Day 2: Friday, Feb. 3

Day two of AGA’s Fourth Annual National Leadership Conference began Friday with an insider’s view of the Washington political climate. Ed Henry, CNN congressional correspondent and former editor of Roll Call, discussed the impact of this year’s State of the Union address. He said the speech was a much smaller in scope than it was last year when President Bush outlined his plans to overhaul Social Security and the tax system.

Both initiatives failed to gain ground, and Henry said the president aimed lower this year. Henry said Bush lost control of his agenda last year in part due to Hurricane Katrina and the government’s slow response. “That really knocked him off his game,” Henry said. Other problems last year included the indictment of Vice President Cheney’s chief of staff and the scandal surrounding Republican Sen. Tom DeLay and congressional lobbyists.

President Bush will forever be tied to the September 11 attacks, Henry said, and to what’s occurred since then. The mid-term elections this year and the 2008 presidential election will come down to Republicans continuing to assure the American people that they are safer with Republicans in office, while the Democrats will say just the opposite.

As a political reporter, Henry has learned that stories often don’t play out the way people think they will. He cited the Lewinsky scandal that plagued President Clinton’s second term. No one thought he’d be able to survive politically when the full story came out, but he did. Henry also pointed to the early emergence of Howard Dean as the Democratic front-runner in 2004. Dean’s campaign later fell apart. A final example was President Bush’s “mission accomplished” speech, which people thought at first would cement his reelection. Instead, the Democrats used it against him when it became clear that the job in Iraq was just beginning.

Even though President Bush’s name is not on any ballot in 2006, he is at the very center of the election, Henry said. He gave Bush credit for being smarter than his detractors give him credit for being. “This president—like him or not and for better or worse—sticks to his guns,” Henry said. “He’s been constantly underestimated.”

He said Democrats have complained that Bush wasn’t smart enough to be president. “Republicans say to Democrats, ‘If this guy is so dumb, what does that make you? He keeps beating you.’ ”

Henry said the Democrats have a real opportunity to fill the vacuum created by Bush’s recent drop in popularity. The question is, he said, “Are they going to capitalize?”
He listed several likely presidential candidates for 2008, including U.S. Sens. John McCain on the Republican side and Hilary Clinton for the Democrats. If McCain can secure the Republican nomination—and Henry says that’s a big if—he would have a good chance in the general election because he has enormous popularity in the center. Clinton has the opposite problem, Henry said. The Democratic nomination is thought to be hers to lose, but her ability to win the general election is very much in question.

Henry’s entertaining presentation was followed by two back-to-back sessions on implementing federal reforms through the President’s Management Agenda. Linda M. Combs, Controller, Office of Federal Financial Management, U.S. Office of Management and Budget, started with a history of the CFO Act of 1990 and a description of the progress made since the pre-CFO Act days, when outdated financial systems, poor data collection, gaps in internal controls and widespread deficiencies were common. Now, pervasive problems are isolated and agencies are held responsible for fixing them. In 1990, she said, just one agency received a clean opinion on its audited financial statements; today, the number is 19 of the 24 CFO Act agencies. The President’s Management Agenda has united the CFOs around common goals with the ultimate intention of making government agencies more efficient and more effective at delivering services to the American people.

Combs then moderated a panel discussion with the CFOs of three federal agencies discussing the specifics of making big changes in financial management. Speakers were: Charles E. Johnson, CPA, Assistant Secretary for Budget, Technology and Finance, U.S. Department of Health and Human Services; Jennifer Main, Chief Financial Officer, Small Business Administration (SBA); and Kathleen M. Turco, Chief Financial Officer, U.S. General Services Administration (GSA).

Johnson began his talk by holding up a newspaper photograph of former Enron chief Ken Lay in handcuffs. The scandals of the private sector brought the importance of the audit to the forefront and led to passage of the Sarbanes-Oxley corporate reform legislation of 2002. Johnson said government can learn from the corporate experience of putting SOX requirements into place. The companies that delayed implementation ended up spending four times as much as companies that took on changes early. Government should therefore start early and make sure every employee feels responsible for reforms, he said.

Jennifer Main discussed how SBA took on a major problem with asset sales, which were being valuated through three different methodologies and in part led to the SBA’s financial statements being inaccurate to the tune of $2 billion. It took a team two months to diagnose the problems, and in the long term, it took a cultural change within the agency, improved communication, agreement on work plans and objectives, and hard work over a long period of time. SBA met the accelerated schedule for financial reporting and improved the audit opinion on its financial statements from a “disclaimer” to a “qualified opinion” in November 2004.

Similarly, the General Services Administration had to work diligently to find success in its financial management procedures: GSA’s “green” rating on the PMA scorecard had turned to red because of material weaknesses in three funds, where project and contract management was weak. GSA has revised its policies, procedures and internal controls and is now integrating financial data so managers can use that information to make better decisions.
 

