THE WHITE HOUSE
Office of the Vice President
Use the Chief Financial Officers (CFO) Act to Improve Financial Services
The Chief Financial Officers (CFO) Act of 1990 promises a new era in federal financial management and supports efforts to gain financial control of government operations. It has been hailed as "the most comprehensive and far-reaching financial management improvement legislation since the Budget and Accounting Procedures Act of 1950 was passed over 40 years ago."[Endnote 1]
The CFO Act calls for the federal government to establish a foundation of basic financial management practices that are common and considered vital in the private sector. It directs the Office of Management and Budget (OMB) to "provide overall direction and leadership to the executive branch on financial management matters by establishing financial management policies and requirements."[Endnote2] The act requires long-range financial planning, audited financial statements, integration of budget and accounting data, and development of cost information, among many other good financial management practices. It also establishes a financial management leadership structure within the Office of the President-- specifically, OMB--and within federal departments and agencies.
The act established a Deputy Director for Management, the position of controller, and the Office of Federal Financial Management, all located in OMB. In doing so, OMB became the focal point for financial management policy in the federal government. Under the act, OMB has authority to set financial management policy, which should serve to eliminate inconsistent practices among the departments and agencies. OMB is also responsible for establishing policies and providing other guidance regarding the systematic measurement of agencies' performance.
The CFOs are required by the CFO Act to be chosen from "individuals who possess demonstrated ability in general management of, and knowledge of and extensive practical experience in financial management practices in large governmental or business entities."[Endnote 3]
Deputy CFO qualification standards include "demonstrated ability and experience in accounting, budget execution, financial and management analysis, and systems development, and not less than 6 years practical experience in financial management."[Endnote 4]
The CFO Act sets a high standard for financial personnel, acknowledging the need for professionalism and competence, and provides a key element in the financial management infrastructure-- quality people. It encourages financial managers to have broad financial management backgrounds. It did not specifically address the qualifications of financial management staff, but implied that high standards should be pervasive throughout the federal financial management community.
The CFO Act also established an important organization, the CFO Council. The council is composed of OMB's Deputy Director for Management and controller, the Fiscal Assistant Secretary at the Department of the Treasury, and the agency CFOs. The council's function is to "advise and coordinate the activities of the agencies of its members on such matters as consolidation and modernization of financial systems, improved quality of financial information, financial data and information standards, internal controls, legislation affecting financial operations and organizations, and any other financial management matter."[Endnote 5] Thus, the CFO Council is an important vehicle for coordinating improvements in all aspects of financial management. With its broad agenda, the CFO Council can take the lead in developing and implementing many plans and projects that can improve agency financial management effectiveness across government.
NEED FOR CHANGE
The CFO Act requires that CFO and Deputy CFO positions be filled by individuals with proven skills in financial management. However, many of the initial CFO appointees were individuals already in place in their agencies when the Act was implemented; there was not sufficient opportunity for the President to appoint new CFOs that fully met the qualifications stated in the CFO Act. Many federal agencies are larger than some Fortune 500 companies, and the past experience of CFO candidates can help determine their ability to effectively run a large financial operation. In order for the public to become confident that the government effectively manages its finances, it is important that the senior financial managers be regarded as professionally competent, both inside and outside of their organizations. They must provide the kind of committed leadership that will bring the government's finances to a higher level of professional management.
Many of the recommendations in this report will require a great deal of technical expertise, such as the information systems integration of budget, accounting, and program data. Unless such projects are managed and operated by technically qualified personnel, the efforts to improve financial management will meet with failure. The issue of qualified, committed personnel goes deeper than just a layer or two in the organizational hierarchy. It reaches down to every level of the financial management staff. Many financial managers complain about a lack of training for their staff and a personnel system that inhibits the hiring of more qualified employees.[Endnote 6]
Recruiting and hiring technically qualified personnel is not easy under present civil service policies. For example, a former CFO for the Department of Housing and Urban Development (HUD) tried in 1992 to raise the standards for candidates of HUD's 10 regional controller positions. The Office of Personnel Management (OPM) would not allow him to specify more stringent qualifications requirements than already existed for the job category. Because OPM's criteria were too weak to screen out unqualified candidates and OPM's pre-set qualifying factors accounted for 70 out of 100 possible points, the CFO was forced to spend weeks developing a complex ranking system using the remaining 30 points. He ended up hiring qualified candidates, "in spite of, not because of, existing personnel rules."
It is apparent that while federal employees are in need of training in the field of financial management, when training is provided, it can be very effective. The Treasury Department's Financial Management Service has led the formation of the Federal Credit Management Training Institute, which has sponsored Accounting I and Financial Statement Analysis classes taught by the American Institute of Bankers at locations around the country for federal credit managers. Recent Accounting I pretests given to 390 federal employees in the field of financial management resulted, on average, in failing scores of 41 percent. Of the 457 employees who took the Financial Statement Analysis course, the average pretest score was a failing 51 percent. However, the good news is that the training was very effective. Final course test scores for the Accounting I course averaged 74 percent, and for the Financial Analysis course averaged 81 percent.[Endnote 7]
Many training programs currently exist in the field of federal financial management. They range from courses sponsored by the U.S. Department of Agriculture Graduate School and the Treasury Department, to internship and job rotation programs sponsored by agencies and OPM. There are also many conferences and seminars sponsored by such groups as the Association of Government Accountants, the Joint Financial Management Improvement Program, and the American Institute of Certified Public Accountants. However, financial management personnel do not take full advantage of the current opportunities for training in financial management. This seems to be largely due to a lack of information about the existence of such opportunities and also due to the cost of the programs. Many agencies do not have sufficient budgetary resources to pay for employees to attend courses. Agencies often are forced to pass up opportunities to train their personnel, even though the cost of the cumulative actions of untrained personnel can ultimately be higher than the cost of any training course.
Financial management training is not a need limited to personnel in the financial management field. Program managers must also be trained in the interpretation and use of the financial information that is and will be made available to them. Budget information has historically been the principal source of financial information for program managers at all levels (from Presidents and Secretaries to line managers). As improved financial information becomes available to aid managers in evaluating program performance, efforts to educate program managers have not kept pace. Currently, there is no coordinated effort to ensure that non-financial managers are informed about the use that they can make of financial information, and the role they can play in improving the management of the government's financial assets. There is also no formal method of ensuring that the financial information provided to the non-financial managers is understandable and useful.
