it.
So whether it's e-governance or real estate and things like that, how does it all fit together? And that comes back to performance, and so I think that's really the challenge of how do we pull these things together so that it becomes effectively a return on equity, if you would use a Wall Street parlance.
Ms. Glick: Where is the Bureau of Resource Management in terms of implementing Sarbanes-Oxley or A-123 requirements? Do you have any lessons learned that you could share with other government leaders?
Mr. Higgins: Well, leaving Wall Street, I was looking forward to getting away from Sarbanes-Oxley and I discovered something called A-123, which is the same thing, but it's for us. We have worked very hard on that at the State Department. We've always maintained robust systems of management controls, as I mentioned before, going back almost 20 years. And, you know, the OMB issued its revised Circular A-123 in December of '04. The deadline was for the end of FY '06.
We intend to have full implementation at the end of [the] FY. So this has been a big issue in our operation, trying to meet that and some of the lessons -- we have already learned quite a few lessons trying to meet that, and I am confident we will meet that standard by the end of September. But it really is important, because you have so many different things going on in a large agency like the State Department and I think the key thing is to identify and then integrate these efforts into a cohesive pattern. And then you have someone managing that process, which is someone who we have in RM following up on that collaboration.
You have to be able to work closely with the OIG, the Inspector General and with the auditor. Again, you know, they aren't going to get too cozy with you, but the practical matter is you've got to work together to be able to meet these criteria. And for those who aren't familiar with A-123, in previous practices the standard was nothing was coming to our attention. Well, now we actually have to prove it. We have to test it and look at these rather than -- the other standard was significantly easier. No one is taking our word for it anymore.
Now, we have to demonstrate proficiency and the first year is expensive and it's time consuming. But hopefully, once we get the standards in place, it will allow us to be that much more effective. But I think the challenge is, first you are doing, you know, a lot of work, but also you have to start early. One of the things I have found, particularly in the public sector, if given enough time, you can, you know, you can fix almost anything. Time is our biggest challenge.
If you identify something in August with a year-end at the end of September, you got yourself a real problem. Most people know we used to have six months to turn in financials. Now we have to do it in 45 days. November 15th is a very hard date for us, so if we are not in place by then, that has pretty dire circumstances to the way we do our operations. So A-123 is a challenge and the demands of OMB on the timing of it, this also makes it doubly difficult.
Ms. Glick: Those are important lessons. We understand your focus on cost accounting and performance measurement. Can you tell us a little bit about your activities beyond in this area? Is there a balance scorecard that's in place in the Department to monitor your progress in this area?
Mr. Higgins: It's something we obviously are working on, and we've had some good discussions with OMB, because this is the core. You know, just doing one thing right isn't enough. You've got to integrate it so you have an effective operation, and I think for me a balanced scorecard is very important. What we have done though, going back to, sort of, the managerial cost accounting, is we've put a team together and we have been out there for, well, about two years now, developing this. And we started off by identifying other agencies' best practices and there is a lot of lessons to be learned from the other agencies. Some of them have done a terrific job.
We have 30 different bureaus at the State Department and we sat down with all of them and we interviewed them to find out what their particular needs are, the type of cost information they need to develop budgets, their current cost accounting practices and reporting. Oddly enough, it's not always uniform, and the bureaus are different, and part of our job is to develop a single standard so that we can have some comparability, and then coming back to looking at outputs and outcomes.
We very much need to have an outcome focus and not how many things we produce, but what type of effects they are having. And that's sort of the next step of managerial cost accounting. And when you start looking at what's the cost benefit of something, we have a lot of challenges in the U.S. Government about, you know, we have choices. Some things generate a lot more benefit than others. Some things are incredibly expensive. Some things are relatively inexpensive that have huge upside. Some of the lessons we have learned at the State Department are really the effect of cultural exchanges.
Relatively low cost, but unbelievably effective because they tend to be the leaders of tomorrow in these other countries, and you know, my job is really on an annual basis, but the State Department is going to be there into perpetuity, and certainly that's what I hope. So we have to be thinking at 10, 15, 20 years who are the future leaders of the other countries and what type of relationships we develop with them, and the earlier the better.
Mr. Morales: Brad, one of the larger business model changes in the federal government these days is the lines of business. Does the Bureau have plans to implement lines of business for the foreign service nationals and third country nationals serving us overseas?
Mr. Higgins: Yes, Al, we do. Again, OMB has made this a top priority, trying to identify who does it best in the federal government. Clearly, our role, and under the constitution, and the practicality of being responsible for foreign relations, it really puts us in a position to handle the overseas. OPM has designated us as the provider of payroll for, you know, the foreign service nationals. And it's something we intend to continue to expand upon.
We will be making a submittal for this line of, actually a line of business for all foreign service support, but it's something that we currently handle, all of the other agencies as I mentioned. And I think, you know, as a practical matter we are doing it anyway, and making it more formalized, I think, only helps.
Mr. Morales: What does the future hold for the State Department and its Bureau of Resource Management? We will ask Assistant Secretary and Chief Financial Officer, Brad Higgins, to discuss this 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 am your host, Albert Morales, and this morning's conversation is with Assistant Secretary of State and Chief Financial Officer, Brad Higgins. Also joining us on our conversation is IBM Project Executive, Bonnie Glick.
Brad, recommendations have been made that State, with the Department of Defense and USAID, establish a means to track and account for security costs to develop more accurate budget estimates. Are there any specific efforts in place to implement such recommendations?
Mr. Higgins: Yes, there are, Al. The U.S. Government Accountability Office, better known as GAO, is in the process of reviewing that issue, and they've asked, and this is particularly in Iraq, to look at the private security providers there, and to account for their costs. And people don't appreciate one of the real challenges, and I think earlier I mentioned some of the cost overruns in the, you know, what people call fraud, waste, and abuse.
Well, that's about five to ten percent of the cost. I'd say about 30 to 40 percent of our costs now have been in security, and I think GAO wants to know about it, but it is becoming part and parcel of operating in this world. And in a hostile environment one of our top priorities is to protect the American citizen. To protect the people we asked to go out there, and it's taking a little adjusting in our budgeting to reflect this really high cost of operating, but that is the cost of being in a place like Iraq. It's a necessary cost. You know, we need to be able to have people out there and we can't do it by phone. So it is something that we're tracking closely, and it also means the importance of us working very closely with the military and the type of protection they provide us.