Friday’s luncheon speaker, Natwar M. Gandhi, Ph.D., CGFM, is the District of Columbia’s chief financial officer. He brought greetings from Mayor Anthony Williams, who was the city’s first chief financial officer before being elected mayor. Gandhi also extended humorous greetings to the Virginia and Maryland residents in the room who commute into the city each day, but don’t pay taxes there.

Gandhi’s presentation focused on the results of the mayor’s efforts to transform D.C. into a “shining city on the hill—as far as Wall Street is concerned.” In 1997 the city teetered on the brink of bankruptcy with a $500 million deficit, junk bonds and lost credit ratings. “We were a financial joke,” Gandhi said, noting that the city council asked the Department of the Treasury to loan funds to the city as a lender of last resort.
Today the picture is much different. With a $1.6 billion fund balance surplus, an A+ rating from Standard & Poor’s and $300 million in cash reserves, the city is in better financial shape than almost any other city in the country. “This is a story of performance and accountability and nine consecutive balanced budgets and clean opinions.”

While the city’s financial status is unique, so too is the role of the city’s CFO. Gandhi said the District’s CFO can’t be fired by the mayor without cause and without two-thirds of the council. The dismissal then sits for a 60-day waiting period on Capitol Hill. In addition, the finance directors for each city department work for Gandhi, not their department heads. So the finance officer in the police department answers to Gandhi, not the chief of police. “Wherever city money goes, the CFO can veto the budget of those institutions,” he said, referring to, for example, the convention center, the baseball stadium, etc. As such, the CFO can cut off funding to any entity that is outspending its appropriation. The mayor set off a political firestorm when he shut down D.C. General Hospital for failing to stay within its budget.

The city balances its budget on a five-year basis. “You can’t have a recurring expenditure without having a recurring source of revenue,” he said. “My job is to balance the budget every year and stay financially viable all the time. Period.”

He said the city is currently on an “economic roll.” He attributes this to a hot real estate market and said the city is recession-proof for three reasons. First, housing the federal government within the city results in enormous financial benefits. Second, commuting to Virginia and Maryland is a nightmare, which means more and more people are moving into the city to avoid the commute. “I do count on Virginia to not solve the traffic problem,” Gandhi said to laughter. Third, in the not-so-distant past, the city was considered a murder capital and the joke of the municipal finance world. Those days are over. “Given all of this, people want to live in the city and we can benefit from the influx of two-income families,” Ghandi said.

Despite the good financial news, the District is not without significant problems, he said. Among these Gandhi said he is concerned about rising interest rates putting a damper on the city’s real property development. He acknowledged that a September 11-like attack on the city would be devastating to the city’s progress. Finally, he said a general downturn in the nation’s economy would have an effect on the city. “But we have no control over any of this,” he said.

The city also grapples with high debt ratios. “We have to borrow as a city, a state, county, school department all rolled into one,” he said. The city’s per capita debt is $8,000 per person whereas Baltimore’s debt ration is $800 per person because that city can operate under the umbrella of a state and a county, which the District can’t do even though it must provide traditionally state-run services such as Medicaid, driver’s licenses, hospitals and universities. “We are an orphaned city. Congress is our state,” Ghandi said.

The city’s tax base is constrained by the fact that $67 of every $100 earned in the District is taxed by either Maryland or Virginia. “When you complain about our potholes,” he said to the commuters in the room, “remember that you don’t pay taxes here.” He said there will never be a commuter tax as long as Maryland and Virginia are represented in Congress and the District is not.

Fourteen percent of the city’s property can’t be taxed, since most of it belongs to the federal government as well as universities, hospitals and other tax-free entities. He noted that only $150 million of the city’s $7 billion annual budget comes from the federal government. At the same time, the city’s population is marked by demographic challenges—some of the youngest, oldest, sickest and poorest people live in the city. “These are our people and we must take care of them.”

So, the city is forced to borrow and tax at a rate that’s among the highest in the country. “Once we find a taxpayer, we never let him go and we keep piling on,” he said.

He ended his presentation with a discussion about the city’s efforts to build a new stadium for the Major League Baseball team, the Washington Nationals. The Nationals had a successful, break-even first season with 81 wins and 81 losses playing at RFK Stadium. The city is now in negotiations with MLB to build a new $631 million stadium. He called the negotiations among the mayor, the council and MLB as “contentious and delicate.” Gandhi is fighting for a bonded lease for the stadium so he can take it to Wall Street to bring in some revenue. In his mind, any other type of agreement would be a deal-breaker for the city.

“I guarantee you, whatever our finances are, they will be balanced,” Gandhi concluded.
 

Many federal agencies are struggling with new internal control requirements outlined in OMB Circular No. A-123, Management's Responsibility for Internal Control, especially the requirement to review, assess and test the effectiveness of the controls for financial reporting. A panel of leaders from three federal agencies tried to answer the many questions that have arisen. Speakers were: Christopher H. Flaggs, Deputy Chief Financial Officer, U.S. Department of State; William McCabe, Chief of Staff to the Chief Financial Officer, U.S. Department of Education; and James L. Taylor Jr., Deputy Inspector General, U.S. Department of Homeland Security.