A strengthened financial leadership structure will enhance financial managers' ability to serve line managers. The leadership structure called for in the CFO Act includes the organizational structure changes to support the newly-established CFOs and Deputy CFOs at 23 departments and agencies.[Endnote 8] The CFO is to be the principal financial officer for a department or agency, reporting directly to the head of the agency, responsible for all financial management activities. To meet these responsibilities, the CFO Office is to have authority over the various functional components of financial management: finance, accounting, budget, and financial information systems. OMB has issued a memorandum outlining the suggested financial functions that should ideally report to the CFO, but budgeting was not among the recommended functions.[Endnote 9] The memorandum serves as guidance only, and sets no requirements for CFO office structure.
CFO candidates should have relevant experience and stature within the financial community. Heads of agencies should ensure that the deputy CFOs are equally qualified, because with the CFOs they can form a strong team promoting good financial management practices within their agency. OMB should enlist private sector associations of financial executives to provide names of qualified candidates, or to develop a rating system of candidates for high-level positions much like the American Bar Association provides for U.S. Supreme Court nominees.
Agencies should improve the quality of personnel hired into financial management positions. They should seek out financial management candidates in the public and private sectors with strong backgrounds in accounting, finance, and information systems when vacancies occur at all levels. Agencies should ensure that vacancy announcements are open to all qualified candidates. Agencies should be able to specify that candidates are required to have certifications if appropriate, such as certified public accountants, certified management accountants, certified internal auditors, and certified fraud auditors, and other qualifications in the fields of information systems, budgeting, and finance. Other National Performance Review (NPR) recommendations dealing with personnel issues suggest the decentralization of the recruitment process, which would allow financial managers to raise the qualifications screening factors in order to ensure that the most qualified candidates will score at the top of a list of ranked applicants.[Endnote 10]
2. Coordinate efforts to provide low-cost, effective training for financial management personnel. (1)
The CFO Council should foster the design and coordination of an extensive array of training options for financial management personnel by May 1994. The Council should seek out low-cost and no- cost training alternatives and reallocate existing training resources in a more cost-effective manner. Agencies should track the training of their personnel, both individually and in aggregate. This tracking should be reported by agencies to the CFO Council beginning in May 1994 to encourage a competition among the agencies and departments for a "best trained staff" award or recognition. In order to improve the qualifications of existing staff and to promote a "lifelong learning" culture, NPR recommends the following possible training alternatives that the CFO Council could adapt to fit agency and personnel needs:
--Job rotation or visitation (within various financial management functions of a department, between program and financial functions, with the private sector, or with state and local governments).
--Private sector or agency training programs that meet standards for professional accreditation programs.
--Other forms of professional development, including continuing education, participation in professional associations, sabbaticals, etc.
The CFO Council should establish a continuing professional education (CPE) program for financial managers by October 1994. The program could be developed in collaboration with organizations such as the American Bankers Association, American Institute of Certified Public Accountants, the Association of Government Accountants, and federal agencies offering training programs. Such a program is being considered by the Joint Financial Management Improvement Program. It could be similar to the requirement that persons performing government audits obtain CPE credits. OMB should issue a policy statement on continuing professional education for employees in the field of financial management, and the policy should be included in the OMB and agency Five-Year Financial Management Plans. Supervisors should consider CPE and other training when making promotion decisions.
3. Ensure that the information being collected, disseminated, and reported on is useful, objective, timely, and accurate for the benefit of program managers. (1)
CFOs should begin meeting regularly with agency heads and program managers to develop tools such as financial measures, indicators, and reporting formats, to ensure that line management information needs are being met by the CFO Office. This would provide CFO offices and line managers with a better understanding of the roles that each one plays in the efficient operation of their organization. Additionally, it should increase the collaboration between the two groups and reduce any existing tensions. The CFO office should explain how to make the best use of the financial information it is providing to line managers. Feedback mechanisms should be established to ensure an ongoing usefulness of the information being provided to the program managers.
CFOs, using the CFO Council as a point of coordination, should jointly develop tools by May 1994 to evaluate overall agency financial management performance for reporting to department or agency heads. CFOs should begin making their reports to department heads by June 1994. Copies of those reports should be provided to the CFO Council.
CFOs should provide financial management briefings to agency heads on a regular basis to report on financial management indicators. All too often agency heads are not aware of, nor do they understand, the financial aspects of program management. Such briefings would provide for more informed decisions and debates on program management. It would also demonstrate the value of financial information to agency heads so that they may better manage their agencies.
4. The OMB deputy director for management should meet periodically with departmental deputy secretaries to discuss financial management issues.
This could include a review of management reports, financial performance indicators, cross-servicing issues, and other activities related to emphasizing sound financial management practices. It should also include a review of the financial management tools developed by the CFO Council. Good financial management practices and tools could be acknowledged and shared. The meeting could also serve to brief deputy secretaries on their role in financial management and to ensure that efforts to improve financial management cross all departments.
5. Identify the set of financial management functions that should report to agency CFOs. (2)
OMB should issue guidelines by December 1993 encouraging agency CFOs to be responsible for all financial management functions. These functions would include finance, accounting, financial information systems, budgeting, accounts payable, collections, and internal control. For larger agencies, OMB should discourage making the CFOs responsible for extraneous functions, such as personnel or facilities management, that reduce their focus on financial management responsibilities. Exceptions to the guidelines should be reviewed by OMB's Director.
CROSS-REFERENCES TO OTHER NPR ACCOMPANYING REPORTS
Reinventing Human Resource Management, HRM01: Create a Flexible and Responsive Hiring System.
ADOPT GOOD BUSINESS PRACTICES
A well-run organization might be described as cost-conscious, professionally managed, efficiently operated, financially sound, streamlined, and accountable. Those words are not typically used when the entity being described is the federal government. They would, however, be used in describing successful businesses. A private sector business, subject to the rigors of the market, pays immediate consequences for poor management. An unprofitable business loses its ability to borrow or raise capital; ultimately, it may have to file for bankruptcy. In the federal government, bad management is exposed to no market discipline. It is hidden by committee, undiscovered, or even rewarded. Historically, the government has been able to avoid accountability for its management of taxpayer assets. Those days are gone. In this environment of scarce financial resources, taxpayers are justly demanding that the government use its resources prudently. Every dollar that is wasted is a dollar taken out of a taxpayer's wallet, or lost from a program that would help build a better future.