I spent a lot of time in Humvees, protected by marines and soldiers, and you know, my hat's off to them, and to what they've done, but as we all know, the costs are high, but again they are unfortunately necessary to winning this global war on terror.
Ms. Glick: Given the management changes that are already underway in the Department of State, in the areas of transformational diplomacy, where do you see the Bureau of Resource Management in the next five to ten years?
Mr. Higgins: Well, to be honest, you know, maybe it's just because where I come from, but what I see and my goal is to turn the resource management into a true financial advisor to the Secretary and to the senior management. They should know what things are going to cost. They should say, "What options do I have, and if I've got X amount of money, what can I do? Are there better programs?" And that kind of goes back to what I was just saying before, about our priorities, of working the interagency side and the international side, so that we're able to, you know, if we provide the seed capital, will the private sector come in? Can we get another country to match what we are doing?
Pushing that, trying to maximize the use of the taxpayer dollars, and I think I mentioned before the philosophy that I've taken is one not of spending, but of investing. We need to be looking at, you know, what is the best use of this money? And that to me is, the real goal of RM is to provide that analytical capability. Not just the budgeting, but to be able to monitor it and work with the various bureaus to say, "You know, if you did it this way, you might be able to get that. If you did it another way --" And I really do believe the challenge for us, particularly with Congress, is not one of funding, it is one of execution.
We get the execution right, I have a pretty strong feeling Congress will give whatever funding we need. They've been very supportive, but I also think they have a right to demand results. And I think part of my job is to be able to provide that accounting, and provide that responsibility. You know, you should know there is something called the CFO Act of 1990. That requires me to be responsible for all financial activities at the State Department. I'm not a glutton for punishment, but if I'm going to take this job, it's important for me to live up to it.
You know, I had that great opportunity of being in Iraq. I know the sacrifices our men and women are experiencing over there, and I think that makes my job very, very clear. Are we getting the results we need? And if we're not, they should replace me, and in fact, I will go recruit someone who would do a better job -- but to me that is really the job number one for the CFO at the State Department.
Mr. Morales: Brad, I'm hard-pressed to believe that you can actually find somebody who's done a better job than you have, but you obviously bring a wealth of experience from your tenure in the private sector. So I would like to ask you a two-part question here. One is, you know, what other best practices and learnings can you share with your fellow public sector CFOs? And what advice would you give to a person who is out there in the private sector, perhaps thinking about a career in public service?
Mr. Higgins: It's a good question. I guess the best advice I would give, and sort of following on what I've said, is for the CFOs is to focus on execution. Let the funding follow the execution. It becomes a lot easier when people have confidence that you are spending the money wisely. You know, I always say, well, that's the way you would run your own home and run your own company, and I think that's the standard we should apply to our own government.
You know, to me, talking about job satisfaction and the type of the job I have, the pay sometimes isn't as good as Wall Street, but there is one thing, I guess, you get to my age, job satisfaction becomes very important. You know, it's not something I thought about when I got out of college, and oddly enough, the only regret I think I had coming out of Iraq was, I didn't go into the marines after college. Because I think the experiences these young men and women have is just life-altering and life-changing in terms of being part of something bigger than themselves, and it's not all about how much money I'm making.
But I also think that there are a lot of us who are, you know, of my generation, when you are born in the '50s, that you're getting to that point of retirement or where you want to have a second career, and I can't think of a better area than going back into the government. And one of the things I'm pushing hard for is to develop fellowships with either the private sector or universities, and we always have constraints on how much staff, and being able to bring people in who can bring the intellectual rigor.
The lesson I learned in Iraq is that most people don't realize this, but people over there work seven days a week, upwards of 14 to 16 hours a day. You actually lose track of what day of the week it is, and the strain of that is that you're constantly putting out fires and you don't have the time to really do that rigorous research and thinking through that you would like to do. And I think one of the things I would like to see is to bring the private sector more actively involved into the public sector, be it on a volunteer basis or sponsored by institutions, but we really benefit from the experiences of the private sector and that's something that, you know, whether it's someone coming out of college, looking to have a career or someone who has already had a career and has got nothing to prove, and I kind of fall into that.
You know, there are days it's been the most frustrating job I've ever had, but there are far more days that this has been the best job I've ever had. So I can't say enough about the State Department. At times it is very critical about some of the things we did in Iraq, and I think the lesson that I've tried to follow was, if I want to criticize, I better have a solution, and I also better be willing to roll up my sleeves and go do it.
I put together courses of action or plans of action, and there wasn't enough staff out in Baghdad last summer, and I said, "Well, I guess I will go out and help." Well, I thought I was going to be there for three weeks. I ended up being there five months. But these people are working very hard and I think that's the message I want us to share, is that this has been a great career for the people of the State Department. We are always looking for talent at all levels.
You know, whether it's entry level or later on, or senior levels, and I would encourage people to go to our website, state.gov, and explore what's going on, whether it's working in Iraq or working in Afghanistan, or just working at the State Department, what opportunities we have. It's an exciting place. Perhaps, more than any other time, and certainly in our history -- at least you know, our immediate history -- there are some real challenges. You just have to pick up the newspaper to realize what's going on and it's a scary time.
And I find it's a lot easier to get involved than to read about it in the newspaper. And one thing I will finish with is that what you read in the newspaper and what goes on out there, sometimes it's very different, and that the challenge is to be out there and to see it firsthand, and to put your experience to work there, and have that sense of satisfaction. Obviously, I'm not going to do it alone, or I'm just a small player, but certainly it's been exciting to be around people like Ambassador Khalilzad or Secretary Rice and see what they have been doing.
Mr. Morales: Brad, thank you. That's great advice and certainly your passion and enthusiasm rings crystal clear through the studio here. Unfortunately, we have reached the end of our time and although I have a million questions, and I'm sure Bonnie has another million, we will have to end our questioning. I do want to thank you for fitting us into your busy schedule today, but more importantly, Bonnie and I would like to thank you for your dedicated service to the public and our country in the various roles you've held at State and in the financial management field.
