2012   Financial Report of the United States Government

Management's Discussion & Analysis

Financial Management Progress and Priorities

The Office of Federal Financial Management (OFFM) within the Office of Management and Budget (OMB) is responsible for the Federal Government’s financial management policy and manages government-wide financial management priorities.  This section summarizes recent progress and outlines several key initiatives intended to achieve improved results moving forward.

Progress To Date

Since the passage of the CFO Act of 1990, the Federal financial community has made important strides in instilling strong accounting and financial reporting practices.  This year, 23 of the 24 CFO Act agencies obtained an opinion from the independent auditors on their financial statements.33  Out of the 24 major “CFO Act” agencies, there were 21 clean opinions, 2 qualified opinions, and only one remaining disclaimer in FY 2012.  In addition, 32 auditor-identified material weaknesses were reported in FY 2012, an approximate 50 percent decline from the 61 material weaknesses that were identified at the start of this past decade.  Over the past 20 years, an increasing number of Federal agencies have initiated and sustained disciplined and consistent financial reporting operations, implemented effective internal controls around financial reporting, and have successfully integrated transaction processing and accounting records.  These efforts have resulted in improved results on financial statement audits.   However, weaknesses in basic financial management practices and other limitations continue to prevent one major agency, and the Government as a whole, from achieving an audit opinion.

The foundations for the accomplishments achieved over the past 20 years are numerous.  In particular, and as envisioned by OMB Circular No. A-123, Management’s Responsibility for Internal Control, the Federal financial management community approached these reporting challenges holistically, integrating both programmatic and financial management disciplines in building successful financial reporting programs.  Given the size and complexity of the programs and transactions involved, these results would not have been possible without the advances in Federal financial management.

Ongoing Challenges

Despite our progress, critical gaps in financial management performance remain.  For example, Federal agencies continue to maintain thousands of  unneeded real property assets on their books, reported approximately $108 billion in estimated improper payments in FY 2012, and continue to incur increased costs to modernize agency financial systems.  Additionally, while Federal agencies have mobilized resources to meet the new and growing demand for real-time transparency into where Federal dollars are going, more work is necessary to sustain these solutions in a cost-effective manner over the long term.  These instances of Government waste compromise the integrity of Federal programs, lead to damaging inefficiencies, and erode citizens’ trust in Government. However, initiatives as outlined below are resulting in progress with these issues and are putting the Government in a better position.

Improvement Initiatives 

 Today, accountability means providing transparent information to the public about where and how Federal dollars are being spent.  It means protecting against fraud.  It means avoiding wasteful or excessive use of taxpayer funds.  It means ensuring that we are not only responsible stewards of taxpayer dollars, but frugal stewards as well, looking for every opportunity to save money and create greater efficiencies. 

Administrative Savings

In an effort to reduce costs, identify and implement efficiencies, eliminate practices that are antiquated and unnecessary, and root out waste across government, the President launched the Campaign to Cut Waste in June of 2011.  Executive Order (EO) 13576 “Delivering an Efficient, Effective, and Accountable Government,” which established the Campaign to Cut Waste, called upon all agencies to reinforce the performance and management reform gains already achieved; systematically identify additional reforms necessary to eliminate wasteful, duplicative or otherwise inefficient programs; and publicize these reforms so that they may serve as a model across the Federal Government.  Building on this effort, the President issued an EO on “Promoting Efficient Spending” that requires agencies to cut certain administrative costs in FY 2013 by not less than 20 percent below FY 2010 levels.  In addition, a key focus of the Campaign has been reducing government travel and conference spending as highlighted through OMB Memorandum 12-12 “Promoting Efficient Spending to Support Agency Operations.”  Underlying the Administration’s dedication to ensure taxpayer money is spent prudently and effectively, many of the innovate management practices highlighted through the Campaign to Cut Waste were included in the President’s FY 2013 budget sent to Congress.  These efforts under the Campaign to Cut Waste are expected to result in billions of dollars in savings by FY 2013.

Accelerating Efforts to Better Manage Federal Real Property 

The Administration is focused on improving the management of real property assets.  The Federal Government is the largest property owner in the country, but it is not using some of those assets productively.  In June 2010, the President signed a memorandum on  “Disposing of Unneeded Federal Real Estate—Increasing Sales Proceeds, Cutting Operating Costs, and Improving Energy Efficiency” which directed Federal agencies to accelerate efforts to remove excess and surplus property and to realize $3 billion in savings from the Government’s properties by September 30, 2012.  As of the first quarter of 2012, Federal agencies have identified $2.4 billion of the President’s $3 billion goal through actions including reducing annual operating costs, reducing square footage through consolidating space within owned and leased buildings, increasing the impact of telework, selling owned properties, and improving energy efficiencies. In addition, in an effort to spur innovation and further improve the management of Federal real property, OMB issued Memorandum 12-12 “Promoting Efficient Spending to Support Agency Operations”.  This Memorandum prohibits the increase of agency civilian real property inventory, unless certain exclusions apply.  This policy will enable the Federal Government to continue making progress on real property management by encouraging smarter use of building space and requiring an agency-wide assessment of newly-acquired space.

