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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.