The government need not reinvent any wheels when it comes to improving its operations. Private sector professionals have designed accounting systems, management reports, financial analysis and planning techniques, service delivery systems, and other tools to make their operations run smoothly and efficiently. The federal government simply needs to adopt the same commitment to improved practices and operations that drives businesses every day. It needs to be run in a more businesslike manner. The recommendations in this section are intended to improve the manner in which the government conducts its business.
"FRANCHISE" INTERNAL SERVICES
The federal line manager generally receives numerous administrative services from internal monopolies and is totally dependent on those monopolies for delivery of the services needed for program accomplishment. These monopolies do not have concrete incentives to treat the line manager as the customer, and the line manager has little control over the quality of services received. Exacerbating this situation is a highly conservative, risk-averse federal culture that emphasizes adherence to regulations over service and results.
In recent years there has been considerable growth of cross-servicing within the government. Enterprising service organizations have expanded their services to customers in other organizations on a reimbursable basis. The Cooperative Administrative Support Unit program has been a catalyst for such cross-cutting service support between agencies. Similar efforts have been successful in the Department of Defense through the Joint Inter-Service Regional Support Group program and the Defense Reutilization Marketing Organizations. Centers of innovative entrepreneurship have developed elsewhere in government including the Department of Agriculture's National Finance Center; the Department of the Treasury Financial Management Service's Center for Applied Financial Management; the Interior Department's Administrative Service Centers in Denver and Washington; and the General Services Administration's Federal Computer Acquisition Center for automated data processing buys. The success of these organizations in improving service and reducing costs sets the stage for expansion of this concept throughout government.
The franchising concept draws from most of the principles of the National Performance Review (NPR), including focusing on the needs of the line manager, injecting competition, finding market instead of administrative solutions, decentralizing authority, and fostering excellence. We have chosen the term "franchising" to refer to internal services based on three basic concepts: They are reimbursable, competitive, and conducted within governmentwide principles and criteria.
NPR's motivating vision is for the line manager to receive quality services fast and for the best value. In this concept, service excellence is promoted through competition among administrative units.[Endnote 1]. The line manager controls funding and buys from the best provider. Servicing units grow or shrink based on demand for their services and are free to manage flexibly to meet demand. The financial bottom line guarantees discipline and excellence in the system. Services are driven by the needs of the line manager who is free to purchase these services from the best provider.
This concept is applicable to any services common to more than one organization. These include all administrative functions such as procurement, personnel, payroll, finance, logistics, security, and facility management. They could include other services such as information technology, engineering, quality assurance, and other types of internally focused support. The characteristics of this approach include:
--The "franchised" support unit operates within principles and minimum criteria, which are established governmentwide by central agencies (ie. Office of Personnel Management (OPM) for personnel) to guide administrative and other services. These criteria would be incorporated in the contracts executed between the customer and servicing agencies.
--The market mechanism drives the model. Administrative units actively market their services to gain business. Entrepreneurial management is a key success factor. The line manager seeks the best deal based on price and excellence of outputs--speed, consistency, attitude, and quality of services provided.
--The franchising could occur in a variety of circumstances including: within small or large geographic areas; with a mix of local, state, and federal government; with any combination of services; among existing or new civil service units; and at some point during the implementation process, with competition by private businesses.
NEED FOR CHANGE
Flexibility to manage a unit is critical for success and includes businesslike practices, the ability to manage the workforce easily in response to business changes, freedom from full-time equivalent (FTE) controls, a revolving or industrial-type fund with pricing flexibility, and simplified personnel practices. A number of actions recommended elsewhere will provide considerable additional flexibility for managing in a businesslike manner.
There are numerous barriers in the current system. Financial barriers block reimbursable activities from the flexible use of "profits" and transfer of funds among line items and object classes. Personnel barriers and recommendations are discussed in an accompanying NPR report on human resources management. FTE controls on agency workforce levels are based on agency appropriations from Congress, and the FTE control system must be changed to enable rising and falling workforce levels and budgets in a competitive, reimbursable cross-servicing environment. FTE controls are discussed in an accompanying NPR report on budgeting. Unless the FTE control system is changed, agencies will lack the incentive to use their own ceiling to expand services and the workforce on behalf of outside customer organizations even though the costs are paid by the customers. Parent agencies do not perceive service to other agencies as a part of their mission, and central management agencies have tolerated or only half- heartedly promulgated this as the government's policy. In addition, a lack of internal agency delegation of financial and other authorities to field-level managers creates impediments to cross-servicing arrangements.
Incentives are needed for success. In addition to new flexibilities recommended by NPR, additional incentives are important to success. A means of providing capital loans for initiating new servicing units or upgrading existing capabilities would be desirable. In addition, an important incentive would be flexible use of "profits" including gainsharing with employees and the parent agency.
A minimum supporting management structure would be necessary to provide services to the franchised support units and customer agencies. The model would be an unbureaucratic "central nervous system" serving as an information repository and broker. Services to units would include coordination with franchising agencies and information on start-up, best practices, business advice and opportunities, regulatory issues, etc. Services to agencies would include working to ensure a critical mass of competing providers and information on potential servicing units and services available. This would be a mixture of central national effort to provide promotional, information, and brokering services and reliance on regional and local efforts among significant numbers of participating agencies.
The desired end-state is a government in which internal services are delivered by servicing organizations (meeting previously established criteria) in competition with similar organizations. Their customers are the line organizations responsible for carrying out the government's missions in the least costly and most effective manner. While the details of this need to be tailored to each agency's specific circumstances and requirements, the basic principles of the process are as follows: agencies prepare their internal service providers for conversion to competitive, reimbursable business practices; in graduated phases, funding for these services is redirected from the current service monopolies and provided to the customer organizations; as the customer organizations receive the funds, they are free to purchase services from competing service providers who offer more effective outcomes; the former monopolies succeed or fail based on their ability to provide equally or more effective outcomes than are available elsewhere. This will not be an easy process. The idea of applying market incentives to internal federal services is revolutionary to those who have practiced in the 100-year monopoly tradition. Even with greater flexibilities and new incentives, there will be great resistance and reluctance to try. While agency heads are grappling with long-term plans for making this concept work within their organizations, NPR recommends an interim effort designed to sell and facilitate the overall concept within and across agencies; identify early opportunities for implementing franchising; and provide a central support activity for start-up and long-term implementation.