To further build on this effort and work in achieving more long-term savings, the President introduced the Civilian Property Realignment Act in the FY 2013 budget.  The proposal would create an independent Board to reduce and realign the Federal civilian property inventory.  The Board would cut bureaucratic red tape, resolve longstanding competing stakeholder interests, and help address the financial challenges that hinder efforts to dispose and consolidate Federal real property.  Expanding on the work toward the passage of the President’s proposal, the Administration has continued to make progress on achieving savings in real property by working with the Federal Real Property Council and the Real Property Advisory Committee to encourage greater collaboration across agencies.

Addressing Improper Payments

The Improper Payments Information Act of 2002 (IPIA), as amended by the Improper Payments Elimination and Recovery Act of 2010 (IPERA), created a framework for assessing every Federal program and dollar for risk of improper payments, annually measuring the accuracy of payments, and initiating improvements to ensure that errors are reduced and eliminated and overpayment recoveries are pursued.  Addressing improper payments is a central component of Administration efforts to eliminate waste.  Over the past three years, the President has issued Executive Order 13520 on Reducing Improper Payments, a Presidential memorandum on intensifying and expanding agency efforts to recapture improper payments, and a Presidential memorandum directing that a Do Not Pay List be established to help prevent improper payments from being made to ineligible recipients.  The Do Not Pay program opened for business last spring.  The Do Not Pay is run by the Department of the Treasury and allows agencies to perform data matching by reviewing multiple databases to determine a recipient’s award or payment eligibility.  A Data Analytics Service has been developed, in addition to the data-matching service, to provide customized matching and analysis of an agency’s payment file to identify irregularities and fraud.  The Treasury Department is also developing new data analytic approaches to assess the relative risk level of those who are identified as suspect through the Do Not Pay tool and working to standardize disbursement data, making it easier to perform computer matching and trend analysis.

While agencies are continuing to implement these initiatives, we are already seeing real results.  Based on information submitted by agencies in FY 2012, the reported government-wide error rate is 4.35 percent, a decrease from the FY 2011 rate of 4.69 percent, and we have successfully reduced error rates in major programs, such as Medicare Fee-for-Service; Medicaid; Unemployment Insurance (UI); the Earned Income Tax Credit; Supplemental Nutrition Assistance Program (SNAP—Food Stamps); Pell Grants; the School Lunch program; and Old Age, Survivors, and Disability Insurance.  If the FY 2009 rate of 5.4 percent had been in effect in FY 2010, 2011, and 2012, the Government would have reported in total $47 billion more in estimated improper payments during the three-year period.  This figure can be compared with the President's ambitious goal of reducing improper payments during the same period by $50 billion.  In addition, agencies reported recapturing more than $2.4 billion in improper payments to contractors and vendors in FY 2012, almost twice as much as was recaptured in FY 2011.

Partnering for Solutions

The Partnership Fund for Program Integrity Innovation (Partnership Fund) was established by the Consolidated Appropriations Act of 2010 (P.L. 111-117) to fund pilot projects to improve delivery of Federal assistance programs administered through state and local governments or where Federal-state cooperation could be beneficial.  Funding supports pilots and evaluations of promising innovations that confront these challenges in Federal, state and/or local administration.  Partnership Fund pilots advance four goals: (1) improve payment accuracy; (2) improve administrative efficiency; (3) improve service delivery; and (4) reduce access barriers for eligible beneficiaries.  OMB is actively working with a Collaborative Forum of Federal agencies, state and local administrators, industry and other stakeholders to identify pilot opportunities that could inform the expansion of innovations to other state or local agencies as well as further potential administrative or legislative action to facilitate these goals. In aggregate, pilots must save at least as much as they cost.  So far, nine pilots have been funded and are being implemented by lead Federal agencies in cooperation with state partners.  These pilots address multiple programs, including the SNAP, Unemployment Insurance, Medicaid, the Earned Income Tax Credit (EITC), and the Treasury Offset Program, as well as other human services and juvenile justice programs.  Early pilot results are expected in FY 2013.