Mr. Higgins: Well, thanks Al and Bonnie. I welcome this and it's one of those things where, you know, we get so focused on what we're doing, and we sometimes forget the message has got to get out there. I would encourage all the listeners to look at our site. I mentioned before about jobs, but to go to the State Department website, and open up our performance and accountability report, and read it. Send us an e-mail if you want more information because I think there is an awful lot going on and it's a much better story than one might first perceive. This is all about learning, you know, from what's working and what's not, and I think that's the one thing I'm convinced with the State Department is that we're trying to do a better job everyday but it's a dynamic situation and we do need the support of everyone involved.
Mr. Morales: Great. Thank you. This has been The Business of Government Hour, featuring a conversation with Assistant Secretary, Bureau of Resource Management and Chief Financial Officer of the Department of State, Mr. Bradford Higgins. Be sure to visit us on the web at businessofgovernment.org. There you can learn more about our programs, and get a transcript of today's conversation. Once again, that's businessofgovernment.org.
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 am Albert Morales. Thank you for listening.
Originally Broadcast Saturday, August 19, 2006
Mr. Morales: Good morning, and welcome to The Business of Government Hour. I'm Albert Morales, your host and managing partner of The IBM Center for The Business of Government. We created the center 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.
The Business of Government Radio Hour features a conversation about management with a government executive who is changing the way government does business. Our special guest this morning is Jennifer Main, Chief Financial Officer at the Small Business Administration. Good morning, Jennifer.
The Business of Government Radio Hour features a conversation about management with a government executive who is changing the way government does business. Our special guest this morning is Jennifer Main, Chief Financial Officer at the Small Business Administration. Good morning, Jennifer.
Ms. Main: Good Morning.
Mr. Morales: And joining us in our conversation is Steve Watson, partner in IBM's financial management practice. Good morning, Steve.
Mr. Watson: Good morning, Al, and good morning, Jenny. Thanks for joining us.
Ms. Main: It is good to be here. Thanks for having me.
Mr. Morales: Jenny, let's start at the beginning. Could you tell us a little bit about the mission and the history of the Small Business Administration?
Ms. Main: Sure. The Small Business Administration was founded in the 1950s -- 1953 to be exact. So we just had our 50th birthday. And the mission has really been the same since the agency began, which is to serve the needs of small businesses, particularly in the United States. We do a little bit of outreach across the world, but the United States small businesses are our focus.
And the programs that we provide have also essentially been the same since the beginning of the agency, which is to provide credit opportunities. We used to do direct loans. Now we usually are partnering with the banking community to provide guarantees on loans that they are doing for small businesses around the country. We provide a lot of entrepreneurial development assistance, technical assistance you might call it, through partners across the country, the biggest program in that area, the small business development corporation program. There are over a 1,000 SBDCs -- they're called small business development corporations -- across the country, tend to be in colleges and universities that support entrepreneurs in their areas of local resources
And also procurement -- obviously the SBA's 8(a) program, which was named for the section of the act, but it's to assist small businesses, and particularly economically disadvantaged small businesses to get procurement opportunities, particularly with the federal government. We have a goal of ensuring that 23 percent of the federal contracts go to small businesses across the country.
So those are the main programs, particularly for small business assistance. We also advocate on behalf of small businesses within the federal government, for example, regulatory issues that come up that could have a particularly burdensome impact on small businesses.
And we also have a major role in disaster recovery across the country. And that one is not just small businesses, but homeowners as well. And that's the long-term economic rebuilding in an area after a disaster has struck. We provide long-term loans at very reduced rates. They tend to be -- right now, probably around 3 percent, which is a nice rate to get. For homeowners and businesses that have suffered physical damage or for businesses that have suffered economic injury, losses of -- there are no customers for the business and it shuts down, for example, so they can get recovery for those type of things.
So those are the main programs and the main areas that we've been working in. And really, although the programs have, you know, sort of, modernized over the years, they've really stayed the same in terms of their core purposes, and who they're -- they intended to serve.
Mr. Morales: That's great. That's certainly a very broad mission. Can you give our listeners a sense of the scale of the operations over at SBA? How many businesses are supported by your organization?
Ms. Main: Well, currently we're doing about over a 100,000 guaranteed loans through our main business programs each year. That totals a portfolio of about $60 billion right now in our primary lending program, again named for the section of the act that it was made under, 7(a), as the loan program that most people are -- the most familiar with. Between that and our Section 504 real estate development program, we have over a $60 billion loan portfolio. And of course we actually have a venture capital program as well, which some people are familiar with.
And then separately, our entrepreneurial development programs -- we reach, we believe, over a million businesses every year, and of course some of them are existing businesses, some of them are startups -- people who are considering going into business and trying to make that decision. And on the procurement front, I don't -- I'm not sure we have a good measure of how many we've assisted.
We have a lot of different things we try to do. We do business matchmaking opportunities, for example, where we've reached thousands of small businesses that are meeting up with either large contractors or potential government agencies or other entities that could be looking for small businesses to help them. So it's in the -- well over millions range that we've helped; certainly, you know, aggregate, you know, it's over 20 million over the years.
Mr. Morales: Can you tell us about the mission scope of your office specifically within SBA? Give us a sense of the number of employees, the size of the budget that you manage.
Ms. Main: I'll tell you, the whole agency is about 2,100 people -- our regular staff. We have disaster staff that can range -- 400 or so is our typical baseline. In the Katrina situation over the last year, the disaster employee base actually grew to about 4,000, which is, you know, twice the agency's size. So you have to, you know, kind of -- the core regular agency is 2,100. So it's a fairly small agency. The CFO's office is about 107 of those. And our budget in the CFO's office is, you know, $1-1/2 to 2 million range. It's pretty small. For my discretionary, you know, things that we need to get done. With the staff included, it's over 10 million in terms of their salaries.
The overall agency budget is just over maybe $650 million on average. Of course, the big factor's disaster. This past year we're going to spend a couple of billion dollars at least lending to victims in the disaster in the Gulf area. So our budget, if you looked at it at any one time it really is dependant on disaster.
Mr. Morales: It's just a variable component too.
Ms. Main: Right. If you exclude disaster, we are in the $600 million range.
Mr. Watson: Jenny, can you tell us a little bit about your responsibilities as the CFO, and how you support the mission of the SBA?
Ms. Main: Sure. I kind of think of what we do on two different fronts. On the one hand we're the financial operations, which means we have to work through the budget process, ensure that we get the funds, and just properly track them and account for them, make sure that everyone knows how much they get, what they are authorized to spend, that we don't spend a dime that we don't have all the paperwork properly in place for, and track that all the way through and do the financial reporting that's required.