The President, by executive order, should instruct agency heads to determine which service functions (e.g., procurement, personnel, finance, logistics, engineering, etc.) their agency does well and can be offered to other agencies and which services are weak and should be purchased from other agencies. Agency chief operating officers (COOs) should be assigned responsibility for making the concept work within and across agency lines and across functional service lines using the reinvention laboratory concept, pilots, or other approaches to accomplish this. COOs should develop long-term agency implementation plans. In order to facilitate franchises, OMB should introduce legislation permitting the establishment of franchise revolving funds in all agencies.
2. Establish an implementation team under the President's Management Council (PMC). (2)
As part of their collective responsibilities in the PMC, the chief operating officers should assume overall responsibility for governmentwide implementation of the franchising concept as soon as is practical. The PMC should charter an implementation team to facilitate long-term implementation by the agencies and look for opportunities for immediate action. The Office of Management and Budget's role should be to guide the initial implementation effort and assist the PMC.
CREATE INNOVATION FUNDS
Innovation capital is a source of money to invest in redesigned work processes, new information technology, or other equipment and ideas that help improve the quality and responsiveness of government services. Innovation capital may also be used to enhance productivity or generate cost savings. Innovation capital provides funding for both capital-intensive projects such as large information technology projects, and smaller, service-oriented improvements, such as training staff in business process reengineering. It is intended that these funds would be repaid, with interest, to the sponsoring entities.
The timing, amount, and availability of innovation capital calibrates the ability of federal agencies to build capacity to govern and improve performance. The increased availability of innovation capital acts as an incentive for federal managers and employees to develop and implement their creative ideas on how to make the government work better and be more responsive to citizens. The current budget formulation decision process that ultimately leads to an appropriation has not resulted in sufficient new innovation capital to achieve those goals. Given the current and outyear budget realities, it looks unlikely that significant new appropriated funds will be available. Consequently, alternative funding sources and approaches must be considered.
NEED FOR CHANGE
The budget process today does not foster many of the larger innovation projects, such as information technology, modernization, or energy and water conservation, which need injections of funds (pulse funding instead of level funding) in the initial years with smaller amounts of ongoing funding for the outyears. This characteristic of capital investment requirements does not match well with the existing budget process. Consequently, numerous high- priority modernization projects are delayed, scaled down, or blocked when the budget process does not result in sufficient new appropriated funds. Smaller projects requiring innovation capital may also run into barriers to fast accumulation of sufficient funds to start or move key projects forward when new appropriations are not likely. Another historic barrier to capital accumulation includes legislation that prevents partners at different agencies or levels of government from matching funds with their counterparts or with private industry for projects where there are shared goals or interests. The accumulation of innovation capital is also stymied by legislative barriers to saving and redirecting unobligated balances from end-of-year savings. There are no effective incentives helping to stimulate and reinforce the desired continuing innovative or entrepreneurial behavior. Unobligated balances or end-of-year operational savings either are lost, can't be pooled, or are otherwise not available for investment in potential high-payoff projects.
The normal budget process is too lengthy to foster sustained, creative, innovative behavior by institutions or employees. More flexible and timely methods are needed for investments in innovation. Also, unless shielded or protected in some manner, these funds are raided for contingencies not related to innovation. There is a potential concern about diversion of funds or potential violations of the Impoundment Act if end-of-year savings are redirected without coordination with appropriate congressional oversight committees.
The following examples illustrate variations of the innovation fund concept:
--Under General William Creech, the Air Force Tactical Air Command created a $10 million innovation fund one year to fund reinvention ideas through grants. The funds were an appropriation set-aside.[Endnote 1]
--In the Department of Commerce's Pioneer Fund, employees apply for cash grants up to $50,000 to finance innovative quality and productivity improvement projects. Funds can be used for project supplies, equipment, and expert services. The source of funding is an annual appropriations set-aside. The Treasury's Internal Revenue Service and the Department of the Interior have or have had similar funds.
--Both the Departments of the Treasury and Transportation currently operate working capital funds (WCFs). The Department of Veterans Affairs has proposed one. These funds require separate legislation and have a specific charter, which focuses on such purposes as information technology modernization. The charter, as implemented by appropriation language, has the potential to make a WCF quite flexible by lifting apportionment controls while adding other operational safeguards.
--In the Department of Justice's fiscal year 1992 appropriations bill (Commerce, State, Justice, and related agencies), permanent language was added to take the unobligated balances from the last five years and transfer them into a department-level WCF as start-up funding for investments in capital equipment and other nonsalary purposes.
--Most federal agencies use secretarial and administrator's reserves under Title 31 USC 1512 for small budget contingencies and to accumulate administrative savings.
--In Florida, Governor Chiles cut budgets 5 percent across the board and returned half to those agencies with approved plans that increased productivity or effectiveness.
--The City of Philadelphia uses an innovation fund that issues loans to government organizations that must be repaid after five years at double the amount borrowed. The County of Los Angeles has a similar fund and approach.
--American Express uses a matching fund approach for its technology research group with 40 percent from the corporate technology (innovation) fund, 40 percent from the interested business unit, and 20 percent from another business unit that has a vested interest in the outcome of the proposed application.
--Texas Instruments uses "wild hare" grants to internal entrepreneurs.
These working capital funds have proven to be successful in parts of government such as the Treasury and the Department of Transportation. Some of the principles distilled from their experience for a successful WCF follow:
--agency users of the WCF have a choice of whether or not to use the fund and have alternatives for the service;
--the WCF has flexibility to adjust its operational cost structure and pricing strategies to adapt to changes in demands for their services;
--certain financial reporting safeguards must be built in;
--a minimum initial investment for start-up costs and one- time seed money that is sufficiently large for significant investments is essential; and
--a level of fees and interest charged and repayment schedules must generate sufficient profits for the WCF to become self-sustaining in a short period of several years.
The following recommendations create a two-tier system of complementary, market-like innovation capital investment vehicles. Each tier serves a different market segment as defined by dollar size, geographical scope, and technical complexity or risks. These mechanisms are designed to meet requirements for innovation capital within each agency and governmentwide to support improved responsiveness, productivity, and quality of service to customers. The recommended new approaches do not assume significant amounts of new or recurring appropriations, but instead either rely on other sources for funding or are designed to repay the initial start-up costs. Smaller and less risky projects can be funded at the agency levels, and cross-agency WCFs would be used for the more technically and financially challenging project levels.