McCabe said it was important to make internal controls a part of agency culture, starting from the top down. Much time must be spent on the planning phase and bringing in leaders from all areas. One of the most surprising lessons learned, he said, was many good ideas were brought to the table from program managers, not CPAs. “Once we brought them in, it was amazing how fast it turned around,” he said. The goal is ultimately is to do more than comply with new regulations, but to bring more value to the agency by preventing fraud, waste and abuse from happening, rather than catching the “bad guys” after the fact, he said.

Flaggs also stressed the importance of front-end planning for A-123 implementation. “It we don’t get this planning right, the rest of this is not going to work.” At the Department of State, an existing Management Control Steering Committee was expanded so internal control testing was “not just a CFO exercise.”

The earlier agencies start examining their internal controls, the sooner problems can be found and fixed. “We’ll probably find some problems that weren’t on our radar before, but that’s not a bad thing,” he said. While the effort and commitment needed to comply with A-123 is huge, the benefits include: more standardized processes, an opportunity to train staff on risk management and internal controls, a closer relationship with program managers and in the long run, more confidence in the agency’s internal controls.

Taylor noted that the problems faced by the Department of Homeland Security are unique because it is such a new agency, with 180,000 people and a huge number of missions. He urged the audience to consider the positive role that inspectors general can play in agency management because they have extensive experience in assessing internal controls. He also said that the planning stage is the most critical, but noted that the documentation phase is time-consuming. The effort will culminate in agencies’ first management assurance statement for internal control over financial reporting as of June 30, 2006. Therefore, he said, make sure to identify problems quickly and get OMB guidance on how to solve them.

The conference concluded with a presentation from Thomas Modly, MBA, MA, Deputy Under Secretary of Defense (Financial Management), Office of the Comptroller, who discussed the unprecedented business transformation at the Department of Defense (DoD).

Modley said he appreciated having the opportunity to speak to an audience that genuinely cares about this type of effort. No one knows just how to transform the DoD so Modley and his colleagues have asked for input on the business systems modernization transformation plan.

On September 10, 2001, Defense Secretary Donald Rumsfeld gave an impassioned speech on how the department needed to change. “The next day the world changed. The day after that, we went to war,” Modley said.

He referred to a series of critical U.S. Government Accountability Office reports that set the tone for the transformation effort. “Billions Being Invested without Adequate Oversight” is an example of one report title. In September 2005 the program finally received a GAO report with the words “Important Progress” in the title. “We’re trying to make that a regular occurrence and not an anomaly,” he said.

The transformation team has taken a five-pronged approach to its task. These are:

• Established enterprise clarity

• Horizontal business transformation focus

• Business alignment to warfighter needs

• Capabilities, not systems, as deliverables

• Accountability

With such important jobs, such as fighting the wars in Iraq and Afghanistan, it’s hard to get people within DoD excited about a clean audit opinion, he said. To take steps toward a clean opinion, the department is putting focus on a step-by-step approach. The number of systems doesn’t matter, he said. The goal is to get transactions completed in one-tenth of the time they do now.

The armed services are elated with this approach and are in agreement with a requirement that they report monthly to the Secretary of Defense to show they are staying within their guidelines or they don’t get to spend any money.

People ask him all the time why DoD can’t be run like a business such as WalMart, Modley said. The reason is that WalMart is a $250 billion company with 11,000 to 12,000 unique inventory items. The Defense Logistics Agency alone has more than 5.2 million unique inventory items. “We’re running—basically—an airline, a fleet of ships and a staff of 3.3 million people,” Modley said. “We can’t architect a single system that covers this full scope.”

Last September 29, Modley and his team delivered a comprehensive transformation plan to Congress—a day earlier than promised—that outlined the goals and milestones for bringing about the transformation. Each of the armed services contributed its own portion of the plan, which was critical to ensuring their buy-in, he said. In delivering the plan, Modley said they told Congress they would miss milestones in the first year. He also acknowledged that they were investing in systems that won’t be live until 2015.

“We’ve shifted from architecture and theory to implementation,” he said.

The Business Transformation Agency has been formed to oversee the process as part of a serious and intentional effort to recruit talent and send them out to work elsewhere in DoD. “It’s a petri dish of sorts where we are trying to grow a virus of change,” Modley said. The goal is to send out disciples after having given them the opportunity to understand the process. “We want a huge line of people wanting to get into this agency.” He also hopes to institutionalize this process within the next three years before he and other politically appointed officials will be out of office.

He said he knows the AGA audience will want to know just when DoD expects to obtain the thus-far elusive clean audit opinion. Modley presented charts that show the agency getting closer each year, but did not predict a clean opinion before 2010.

—Marie S. Force and Christina M. Camara