We're one of the 24 CFO Act agencies -- we're one of the smallest -- but that means we're required to do anything that a CFO Act agency is required to do. So we have audited financial statements and quarterly reporting, et cetera. So the CFO's office covers all of those basic operations. And we certainly I think are typical in that sense in terms of what our role is.
The other side, in my mind of what we do is performance management, performance measurement, really trying to help support the agency in achieving its goals, ensuring that the funds that we spend are accomplishing what we intended them to accomplish.
In that regard I think of us a bit -- the program offices I think are very focused on serving their customer, identifying with their customer's need and making sure that they are doing everything they can to create creative products and interesting tools to help support their customer. And in the CFO's office, I feel a bit responsible, sort of, for the shareholder if you will. The taxpayer. Is the taxpayer getting, for the funds that are going into our agency, the best that it can get?
And ideally we have strong alignment between what we're trying to do for the customer and what we're trying to do for the taxpayer. That's the best scenario and usually it's the case and we're all in alignment. But sometimes you have a conflict there. You might have to look at them, and obviously, there are a lot of people who would have been very pleased if we could have just given out grants in the Gulf coast to people who had such disastrous events impact their lives. But from a taxpayer perspective, we don't have a program that budgets to give grants to everyone; we have a long-term loan program, and that means we can only make loans to people who meet our standards for the likelihood that they will pay those back. So in the CFO's office, I tend to think of myself as the one who's trying in our office. It's our job to make sure that the taxpayer's voice is at the table when the agency is making some of these kinds of decisions.
Mr. Watson: You know, responsibilities for CFOs differ across the 24 agencies. What responsibilities do you have as the CFO of SBA? Do you budget, for example?
Ms. Main: Yes. Yes, I have. Specifically, I have budget, accounting, financial reporting; I have internal controls. We also have performance management. And that's something new that we created in office about two or three years ago within the CFO's office that's called the Office of Accountability, Planning, and Analysis, with an emphasis on ensuring that we are measuring the results that we're getting from the funds that we're spending, that we're tracking outcomes, that we're tracking outputs and using that feedback to influence the business decisions we're making in terms of the funds that we request and how we spend the money that we get.
Mr. Watson: That's a broad scope of responsibilities. I know in reading your background before the show started that you had some private sector experience as well. How has that private sector experience prepared you for this role as CFO of SBA?
Ms. Main: Well, it's interesting. I actually -- and my private sector experience kind of spans a wide range. I worked at a very large consulting firm, multinational, huge place. And I actually worked in several small businesses, one of which I started with two other people, so from the very biggest to the very smallest. And I would say that I got some good experience in both of those places to work in an organization like the one I'm in.
From working -- having started my own business, the thing you have to do if you start a small business is be prepared to wear any hat. You could do every job in the business during one day. So you have to be ready to roll up your sleeves, no job is too big or too small to tackle. And the CFO's office that I came into almost four years ago now at SBA was really struggling. We were in a disclaimed audit opinion and we had a lot of challenges in front of us. And I think one of the things that helped me a lot personally, and helped me create a good rapport with our staff, was that I was willing to roll up my sleeves, get out my pencil and my calculator, and sit down and go through all the issues and really understand what was happening, why it was happening, and what was going on, and I think that earned me respect from my staff, which was -- is very important for a lot of reasons. And it just gave me an understanding of what was going on and helped me come up with better solutions, and provided opportunities for leadership.
So that's on the one hand. On the other hand, working at a very big firm I got an opportunity there to see that people have different skill sets, different styles, different roles. And that's what a team is made up of, that you're going to have different things coming to the table, and as the leader of the team, my goal is to leverage, bring out the best in all those skills in people that we have. And frankly, in some cases, try to minimize some of the weaknesses, you know, find a way to not have them impact the team while you work on making improvements, for example.
So between the two of them I really do feel like I used some of the skills that I got from those two different kinds of experiences in my regular work at SBA.
Mr. Morales: Jenny, we only have about a minute left, but I do also want to get to some other public sector experience that you've had outside of SBA. I understand that you spent a portion of your career as an expert in credit programs at OMB. How has this experience at OMB affected your perspective now at SBA?
Ms. Main: I think a couple of things on that front. The main one is certainly having been at OMB I really have an -- obviously an inside understanding of what they're looking for. So when we get into issues that OMB is going to be concerned about, and it happens very regularly, I have a pretty good sense of anticipating what their concerns will be, and that helps us be more prepared.
The other thing is, I really feel like I recognize that OMB is the policy entity for budget and financial management. We are the operations, so it helps me sort of frame issues with them sometimes that they may have a goal of what they want, but on the operational side it may just not really work that way. And so it's a nice opportunity. I have a lot of colleagues who still work at OMB that I have good relationships with, and I think it's been helpful on both sides to be able to engage in a sort of a knowledgeable dialogue about the issues.
Mr. Morales: Great. What are the Small Business Administration financial priorities? We will ask Chief Financial Officer Jenny Main 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 Small Business Administration Chief Financial Officer Jennifer Main. Also joining our conversation is Steve Watson, partner in IBM's financial management practice.
Jenny, can you describe for us what are the goals for your office in 2006?
Ms. Main: Sure. Probably the primary goal is the maintaining our unqualified audit opinion that we were able to achieve in 2005. I'm very optimistic about that, but I also have a new auditor this year, so that just by its nature brings a new set of folks looking at the issues and having different perspectives. So certainly we are anticipating that we'll get feedback that, you know, of a different nature than we've gotten in the past. So maintaining the unqualified opinion is our top priority.
We also have had a repeat material weakness for several years now. And that is really our target to get rid of that material weakness. We've taken a lot of action over the last few years, and I'm hoping that the cumulative effect of those is going to pay off this year in terms of eliminating that.
And the other big item that's on my radar screen is the implementation of the Sarbanes-Oxley type work for the federal government, the OMB Circular A-123. We started that last year like everyone else did, and I really want to get something valuable for the agency out of that. I don't want it to be a paperwork exercise. I want it to be something meaningful. And I think we're on track to do that. But that's been a real goal this year, is to make that add value at the agency, and not be something that people are just feeling they have to do.
Mr. Morales: I wanted to go into this audit opinion, because I think there's a wonderful story here. We understand that -- I believe it was in 2002, in your audit, you did have a disclaimer, but by 2005, you went back to an unqualified audit status. Can you describe some of the steps that SBA had to take to improve controls to get to unqualified?