The retained savings approach at the agency level is significant because of its reliance on major changes to the incentives influencing behavior of federal managers and employees. Under this approach for the agencies, the major beneficiaries will be the general public as the revitalized incentive structure starts to work within the federal government operations. The self-interest forces will reward innovation by employees redesigning their operations to be more efficient and effective. A major advantage of this reliance on changed incentives is its ability to overcome the resistance from the "not invented here" syndrome. Another advantage results from avoiding creation of another layer of bureaucracy or separate program to handle innovation. In addition, when used in combination with the departmental working capital funds, the executive branch will have greater managerial flexibility for more risky or cross-agency projects, and a suite of powerful tools to build and sustain self- regulating, self-renewing organizations for the long term.
The Director of OMB should propose legislation as part of the President's fiscal year 1995 budget to allow agencies to create innovation capital funds, based on type M (no year) accounts for retained savings from operational funds such as end-of-year savings at the agency level. Another potential funding source is all or some portion of unobligated balances from programmatic funds that could be folded into these accounts to supplement any current year contributions to start-up costs or one-time seed money. Initially they could be funded by prior year unobligated balances going back multiple years, such as in the Department of Justice.
For implementation, each agency should develop its own investment proposal selection process, and specific investment criteria such as return on investment, payback period, extent of matching fund or inkind support, technical merit, and budget realism. Project funding decisions should be made by managerial and operational peers rather than by administrative or budget staff.
Each stage of the funds' operations should use safeguards. These should include, but not be limited to, sound peer review of proposals, effective project management oversight that relies on various measurable indicators of progress and regular reviews, and post-project audits.
The shielding of these funds from diversion and allocation of the accumulated savings under the proposed governmentwide legislation is crucial. If too much is siphoned off for other priorities, the potential positive influence on federal employee behavior from changing the incentive structure to encourage innovative thinking and behavior would be minimized. The following illustration preserves some degree of agency and managerial flexibility on how a balance can be struck among these conflicting objectives:
--deficit reduction (no less than 25 percent);
--innovative investments by the agency or organization that receives the appropriation (no less than 10 percent);
--innovative investments by the agency or organization that created the savings and that receives the allotment from the level of organization that receives the appropriation (no less than 25 percent); and
--contribution to the pay and awards (gainsharing) for the lower level organization that created the savings (no less than 10 percent).
Each agency should develop a formula for how to reward both individuals and teams who originated the savings. The savings could be segmented to ensure that the incentives reach all parts of each agency.
The Office of Personnel Management (OPM) maintains a list of experiments on these approaches in agencies such as the Department of Defense that can serve as models. In addition, the General Accounting Office (GAO) has conducted studies about successful sharing of productivity gains that can then be used by management for higher priority projects.
Once this recommendation to change the incentive structure is implemented, employees will have more freedom to exercise independent judgment. Since both their individual pay and organizational budgets benefit, self-interest becomes harnessed to reengineering efforts. Upper management and the public benefit by avoiding future program cost increases since the benefits from the investments of innovation capital help reduce pressure for future tax increases. The general public would also benefit from the resulting service innovations and productivity increases.
The administration's recent executive order reducing agency administrative costs is already underway. The retained savings recommendation, when fully implemented, should greatly aid agencies' abilities to meet those reduction targets while maintaining and enhancing their abilities to provide services to taxpayers and fulfill their missions. The recommendation could be tested in one or more pilot programs and be evaluated by interagency groups and congressional staff to accelerate the spread of the use of these funds governmentwide.
2. Establish working capital funds (WCFs) for all federal agencies.(2)
The Director of the Office of Management and Budget (OMB) should facilitate WCFs for all appropriate federal agencies as part of the fiscal year 1995 budget at the cross-agency levels. OMB should initiate discussions with each major agency to implement this recommendation. Each agency should design a charter that specifies the intended purposes for the WCF (e.g., information technology investments) and establishes a minimum set of safeguards such as annual inspector general audits.
Each stage of the funds' operations would use safeguards. These would include, but not be limited to, sound peer review of proposals, effective project management oversight that relies on various measurable indicators of progress and regular reviews, and post- project audits. Since the WCFs would be concerned with larger and more technically complex projects than those addressed by the agency level ICFs, a correspondingly more thorough due diligence process evaluating proposals and more sophisticated oversight of project management should be used.
In addition to agency level WCFs, pilot programs could also test the feasibility of possible regional or local WCFs during fiscal year 1994.
3. Convene a working capital fund (WCF) forum. (2)
The President's Management Council should convene a forum of representatives from all existing and planned federal working capital funds at the agency and cross-agency levels. The purpose of the WCF forum would be to discuss issues of mutual concern at least quarterly. The forum could sponsor continued learning through sharing of operational experience, collaborative problem solving, and leveraging efforts by developing cross-agency projects funded by matching funds. In cooperation with the OPM Office of Innovation, it could sponsor conferences or workshops, operate computer bulletin boards, facilitate site visits, and pursue other techniques to support the transfer of innovative ideas and experiences using innovation capital to help make government more responsive. After the initial meeting, the members of the forum could select their own lead agency to act as host or convener. Representatives from agencies with existing WCF experience, such as Transportation and Treasury, should form the initial nucleus of the forum. This cross-boundary organization should refine its own charter based on the evolving requirements of members.
4. Allow agencies to match funds. (3)
The Director of OMB should forward legislation to Congress that would allow agencies to match funds with each other through the WCFs for cross-agency projects or with other partners such as state and local governments and private industry to share risks and leverage participation at agency and cross-agency levels. For fiscal year 1994, OMB should test this idea in a pilot program at one major agency by including new legislative language. The pilot program should test the feasibility of using the approach based on the approved scope developed in cooperation with OMB and Congress to control the investment pattern as an alternative to using prior coordination and approval by OMB and Congress on each project.
