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Improving Financial Management

Executive Summary

In the recent hit movie "Dave," a presidential look-alike finds himself in the Oval Office, acting as chief executive. He brings in an accountant friend to look over the federal government's books, hoping to find money for a favorite program. "Who does these books?" the friend exclaimed. "If I ran my business this way, I'd be out of business!" With a few hours' application of accounting know-how, they find the money and save the program.

In real life, it's not quite that simple. But the satire identified an all-too-true phenomenon--Washington's financial management practices are tangled and inadequate. They do not give managers good tools to govern. Nor do they save taxpayers money by using the best innovations of business.

And where government has the know-how, it uses it only sporadically. Take electronic funds transfer (EFT), which can speed the exchange of funds to and from government and reduce processing costs. With a 1992 cash flow of $2.5 trillion, the government accepted only 10 percent of its collections electronically and made just 42 percent of its payments that way. When some agencies sought to force employees to accept pay by EFT, rather than paper checks, as a condition of employment, they faced objections from unions.

Vastly improved financial management is a critical part of the overall effort to reinvent government. First, as we have said, it saves taxpayers money. Even a relatively small improvement in managing funds can recover billions of dollars. Second, we need accurate and timely financial information if we are to give managers greater authority to run agencies. Greater responsibility for line managers requires greater accountability through budgeting, or the best-intentioned reforms will only create new problems. Finally, better financial management is necessary to give the President, Congress, and other policymakers an accurate picture of the federal budget when they make broad policy decisions and to show Americans that their money is managed well.

The Nature of the Problem

Today, to put it simply, the federal books are a mess. Any business with separate, uncoordinated systems for budgeting, accounting, and product sales would soon be bankrupt. But the federal government has such systems. Indeed, our government requires companies, states, and localities to meet professional financial standards that it does not come close to meeting itself.

Consider, for instance, what the Office of Management and Budget (OMB) found in its 1992 survey of 878 agency financial systems: Over half don't meet agency financial processing requirements; nearly half don't meet their own internal automated data processing requirements; 40 percent don't meet internal reporting requirements; a third don't meet functional requirements for reporting to OMB and the Treasury Department; over 30 percent are more than 10 years old; and, perhaps most shocking, the age of nearly 20 percent couldn't be firmly established.

To be sure, OMB also found that a quarter of agencies say they're replacing their systems or planning to do so; another quarter have upgrades planned or under way. Many of these improvements, however, have been largely piecemeal and uncoordinated, lacking a governmentwide framework. Agencies with state-of-the-art approaches, such as the Internal Revenue Service's integrated data collection system, are "islands of best practices" in a sea of backwardness.

Hundreds of rules, 120,000 financial management employees, and millions of lines of reports have not produced useful, accurate information for line managers who actually decide to spend federal dollars. [Endnote 1] Why? Not due to the lack of hard work or dedication by financial employees or those line workers delivering direct services to the public. Rather, the problem is due to decades of uncoordinated, budget-obsessed focusing on cash flows that are unrelated to any measures of achieving a mission as well as to multiple procedures to create the illusion of control.

Currently, 60 percent of major federal agencies have one or more programs on OMB's high-risk list of programs particularly vulnerable to fraud or waste. Of course, policymakers have sought to ward off abuse. Over the years, scandals have prompted new laws, OMB has issued circulars to implement the laws, and agencies have then issued further guidance and regulations, including a growing burden of reporting requirements.[Endnote 2] But while each was well-intentioned, this profusion of laws and regulations is like having six thermostats in a room at different settings to maintain climate control, guaranteeing wasted energy without accomplishing a satisfactory result.

A Vision of the Future

The National Performance Review (NPR) envisions a much better day, not far off, when virtually all funds in and out of the government flow electronically and financial information is a normal byproduct of operations. This information would be accurate and readily available to line managers, financial staff, and auditors--enhancing probity and policymaking.

Technology now allows data to be collected as part of normal program operations--not as a separate task--and made available to all appropriate individuals. Automated systems can be programmed to alert supervisors to ACTIONS falling outside established norms. Such controls would allow program managers to make timely decisions, eliminating most staff approvals prior to action. The government could monitor accountability for program managers' decisions with an effective computer/telecommunications infrastructure, thus letting managers focus on performance, not process and paperwork.