Ms. Main: Sure. The cornerstone kind of the problem of the disclaimed audit opinion was that SBA had done a series of asset sales where we sold loans, primarily defaulted, but in some cases performing loans. And over time -- the sales were between '99, and 2002 -- and over time it became clear that the books that we were keeping, the accounting books, were not reflecting that we were making money on the sales. And yet the budget tools that we were using, the budget models, were showing that we were making money on the sales.
And I have to add that we were following the guidance that OMB has in its circular for how you do this type of thing. But it was complicated. It was a difficult problem and it was complicated and we were not -- by late 2002 when I got there it was clear that our accounting situation was very out of whack. I mean in effect the loans that were left on the books had to be valued at more than a 100 percent of the return. In other words, borrowers were going to pay us $120 for every $100 they owed us, which simply couldn't be true.
So that was kind of the cornerstone of the issue that got the disclaimer. And we had to resolve that issue itself, which we did through a team effort. We brought in experts from consulting firms. I obviously from my experience at OMB and credit accounting had a lot of expertise to add, and we worked with OMB. We actually asked them to be a partner with us in resolving that issue. So we worked through that and got those things resolved.
And then separately I really felt like we also had to look at what was it that allowed this to happen. And really we needed to address the culture in the CFO's office. So we did it primarily by creating teams. We created two teams, one for all loan programs credit issues in the CFO's office, and really anyone who works on credit issues within the CFO's office is a member of the credit team. And then we met biweekly. And I could give you a lot of details about exactly how we did it and what we did, but our goal was to expand communication and accountability.
Collectively we identified what the key issues were, and then we divided ourselves up into sub teams, and held ourselves responsible for getting those issues resolved. And that meant that everyone who was there had a role in finding solutions. And I think it really worked well just at a lot of levels in terms of getting folks involved in a constructive way to solve problems, empowering ourselves that we could solve problems and address the issues, and communication. If something was going on and someone knows about it in a pocket of our organization and two or three months later -- and they don't say anything -- and two or three months later it comes back as an issue, the whole group was willing to hold that person accountable for not having communicated and participated and worked through the issues.
So we really -- we broke down the silos. The budget, you know, team, the accounting team, the financial reporting team would -- you know, when I got there were sort of pointing fingers at each other. We broke those silos down and we said we're all on the CFO's team. Collectively we have to figure out how to solve these issues. So that was really to me the way that we moved from, over a three-year period from 2002, with a disclaimed opinion all the way up to the 2005.
Mr. Morales: A specific question. We understand that you also had to -- aside from the asset sales valuation method, which I think you needed to work on, was that you improved the cash and tracking of loan performance. Can you describe that a little bit?
Ms. Main: Sure. When I got there, we really didn't have adequate reports on what was happening. Particularly, as I mentioned, we had the $60 billion loan portfolio. And what that means is we have cash coming in every month, fees and repayments of loans, all sorts of different potential sources of funds that are coming in to our account there, as well as funds that are going out. Payment of defaults, payment for care and preservation of collateral, for example. And the fund that these loans are in, it's called a financing account in budget terms, and it's technically a non-budgetary account, because you've accounted for the cost on the budget front in the -- what's called the program account.
So these financing accounts don't have all the same controls on them that a traditional budget account would have. And the problem was that they were -- the team that was there at the time didn't have adequate knowledge of what was coming in and what was going out. In fact, when I got there that summer -- I'm happy to say it happened a month or two before I got there -- we overdrew the account by $50 million that they paid out. And so they clearly did not have enough knowledge about that.
And so we instituted a really tight monthly report -- I would say it took us literally a year and a half to get the report to where it should have been, you know, honing and improving it. But we have a really tight monthly report now that everyone takes a look at and understands exactly what's coming in each month, what's going out. And if you do that and you break it down by your loan programs, you can really understand, are we on track for the defaults that we expected to occur this year? Are we on track for the fees that we expected to get? How are we doing on recoveries? And you can do that by every program that you have. And that's really helped us in our long-term modeling that we have to do to understand what the costs of these programs are.
Obviously, loan programs by their nature -- you make a loan today, you expect to get paid back, but you don't know until year three, four, five, whether the borrower was really going to do that. So we're constantly modeling these long-term liabilities. And having much better data, much more accessible, has really improved the models that we have. And I think that's also been a big part of eliminating our disclaimed audit opinion. And we also had a mature weakness in that area, and that was eliminated in 2005 as well.
Mr. Watson: Jenny, I read your auditor's report before coming here. And they had strong praise for the corrective actions that you've implemented and the financial improvements you've made. Yet SBA's still not at the green status on the PMA. What additional improvements are needed to get to green?
Ms. Main: Well, the last remaining item is this repeat material weakness in financial reporting. And there were a number of items in our audit recommendation list particularly setting up, for example, change control process around accounting -- that's an example. I feel like we should have had some miscellaneous weaknesses last year, certain items that the auditors found that they weren't comfortable with. My hope is that we've addressed all of those. And we really feel like we have a solid quality assurance process in place.
They recommended that we continue to improve our quality assurance. We did hire an additional credit accountant this year. And with the A-123 internal control initiative, we've also done more of our own testing and our own analysis in the financial reporting front.
Another thing we've been doing is -- most agencies have been doing this, to meet the accelerated financial statement deadlines -- is quarterly -- the level of quality assurance and analysis that you're doing quarterly has really increased. Things we used to just do at the end of the year, now we're doing quarterly, you catch a problem much easier earlier in the year than you had before.
I don't think we have a pervasive weakness that I can see. So I think we have some smaller issues that last year our auditor felt like we had enough small ones that they added up to enough of a big thing that they didn't want to say okay, the material weakness is gone. I've been of the view that we're there. And we'll see. We have a new auditor coming in, and I'm actually very much looking forward to getting their views on how we're doing, and in comparison to the other agencies they worked with.
Mr. Watson: Well, good luck with moving to green this year. Moving away now from the audit and the financial reporting to your additional responsibilities to work with program managers better support the business. What steps are you taking there to help the program managers better operate at SBA?