REDUCE FINANCIAL REGULATIONS AND REQUIREMENTS
Every agency rewrites and interprets the central management agencies' requirements into its internal guidance. These requirements are usually more restrictive and do not provide managers with the flexibility to use reasonable judgment and to consider the cost of their actions. Several examples of such regulations, requirements, and processes follow:
--Agencies spend a lot of time interpreting and enforcing travel regulations that are paperwork intensive. In addition to the many regulations put out by the General Services Administration (GSA), most federal agencies rewrite their own regulations. For example, the Federal Travel Regulations are about 200 pages, and one agency issued a 300-page manual to implement these rules. In addition, the agency developed a simple help guide for its employees because the manual was too complicated.
--Treasury prohibits agencies from having their own bank accounts but allows the use of third party drafts. A third party draft is a check-like instrument drawn against, and paid by, an outside-the-government contractor.[Endnote 1] Third party drafts are checks that can be used for small purchases, travel advances, and travel reimbursements. Essentially agencies pay someone else to have a bank account for them because they aren't allowed to have their own. This process is often slow and procedurally difficult to follow.
--The General Accounting Office's (GAO) Title 7, "Concepts of Federal Accountability and Responsibilities of Accountable Officers," discusses the use of fast pay and alternative pay.[Endnote2] Both methods are for agencies to improve their ability to pay bills more quickly. Generally, alternative pay defers the verification of the receipt and inspection on the condition that they be performed on a sample basis after the payment. Effective control over certified disbursements ordinarily requires prepayment examination and approval of vouchers before they are certified for payment. However, to use the alternative pay option, a detailed plan must be developed and submitted to GAO for approval, thereby discouraging its use.
--OMB Circular A-50, "Audit Follow-Up," provides the policies and procedures for use by executive agencies when considering reports issued by the Inspector General (IG), other executive branch audit organizations, GAO, and non-federal auditors when follow-up is necessary. The current circular gives no consideration to the significance of the findings.
--Some agencies' time and attendance systems currently require the submission of paper time cards for each employee every two weeks. Specifically, a time card is prepared by a timekeeper in each work unit recording hours worked, leave taken, and overtime worked, if any. Once the time card is filled out by the timekeeper, the employee must sign-off or initial for any leave taken, and the supervisor in the work unit is required to approve the time card. The timekeeper is then charged with the responsibility of ensuring that time cards are transmitted to the appropriate payroll office for processing or entering the data into the payroll system.
NEED FOR CHANGE
Change is needed to give managers flexibility to do their job. The difficulty with eliminating or modifying many of the rules and requirements is that they were brought about by poor decisions or mistakes that people made. However, government needs to determine the cost associated with blindly following many of these rules.
Travel. In addition to duplicating the travel regulations that GSA issues, most, if not all, agencies have staffs that reissue and interpret the travel regulations and spend time requesting decisions from the Comptroller General (CG) for very minimal travel dollars. In addition, the CG must research and respond back to the agency. For example, in a three-page CG decision, a special agent-in-charge represented an agency at a retirement banquet honoring a local police chief and presented him with a plaque and commendation letter. The CG was asked to determine if the employee could be reimbursed for the cost of the banquet. The CG determined that the meal was incidental to the ceremony, therefore, the agent may be reimbursed for the $35 cost .[Endnote 3] Also, during a visit by the Vice President to the Department of the Interior, an employee explained that she had volunteered to travel on government business with a free frequent flier ticket that required her to stay over on a Saturday night, in effect adding a sixth workday to her week. But when she filed for her per diem allowance for that Saturday, her $38 claim was rejected.
THIRD PARTY DRAFTS Third party drafts were initiated to improve the control aspect over the government's funds and for cash management reasons. However, the same controls could exist with commercial checking accounts or the government commercial purchase card known as IMPAC (International Merchant Purchase Authorization Card).
Cash in every office is counterproductive to any sound cash management program, because millions of dollars lie dormant in safes and cash boxes. Moreover, imprest funds have been prone to fraud, as low-graded, poorly paid and trained employees are asked to handle substantial sums of money. Major benefits exist through the use of checking accounts and the IMPAC card. For example:
--Commercial checking accounts would decrease the risk of loss through fraud or theft, eliminating the need for cash and the risk involved in maintaining cash. Electronic fund transfer capabilities could be used to expedite the replenishment of the fund, thereby eliminating the middleman. Some of the cash management concerns could be eliminated by requiring the use of interest-bearing accounts.
--IMPAC cards are also an alternative to third party drafts and need to be greatly expanded in the agencies. These cards are convenient and easy to use for major purchases. A number of unique controls have been developed for the IMPAC Program that do not exist in a traditional credit card environment. These controls ensure that the card can be used only for specific purchases and within specific dollar limits. Controls for audit purposes can be stronger and more timely with checking accounts and the IMPAC card than with imprest fund cash and third party drafts.
ALTERNATIVE PAY. Alternative pay is a payment mechanism that can save money by lowering administrative costs, prompt pay interest, and penalties, as well as allowing more discounts to be taken, since payments can be made more quickly. This payment plan is based on making payments, on a not-to-exceed amount, without the receipt of a receiving report. To obtain GAO approval, even on a pilot basis, it is necessary to perform a major study that would present a specific plan for its implementation. A detailed study requires taking individuals out of their daily functions, thereby backlogging their own workload. According to GAO, very few agencies have filed for this approval. For example, one agency has piloted its plan for years. Agencies need to improve payments without going through a bureaucratic process of developing detailed plans on how they will make payments. Many agencies may not have asked for approval because of the complex preparation process for the plan.
AUDIT THRESHOLDS. Establishing audit thresholds can save time and money and efficiently use resources. The Department of Education, for example, has adopted a threshold policy for monetary audit findings below which extensive audit resolution processing is minimized. Prior to the adoption of this policy, the agency applied the same comprehensive resolution procedures to all monetary audit findings, irrespective of the dollar amounts involved. With the adoption of the threshold policy, audit findings are screened for significance. For example, in fiscal year 1992, the agency received a audit report with a total of $9 in questioned costs. While no recoveries would have been requested on the $9 audit report, approximately 16 work hours would have been expended to put the report through the required resolution processing steps. Under the agency's threshold policy the resolution of the finding was expedited in less than one hour. In times of scarce resources, it makes good management sense to establish a threshold for monetary and non-monetary audit findings below which extensive resolution processing could be minimized.
