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.

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