Ms. Main: Best way I can answer that is to sort of tell you my philosophy about that role, which is, I feel very strongly that the CFO's office is a support office, and I'm excited -- you read articles today about CFOs getting a seat at the table. And I'm excited about being, you know, perceived as having a strong role in an agency. But I really want us to use that to empower the program offices to be responsible for their programs, and to ensure that they are getting results that they have established.
I don't want to be the one setting up goals, then telling them that they have to meet them, and then hearing from them that they don't believe in the goals. I want them to establish the goals, and then we'll help hold them accountable. We'll give them tools, try to give them resources. The whole point is to have -- they're the program managers, they know the programs best, and I want to support and help them in achieving what they've identified as the best way to achieve the agency's mission.
So that's really my philosophy about it. Again, the best example I have is this year with the A-123, the internal control situation. We did a sit down kind of qualitative assessment with each of the managers in the main program areas and said, what's keeping you up at night? What's happening in your area that makes you worried? And we identified a couple critical ones. And we've used the contractor that the CFO's office had hired to do this implementation, to go in and do extra testing and create recommendations for them about what they could do to address some of those issues.
So really to make it practical and valuable for them, that they'd have something additional to say when the IG or someone else comes in and says, "What have you done about this?" And we've helped them solve a real tangible problem that they identified that they were worried about. It's a big thing for me. I want them to have ownership of those types of things, the goals and the issues.
Mr. Watson: Following up on that, did ownership of data change, or processes, or the way the CFO interacts with the program offices?
Ms. Main: Well, it's interesting. The data ownership -- we were actually -- the last couple of years the CFO's office has expanded the amount of data that we kind of are tracking for our performance and accountability report, to the annual report that the agency has to do like all federal agencies. And one of my big goals this year is to trim back that data that we all say we're going to track. And if the program officers want to use the data that we've been collecting for their own management purposes, then great. But if they don't, then we shouldn't be tracking it. I think we've accumulated some data in the last few years that we've taken on ownership of, and I'm trying to push it back out. I want them to be the owners of it, because that's where the quality's going to come from. If they use it, the data quality will be good, because they care about it, and they'll notice when something is askew. If they don't use it, it could take a long time for someone to notice that there's a problem with the data, if no one's using it, keeping an eye on it.
Mr. Watson: Moving beyond basic scorekeeping, do you work with the organization to actually help them achieve their goals?
Ms. Main: Definitely. SBA's a very small agency. And literally, the headquarters, the whole management team is in one building on four floors -- five floors. So I see the folks that I work with, I see them at the management meetings, and I see them down at the lunch counter. And I've developed, I think, pretty good relationships with them as I'm working through them -- with them, and trying to keep my eye on what tools do they need, what things do they need that I can help them with.
Mr. Morales: Jenny, we talk with many of our guests about this topic of ownership, of about working together in collaboration. What kinds of partnerships are you developing now to improve the operations or the outcomes at SBA? And how will partnerships with other federal agencies, or the private sector for that matter, change over time?
Ms. Main: I guess I have two different answers for that question. In the first answer, SBA is very much about delivering its products through its partners. Almost all of our programs are delivered through the lending community, and as I mentioned, the small business development companies around the country. Partnership with the private sector is really what we're about. We can't afford to be having a lot of one-on-one relationships with small businesses. So the entire model of the agency's delivery mechanisms has changed to this partnership notion. And we actually engaged in some discussions internally about, is the customer the lending community, or is the customer the small business? And obviously the small business is the ultimate customer, but we recognize that those partners in the private sector are the ones really delivering the services. So we're focused on both. So it's been -- that's a big area for SBA.
In the CFO's office in particular, I would also add -- and I think this is also happening across other federal agencies -- we are recognizing that there are areas of expertise that we can just leverage private sector expertise. We don't to have to do it ourselves.
This notion of outsourcing, hosting -- SBA moved to -- shifted its administrative accounting system to -- we outsourced it to a -- through a competitive bidding process. And that has worked out very well for us. And I think we'll continue to do that, and we're looking for more opportunities to outsource the hosting of our major systems. And potentially, even some of the core functions that repeat commercial operations that could be done anywhere in this budget environment, which is just extremely tight, and anyone who pays attention to what's happening to the budget can see that 10 years from now it's going to be -- it's only going to get worse. We have to be finding ways to lower our costs. And the outsourcing, working with the private sector, is absolutely a top priority for us.
Mr. Morales: How is SBA integrating budget and performance information? We will ask CFO Jenny Main to share the details 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 Small Business Administration CFO Jenny Main. Also joining us in our conversation is IBM's partner in financial management, Steve Watson. Jenny, many agencies are working to implement the budget and performance integration aspect of the PMA. And we've talked a little bit about the PMA in our last segment. What is the status of SBA's plan for this effort?
Ms. Main: I'm really pleased to be able to say that SBA has been green on the budget and performance integration in President's management agenda item since a quarter or two after they started the PMA. We were one of the first agencies to be green. And I think the reason for this is that the agency has had a lot of experience that probably since 1998, we've had an activity-based cost model that we used to identify the cost across the agency of the activities that we do. And we've been pretty successful at linking our whole budget environment to -- you know, having a strategic plan that's the baseline that identifies the key outcomes we're trying to achieve.
Our budget itself is mapped to those, and then includes the activity-based cost results in terms of what things cost us, and then our performance and accountability report reports against those same things with the costs identified all the way through.
So that framework has really helped us demonstrate that we're focused on budget and performance integration. And actually, if you went to the culture within the agency, we have what we call -- it makes me laugh -- it's called the execution scorecard.
I always wanted to call it the executive scorecard, but it's the execution scorecard that the chief operating officer uses to manage the program managers and all the managers throughout the agency. And the items that are in there are the same things that are in our budget, on our performance accountability report. He meets monthly with the major office heads to go over the results and how they're doing to date, against those things. So you can really kind of show that we have an integrated performance culture. And I think those different components all put together have helped us achieve green in the first place, and then sustain it going forward.
One thing that concerns me though in this march towards budget and performance integration, which I wholly support, is that there are really two sides to what you have here. You have the cost side, and we're getting better and better. The tools, the data, are more readily available. It's cheaper to track data and keep it and look at it. So we're getting really good at identifying what it costs us to do things. The other side though was the benefits. Unfortunately, particularly in a lot of the programs that the federal government is involved in -- we're involved in them because for some reason the private sector isn't doing them, but collectively our government and our country have decided that they're important activities for us to do.