Decreasing the Cost of Financial System Modernizations

Complexity and inefficiency in the Federal Government’s financial management operations has led to an increasingly expensive environment for modernizing financial systems.  Also, once deployed, the Federal Government’s modern systems do not consistently meet our business needs or produce the right information to support decision-making.  In June 2010, OMB froze activity on CFO Act agency financial system plans pending their immediate review and approval.  As a result, agencies have realigned their financial system plans through splitting projects into smaller, simpler segments with clear deliverables; focusing on the most critical business needs first; and ensuring ongoing, transparent project oversight.  OMB is committed to reshaping its approach to modernizing financial systems and will continue to work with the agencies to find smarter practices in modernization.  During FY 2012, OMB and Treasury partnered to develop a performance-based approach to assessing compliance with the Federal Financial Management Improvement Act and revise financial management system requirements to emphasize the Federal government’s financial management business needs.  OMB plans to implement an outcome-based approach and revised system requirements in FY 2013.  Moving forward in FY 2013, to meet agencies’ long-term financial management needs, OMB and Treasury will work with external service providers to enhance service offerings, expand technology and transaction processing capabilities, and build a strong governance structure to achieve cost savings and reduce risks in financial system modernization efforts.

Improving Data Quality for Federal Spending Information

Ensuring the quality of Federal spending information has been central to OMB’s efforts in implementing the Federal Funding Accountability and Transparency Act.  As part of  the Administration’s Campaign to Cut Waste, the President issued Executive Order (EO) 13576, “Delivering an Efficient, Effective, and Accountable Government,” establishing the Government Accountability and Transparency Board (GATB) in June 2011.  Under the EO, the Board is charged with providing recommendations to the President on enhancing the transparency of Federal spending and advance fraud detection efforts, data quality and fraud detection, leveraging the experience and lessons learned from the implementation of the Recovery Act and the Recovery Accountability and Transparency Board (RATB).

The Administration issued Memorandum 10-26 “Open Government Directive,” which required each agency take specific steps to ensure that data is reported quickly, efficiently, and accurately.  The Open Government Directive was quickly followed by the Data Quality Framework, which provides specific guidance on data quality plans as they relate to Federal spending data.  Pursuant to this guidance, Federal agencies developed these specific data quality plans that outline a governance structure, risk assessment process, governing principles and controls, communications, and monitoring of Federal spending information.  Notwithstanding these accomplishments, efforts must continue to address existing and burgeoning data quality concerns.  Informed by stakeholder input and recommendations, OMB and Federal agencies will work to improve reliability of existing data.  Approaches that may be explored include, but are not limited to the use of control totals, such as through validation against award documents and/or using data from financial systems.  Efforts such as these could improve the quality of Federal spending information to promote accountability and ultimately to improve the performance of Federal programs.

Improving Grants Management

Each year, the Federal Government provides over $500 billion in grants to State, local and tribal governments, colleges and universities, and other non-profit organizations – roughly one-sixth of the Federal budget.  OFFM is committed to working with the grants community to make the grant process efficient and citizen-friendly. In February 2012, OMB published an Advance Notice of Proposed Guidance discussing possible policy changes to meet the President’s February 2011 directive that OMB will work with Federal and non-Federal stakeholders to review OMB Circulars and look for ways to better target risk and reduce administrative burden for recipients while improving program outcomes for Federal grants.   In November 2012, the Council on Financial Assistance Reform (COFAR) approved a set of five priority goals for fiscal years 2012-2015.  These include implementing revised guidance to target risk and reduce administrative burden per the directive above, standardizing business processes to streamline data collections, providing the public with validated financial data that aligns spending information with core financial accounting data in coordination with the work of the GATB, ensuring that grants professionals are highly qualified, and providing strong program oversight that increases the number of clean, single-audit opinions for grant recipients.  The COFAR was created in October 2011, when OMB issued Memorandum 12-01, “Creation of the Council on Financial Assistance Reform ” to provide policy-level leadership for the grants community to implement much needed reforms to improve effectiveness and efficiency in Federal grants.    

Conclusion

The sweeping challenges we face in the Government today require our financial managers to move beyond the status quo and to generate a higher return on investment for our financial management activities.  The Financial Management Community has made critical progress – decreasing the reported government-wide improper payment rate, from 4.69 percent in FY 2011 to 4.35 percent in FY 2012, and nearly doubling the amount of recaptured overpayments to contractors and vendors.  The steps outlined above leverage the tools and capacities in place today, and refocus energies on critical and emerging priorities – cutting wasteful spending, improving the efficiency of our operations and information technology, and laying a foundation for data quality and collaboration as we enter a new era of transparency and open Government.

Footnotes

33 HHS received a clean opinion on all statements except the Statement of Social Insurance and the Statement of Changes in Social Insurance, both of which received a disclaimer of opinion.(Back to Content)


Last Updated:  February 27, 2013