TIMEKEEPING. Sign-in and sign-out sheets for salaried employees working a standard work week, and time cards, are both a signal of distrust and inefficiency. As a result of continual technological breakthroughs and increased software applications, it is clear the current time and attendance system is ripe for revision. Time and attendance systems should be automated to eliminate the need for submitting most time cards. Also, the system should deal with exceptions such as annual leave and sick leave and not require entering attendance data for a normal work week. For example, the Department of Labor's (DOL) time and attendance system results in: (1) completing a piece of paper for each of the over 18,000 DOL employees nationwide to record their time and leave usage during the pay period; (2) duplicating each submitted time card so that each timekeeper will have a record of what has been submitted; and (3) routing the completed time cards to the appropriate payroll. A preferred approach would be to have timekeepers enter data to an electronic file of employees in a work unit and the supervisor to provide a single certification covering all data forwarded to the payroll office. For example, time cards were eliminated by the Comptroller of the Currency (OCC). OCC developed an automated time entry system that requires time and attendance data to be recorded on an exception basis. This system also stores data electronically but it currently does not allow for electronic signatures. DOL is also in the process of eliminating paper time cards. By January 1994, the Department will implement an automated timekeeping system.
More efficient use of existing hardware and software for recording time will free up those charged with timekeeping responsibility throughout the government from manually completing and approving time cards. This could save significant time and ensure maximum utilization of existing technology.
Changes in policy related to each of these areas would reduce workload, improve overall agency operations, and allow agencies to set priorities for managing scarce resources.
The Secretary of the Treasury should consider eliminating the use of third party drafts and allow federal agencies to use commercial checking accounts for small amounts of money.
2. Give agency heads the flexibility to determine when to do alternative pay and work out any problems with the vendor. (2)
The Director of OMB should specify reasonable criteria to give the agencies the flexibility in making some payments without receiving reports; however, the ultimate solution is to have agencies develop electronic receipt and acceptance systems.
3. Revise Circular A-50 to incorporate an audit resolution threshold. CFOs should establish these thresholds with their inspectors general or heads of audit. (2)
4. Eliminate time sheets and time cards, and use technology to enter payroll data on an exception basis. (1)
Federal agencies should review their payroll systems for employees with a standard work week and (1) eliminate sign-in and sign-out sheets, (2) eliminate the use of time cards, (3) move to automated systems that require data to be entered on an exception basis, and (4) use existing technology to enter and approve time and attendance data electronically.
CROSS-REFERENCES TO OTHER NPR ACCOMPANYING REPORTS
Reinventing Support Functions, SUP07: Simplify Travel and Increase Competition.
Reinventing Federal Procurement, PROC09: Lower Costs and Reduce Bureaucracy in Small Purchases Through the Use of Purchase Cards.
SIMPLIFY THE FINANCIAL REPORTING PROCESS
Federal financial reporting requirements need to be reviewed and consolidated, and the amount and type of information requested needs to be changed or eliminated.
Over the years, legislation and regulations have been developed to improve financial management in federal agencies. For example, in 1982 the Federal Managers Financial Integrity Act (FMFIA) was passed to ensure that managers review internal controls. In 1990, the Chief Financial Officers (CFO) Act was passed; among other things, it requires federal agencies to have their financial statements audited. Each new piece of legislation and regulation has required additional, separate reports from agencies to the President, Congress, or to a central agency like the Office of Management and Budget (OMB). The following table lists the current reporting requirements and their due dates.
These independently prepared reports do not give an integrated perspective of an agency's performance of its mission or its financial practices. Additionally, although federal managers spend much of their time providing multiple reports to central agencies, those agencies--as well as federal managers and Congress--often indicate that they are not receiving the information they need.
AGENCY REPORTING REQUIREMENTS
(Report Due Date)
Inspector General Act
IG and Management Reports (OMB Circular A-50) Nov. 30/May 31
Inspector General Act Amendments of 1988
Federal Entity Audit Coverage
Federal Managers' Financial Integrity Act
FMFIA Report (OMB Circular A-123)
OMB policy based on FMFIA
High Risk Report
Prompt Pay Act
Prompt Payment Report (OMB Circular A-125) Nov. 30
Federal Civil Penalties Inflation Report Adjustment Act of 1990
Civil Monetary Penalty
Single Audit Act
Single Audit Report to Congress
Accounting and Auditing Act of 1950
CFO Act Five-Year Plan
OMB Circular A-11
Budget Exhibits on Financial Management Activities and High Risk Sept. 1
U.S. Code Title 31 Section 9106
OMB Circular A-127
Financial Systems Plan
Government Performance and Results Act of 1993
To be developed
To be determined
NEED FOR CHANGE
Federal financial requirements need to be reviewed and consolidated, and the amount and type of information requested needs to be changed or eliminated. These actions will help provide a complete picture of an agency's performance and financial accountability in meeting its mission.
Examples of duplicative or overly detailed reporting requirements abound in the present system of "single issue" reports:
--The FMFIA requires each agency to prepare a report to determine if its accounting system conforms to the principles, standards, and related requirements prescribed by the Comptroller General.[Endnote 1] The CFO Act requires that 10 pilot agencies have their accounting system controls evaluated by independent auditors as part of the process of preparing audited financial statements. [Endnote 2] Agency reviews of accounting systems should not be necessary for those agencies that have audited financial statements to the extent they duplicate the previous scope.
--The Prompt Payment Report requires over 40 pieces of information, ranging from the number and dollar value of invoices and a description of progress made, to problems identified and corrective actions taken in agency vendor payment systems during the year. [Endnote 3] The focus of the Prompt Payment Report should be only on total dollars and the amount of interest paid.
--Agencies identify and report on high-risk areas and material weaknesses as part of their annual FMFIA report. Until 1992, OMB encouraged the inclusion of detailed corrective action plans; it now offers an alternative reporting format that focuses on key milestones. Agencies that used the alternative format increased the readability and significantly reduced the size of their reports. Additional economies could be realized by providing a statement on each weakness and summarizing the results achieved rather than providing detailed corrective action plans.
Financial reports should provide certain information to enable the reviewer to make policy and management decisions. The various reports could be combined and consolidated into two reports, one with planning information, one with accountability information.
A report that contains planning information could be submitted during the annual budget submission and would include:
--information on the overall management health of the agency, including the agency's ability to meet mission requirements and program goals, plans to improve the agency's mission and management, and the budget necessary to achieve the improvements;
--how resources are allocated to the programs within the agency; and
--performance measures and standards for evaluation.