So there's a benefit there. And it's very hard though for us sometimes to figure out what the benefit is. We have a range, as I mentioned, of different loan programs at SBA. What's the benefit of a small business getting a loan on the terms and conditions that a private sector bank wouldn't provide them? That's the criteria for our primary loan program that the lender wouldn't provide that loan on the same terms and conditions. So figuring out exactly what benefit -- how much revenue we add to the economy.
Well, did, you know, the business retained a person or two, a job or two, or maybe even the whole company that they wouldn't have otherwise. Figuring out how to measure the incremental effect of that is really challenging. We've been working on it a lot, and it's not new to folks who follow this type of issue in the social services world. Because we're so focused on costs and benefits, and because our benefit data isn't so great, we're driving to the lowest cost products.
And I think maybe, especially since I'm in the -- I'm the CFO, I'm the one who's supposed to keep my eye on the budget, I worry that if we keep doing our jobs so well, we're just going to have all the low-cost programs funded, and anything that's higher cost, because we haven't shown what the -- that the benefit is commensurate with the higher cost, you know, we're not going to be able to do those things. So that scenario I've been struggling with. Our office has been leading a large multiyear program evaluation trying to quantify the benefits of some of our loan programs.
But it's challenging. I know when we're done there'll be, you know, a potential for people that, well, you didn't have a prefect comparison sample, because you can't.
Mr. Watson: Jenny, shifting gears here a little bit, the internal control requirements of Sarbanes-Oxley have moved into the public sector in the form of an expanded circular A-123. How is SBA implementing the new A-123 requirements?
Ms. Main: Well, we've really done what I would call, sort of, a traditional A-123 implementation, and I'll confess in the government you're allowed to do this. We just took OMB's guidance that they provided us last summer and used it as the basis of our plan. We just went section by section and said, "Okay, OMB wants us to do these things, let's put them in our plan." So we're kind of trying to do the baseline traditional version of it. And it's actually worked well for us in the sense that I think everyone's clear about the goals, there's a lot of documentation for exactly what we're doing and why we're doing it.
But as I mentioned earlier, from my perspective, the number one thing is to bring this back to the actual issues the agency is facing, and allow it to give us a few solutions to problems that we know we have. SBA has literally a couple hundred open IG audit recommendations, and we are not alone in that. Any agency you go to is going to have a lot of open audit recommendations. We have unresolved issues. If there are issues around that the resources we're using under A-123 can help solve some of these problems then my view is let's do that.
Rather than going finding more new things, let's make it really hands-on and practical and solve a few of those problems. So we picked to go deep, if you will, in a couple of key places. Rather than 10 miles wide and an inch deep, we said we'll go five miles wide and pick two or three and really drill down. And that's how we've done it. And I feel like I've gotten some really good feedback from our program managers, because they're going to have something tangible that they can use in a response to the IG, for example, on a problem they've been working on.
Mr. Morales: As a result of your efforts, are there any lessons learned you will apply for next year, or could provide to other government agencies that are going through the A-123 process?
Ms. Main: Well, certainly the most practical one that we're learning right now is because we spent the whole year planning, and this is the first year of it, we're testing the exact same time that the auditors are testing. It's frustrating on a number of fronts. We certainly wish that we would -- could and hopefully next year will test -- you know, February-March range. It'll separate the sampling process. Right now, we have program offices getting request for samples of loans from our internal management's auditor, and which is -- because we hired a firm to help us -- and from the IG's external auditor.
And they don't know the difference. You know, we can try to tell them, and I've tried, believe me. But when all is said and done, you know, they're auditors, whatever, you know. So hopefully if we push our testing back a few months, maybe February-March, and then I would say we'll have the results earlier. And if there are issues that you can address and get them solved, that's the ideal situation. At least by September 30th you might be able to show that you've cleaned up whatever the problem was, and that you have a practice in place that the auditor, then when they test it in June or July they'd see something that they're comfortable with.
Mr. Watson: Do you envision being able to integrate that testing going forward so that there's not the A-123 auditors and then the traditional financial statement auditors both testing and looking at data?
Ms. Main: Well, from everything I can tell, the intention is that they want us to test for ourselves, and have the auditors test on top of it. That's my understanding of where they're headed. I think they're willing to let us document -- you know, the first year they want us to test every -- a baseline of the key processes, and then going forward it seems like there's some opportunity to show, hey, we have a really strong track record that we don't have any issues. We have these processes in place that would tell us if there's an issue, and therefore we're only going to -- we're going to sample a smaller number, we're going to sample less frequently in a sort of a multiyear kind of thing. But I think the notion that management has to have something of its own to stand behind the assertion where we have to assert as to the quality of our controls that are in place -- in the past you could make that assertion based on whatever your --- process would let you get away with in a sense.
You know, you had to write a letter, and it said, "Yeah I've looked things over. I've checked it out. Based on my management judgment, I think we're fine." And my understanding is now you have to say, "Hey, I feel good about the internal controls, and I tested them. And we didn't have any exceptions." Or, "The exception I had I could understand and explain it away," you know, whatever the case may be. But you have to have that testing, I think, to make the assertion that you have things under control.
Mr. Morales: Jenny, how has SBA handled the accelerated financial reporting requirements implemented in '05 and '06, and what steps is your office taking to ensure the deadlines will be met?
Ms. Main: This one I -- near and dear to my heart. We actually had a disclaimed audit opinion the first year that they -- that was actually in '04, the first year that they were -- we had to meet the November 15th. The number one that was one word, "planning." And we literally planned down to the day who was doing what, when. We had plans and sub-plans because our auditor -- and of course our auditor was nervous about making November 15th too, it's a lot of work for us, it's a lot of work for them.
Our IG and OMB, we had so many planning meetings and discussions, we had literally almost 100 pages of planning documents of exactly what was going to happen when we tracked every component of the financial reporting process down. And then the audit process, I think they did the same thing on top of it. And that's how we made it. And it served us very well because we could just update those plans in subsequent years.
Mr. Morales: What does the future hold for SBA? We will ask CFO Jenny Main to discuss this 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 SBA's chief financial officer, Jenny Main. Also joining us in our conversation is Steve Watson, partner in IBM's financial management practice.
Mr. Watson: Jenny, in the last segment we were talking about various OMB initiatives for internal controls and accelerated reporting. I want to talk to you a little bit about the line of business initiatives. Where is SBA with respect to implementing lines of business?