In this report, the NPR offers recommendations that should result in a need for significantly fewer federal staff support employees, and shift the emphasis of financial management to timely and useful support for program delivery to the public. Notwithstanding large annual overhead savings, the real value to taxpayers will be much better stewardship of their tax dollars. Federal managers will be clearly accountable for measurable program results at the most efficient cost. Financial managers will be respected advisers to line program managers--effective members of a team ensuring excellent public services. And, due to clear reporting of tangible results, the government will earn Americans' trust that it is well managed.

Recommendations and actions

This report provides the needed road map to change today's unsatisfactory status quo. The first part deals with the steps necessary to build a strong financial management infrastructure. The second concentrates on adopting good business practices. Key recommendations include the following:

--The President should issue an annual financial report to the citizens. The public deserves a clear, concise, accurate financial accounting of the nation's books. The public reads little of the deluge of official reports submitted to Congress. As a result, public perceptions of the federal financial condition result from fragmentary coverage in the media. As the steward of the taxpayers' dollars, the President can offer a simple and readable report each year to help the citizens receive a fair and balanced picture of the nation's financial condition.

--Legislation should be enacted to allow funds for debt collection activities to come from revenues generated from collections, letting agencies keep a portion of any increased collection amounts for further improvements. Compared to spending program money, agencies have not placed a high priority on debt collection. Based on experience at several agencies, paying for the activity on a self-funding basis would dramatically increase the dollars recovered. Letting agencies keep some funds would create an additional incentive.

--Issue all federal payments through Electronic Funds Transfer (EFT) or Electronic Benefits Transfer (EBT). EFT (commonly known as direct deposit) replaces checks and costs about a sixth as much. It has grown, on a voluntary basis, to over 40 percent of all federal payments over the last 15 years. EBT is a newer system to bring the same lower-cost distribution of funds and benefits to people without bank accounts. Now, the federal government should accelerate toward a full electronic system for payments to all businesses and individuals.

--Issue a comprehensive set of federal financial accounting standards within 18 months. The federal government's failure to adopt generally accepted accounting standards has contributed to the uneven quality of information as well as other problems. While the government has begun to correct this failing, it must take further action to produce an initial set of standards that would lay a foundation to meaningfully implement the Chief Financial Officers and Government Performance and Results Acts. Reports on value for the dollar need consistency across government.

--Allow agencies and departments to create "innovation capital funds" out of retained savings from operational funds as well as other sources. Without additional appropriations, agencies can effectively use a portion of money unspent at year-end to invest in major improvements that can cut future costs and improve services. These funds have worked in several agencies.

--The President should instruct agency heads to implement, at their discretion, franchising for service functions. Internal administrative support services, such as personnel, finance, and procurement, are duplicated in every federal agency as separate, inside monopolies. The franchising option will allow line program managers to control the money and obtain such services from whichever agency offers the best service at the lowest cost. The incentive of competition should increase responsiveness to the line customers in agencies and lower costs.

Achieving Results

Implementing ACTIONS in two of the 13 recommendations should begin providing spending reductions or increased revenue quickly. During the next five years, the growth in electronic payments as a replacement for checks and the increase in electronic collections should reduce expenditures by over $350 million.

Recommendations for strengthening debt collection should result in $1.5 to $6.0 billion in additional collections during the same period.

The remaining recommendations will not provide immediate savings, but should provide the basis for hundreds of millions less in overhead dollars each year once the infrastructure is in place.

During the next three years, a strong financial management infrastructure needs to be built, and the spread of good business practices needs to take root. With the changes in place, significant redirection of financial staff into line program positions should occur. Ultimately, over one quarter of the financial management positions filled today would no longer be needed. All of the above figures have been incorporated in other accompanying reports.

The manner in which change of this nature is implemented is crucial to its success or failure. Until the investment and implementation in systems and changes in other processes are completed, these positions will still be needed. Reductions in personnel prior to these changes will likely result in more serious financial problems.

ENDNOTES

1. "1969-1991 Trend of the Federal Civilian Workforce in Accounting and Budget Occupations," special report from Office of Personnel Management. Figures represent 1991 employment in occupation series 501, 503, 505, 510, 511, 525, 530, 540, 544, 545, 560, 561, 593, 599, and half the total number in 343 (Management and Budget Analysis).

2. The Treasury Financial Manual, providing guidance to agencies, is approximately 630 pages.

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