An accountability report would be provided after the close of the fiscal year on the overall performance of the organization and would include:
--information on the agency's financial condition and whether the disclosures help indicate if program managers are properly carrying out the programs entrusted to them;
--assurance that controls were adequate to protect resources and that desired outcomes were achieved;
--assurance that the agency met or exceeded established measures or standards; and
--supplemental information on such things as prompt payment and credit management.
Legislation should be enacted to modify the reporting dates and consolidate overlapping content of the various financial reports currently required.
2. Require agency heads to provide two reports annually, a planning report and an accountability report. (3)
Agency heads should be required to provide two annual agency reports, one on planning and one on accountability. These reports would consolidate the single issue reports required at present. The dates for the planning report and the accountability report would be determined by OMB. These reports should be at a summary level and some cost analysis performed as to the need for the data collected. OMB should accept audited financial statements as meeting the reporting requirements of Section 4 of the FMFIA; Section 2 reporting could be handled as one of the summary reports. OMB should also review reports such as the Prompt Payment Report and reduce the amount of data collected and focus on the significant issues.
3. Ensure that any future financial management reporting requirements be addressed in either the planning or accountability reports. (2)
The Director of OMB should work with Congress to ensure that any future reporting requirements can be simplified and incorporated into one of the two reports.
CROSS-REFERENCES TO OTHER NPR ACCOMPANYING REPORTS
Streamlining Management Control, SMC02: Streamline the Internal Controls Program to Make it an Efficient and Effective Management Tool; SMC06: Reduce the Burden of Congressionally Mandated Reports; and SMC09: Expand the Use of Waivers to Encourage Innovation.
PROVIDE AN ANNUAL FINANCIAL REPORT TO THER PUBLIC
Article I, Section 9 of the U.S. Constitution requires that ". . . a regular statement and account of the receipts and expenditures of all public money shall be published from time to time." However, the federal government's existing financial management infrastructure is so inadequate that no such reliable report can be made. The Department of the Treasury has been preparing prototype financial statements for the last 20 years, and still cannot provide any assurances regarding their accuracy.
NEED FOR CHANGE
The U.S. Securities and Exchange Commission (SEC) requires that corporations meet very strict standards of financial management before their stocks can be publicly traded. All such companies are subject to rules requiring disclosure of their financial condition, operating results, cash flows, long-term obligations, and contingent liabilities. They are also required to be audited by independent certified public accountants (CPAs). These requirements exist to provide a certain level of assurance to investors in the stocks of these companies. These requirements are considered to be common business practices. They are common not just because the SEC requires them, but because they instill a level of financial discipline that enhances the financial viability of the firm. It's the right thing to do. Unfortunately, these common business practices are very uncommon in the federal government.
The growing public outcry over the financial management of the federal government, the ever-increasing national debt, and the concern regarding taxes have created an environment where the government is being held more accountable for its actions than ever before. The information age we live in provides unprecedented opportunities to inform the nation of the performance of its government. The public expects an informative response when accountability is demanded. Our recommendations address the challenges put to the government to explain its spending decisions, and the ramifications thereof. These recommendations are facilitated by the Chief Financial Officers (CFO) Act of 1990, requiring audited financial statements of major departments and agencies.[Endnote 1]
The CFO Act of 1990 found that "current financial reporting practices of the federal government do not accurately disclose the current and probable future cost of operating and investment decisions, including the future need for cash or other resources. . . . "[Endnote 2] The President's budget discloses contingent liabilities of the federal government guarantees and their estimated costs. An experimental balance sheet and report on claims on future budgetary resources have also been published. However, these documents are neither readily available to the general public nor easily understood. Therefore, the public is not aware of the kinds of exposure to which the federal government may be liable nor the magnitude of these contingencies and future claims.
When contingent liabilities move from the category of being contingent to actual, they seem to occur as a surprise to the public, as in the case of the savings and loan scandal. They also seem to come as a surprise in the budgetary process, as in the case of accounting for guaranteed loan programs. Before the Credit Reform Act of 1990, guaranteed loans were budgeted at no cost to the government until later years when loans defaulted and federal payments were made. Under credit reform, an estimate of future losses has to be budgeted at the time the guarantees are extended. Other contingent liabilities against the federal government--such as deposit insurance, pension guarantees, and other insurance--can be estimated through financial analysis and could be budgeted at the time the contingent liabilities are incurred or assumed.[Endnote 3] Expected costs could be recognized as a liability in financial statements, and footnotes could contain information on dollar ranges for contingent liabilities where exact amounts are uncertain. Federal retiree benefits could also be budgeted as they accrue. The government could also report on expected claims on future budgetary resources based on existing legislation.
The Department of the Treasury should continue to issue prototype consolidated financial statements, and should set a goal of 1997 as the first year to drop the prototype disclaimer and issue audited (to the extent possible) consolidated financial statements on the federal government. While not all components of the federal government would be required to be audited by that time, this goal would drive the improvement in data quality toward a definite destination. These statements should include addenda with information on the financial statements of government sponsored enterprises and governmental trust funds, all of which have some contingent liability aspect for taxpayers. The Federal Accounting Standards Advisory Board (FASAB) is currently addressing accounting standards for claims on future budgetary resources of the federal government. FASAB should expedite its standards development process on this issue in order to provide timely guidance for this report.
2. Issue an annual financial report to the taxpayers. (2)
The Department of the Treasury should develop a simplified version of the consolidated financial statements for distribution to the public by the President by June 1995. In order to provide an accounting to the public, an annual statement of the government's revenues, expenditures, investments, contingent liabilities, and financial condition should be provided to the public in terms that are easy to understand. This would provide some much-needed accountability from the government to its citizens. The report could be called the Annual Accountability Report to the Citizens, and its publication should be codified in a Presidential Executive Order in order to ensure its ongoing publication.[Endnote 4] This information could be provided in printed and electronic form to provide wide accessibility to thepublic.
3. Develop a method of identifying and budgeting for the expected costs of contingent liabilities of the federal government. (2)
OMB, in consultation with the Federal Accounting Standards Advisory Board (FASAB) and the CFO Council, should perform a study proposing a strategy for identifying and budgeting for future claims and contingent liabilities by September 1994. Similar to efforts to recognize and fund the costs of loan programs under the Credit Reform Act of 1990, contingent liabilities of the federal government should be costed up front and budgeted for based upon expected loss or subsidy rates.
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