Ms. Main: We're very supportive of the lines of business initiative. I can tell you as again, one of the smallest of the CFO Act agencies, we are constantly looking for opportunities to team up with a bigger agency who has gone the path of getting all of the standards and requirements in place for some sort of technology that we can just piggyback on. But we're just too small to be developing our own things. That said, we had just outsourced our administrative accounting system in 2003, right when the line of business initiative was kicking off for the financial management side.
And so we're anticipating when that contract is up -- we have a very, very good contract that has been very cost effective for the agency. So we don't want to move away from that in the short run. But when that contract is up in a couple more years we'll be anticipating transitioning to one of the existing centers of excellence or, you know, our service provider is actually I think becoming a center of excellence. So that will be a competitive opportunity that we'll look at. We are a small entity that benefits from others who want to do this. I don't anticipate us becoming a center of excellence because we're a small fry in the mix.
Mr. Morales: Jenny, I want to transition, now, to the future. What trends will have the largest impact on SBA, say, in the next five to ten years?
Ms. Main: I think it continues to be technology. We're primarily a wholesale provider of services to the small business community. We're working through our partners as I mentioned. And technology -- you know, the number of people who have computers and Internet and access to things -- we really want to move to 100 percent electronic transactions with everyone that we deal with. Obviously, aside from training and counseling type of activities where although you can do a lot of that through the Internet, and we've been expanding our presence on that front, you know, person-to-person is still I believe an important part of like a training or a counseling program.
But lending and those types of things -- the lenders are going to be the ones that interface directly with the small businesses, and we really will just interact electronically with our lenders. And we're using technology now to monitor our lenders much more effectively. We can get data. We have over 4,000 lenders. We need to know very quickly which ones are high risk, and you can use data to do that today. And we'll just become more efficient and proficient at that in the future.
The other area that, unfortunately, I'm not so optimistic about -- I know it's going to impact us, but it's not in a good way, is the budget. As a small domestic agency, very small, we have already shrunk almost, well, over 30 percent as our -- what our budget has declined over the last five years. Our staff has gone down 20 percent. We haven't given up any programs or any major programs at least, and our loan portfolio only grows. When you make loans, it creates a liability that can be 5 to 10 to 15 years down the road that you're still working on it.
So we have to maintain sufficient infrastructure. As a steward of the taxpayer's dollars, it is penny wise and pound foolish not to be maintaining an adequate infrastructure to manage that portfolio. In this current budget environment we're looking at cuts, you know, across all the agencies. I'm not the only one, you know, singing this problem. But I -- when I look at the impact of that on our agency it makes me very nervous, and we've been working hard for the last few years to try to figure out strategies. But you get to a point where you can't tighten the belt anymore, there's bone there, and just need a different approach.
Mr. Morales: Certainly a challenge. I want to transition back to some comments you made earlier in the show around disaster and disaster planning. And we've talked to many of our guests about what their organization's role is in this area. What role does SBA play in national efforts to support businesses and the economy during a disaster response?
Ms. Main: Well, SBA has one major disaster program. It's a loan program. We provide long-term recovery loans for rebuilding either homes or businesses after a disaster. And that's -- it's been a bit of a challenge. And over the past year with the extreme nature of the disaster in the Gulf, I think folks really wanted, for example, a bridge loan type of thing. Something that could keep them going for a few months while they were trying to figure out how they were going to salvage their business, or whether they were going to be able to return to the area.
And unfortunately, SBA doesn't have a statutory program that provides a short-term bridge loan product. And that was a source of, I think, a lot of frustration. But what we really have is the long-term recovery program. And in fact, most of the loans are 30 years. We will extend the payment term out as long as it takes for the borrower to be able to make the payments on their forecasted, you know, income that's available. So that's our primary program. It's been around for more than 30 years.
And overall, I would call it a very successful program. Folks who have used it -- Northridge earthquakes, for example, we did about $4 billion there in Southern California. We've gotten, over the years, a lot of positive feedback about it. But in such a dire circumstance like the Gulf, I think we found that that program alone was challenging. It caused a lot of frustration that there weren't more things. And, you know, today you can find that Mississippi and Louisiana are actually giving out grants to homeowners who have gotten SBA loans, and we're going to use -- and we're coordinating with them to coordinate that benefit.
But the devastation has been so bad that the federal government responses said, you know, we want to go a step further. So we've been working with them to make that happen.
Mr. Morales: Great. Jenny, you've enjoyed successes both in the private and now in the public sector as well as starting up your own business. What advice could you give to a person who's interested in a career in public service?
Ms. Main: Well, certainly, I've always loved being a public servant. I actually have a master's degree in public policy. So I really enjoy the challenges, the issues that you face. I mean, I kind of define the issues that the government frequently is looking at, or the things that didn't get taken care of in the private sector. There are issues that people care about, but the for-profit bottom-line isn't making them happen. So that by its nature I think makes it interesting. And I would certainly offer encouragement.
And we're looking at a huge demographic shift in the federal workforce in the next 15 years -- 40 -- 45 percent of SBA staff are eligible to retire in the next 5 years. So we need good people. So I would very much encourage anyone who's interested in public service. I would say that it's a -- it can be very challenging. There's a lot of tough things about it. But I personally feel like I make a difference every day. Personally being there, helping to make a decision or change something that otherwise would have gone a different way, I feel like I make a difference everyday, and that's very rewarding.
Mr. Morales: Great. Excellent. Jenny, unfortunately that -- we've run out of time here, and that'll have to be my last question. I do want to thank you for fitting us into your busy schedule today. But more importantly, Steve and I would like to thank you for your dedicated service to the public in our country in the various roles you've held at OMB and now at SBA.
Ms. Main: Thank you very much. I really appreciated the opportunity to be here. And I just want to make sure that all of your listeners know that if they're interested in the Small Business Administration and the products and services that we offer, particularly if they're considering starting up a small business, you can go to our website, which is www.sba.gov, and take a look at all the many great programs that we have.
Mr. Morales: Great. Thank you. This has been The Business of Government Hour featuring a conversation with Chief Financial Officer of the Small Business Administration, Ms. Jennifer Main. Be sure to visit us on the web at businessofgovernment.org. There you can learn more about our programs, and get a transcript of today's conversation. Once again, that's businessofgovernment.org.
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 am Albert Morales. Thank you for listening.