Are We Prepared for the New Millennium?

The Honorable William J. Lynn III

Under Secretary of Defence (Comptroller)

One of the true pleasures of this job is the opportunity to come each year and address this conference. It is at its core a professional gathering--speeches and seminars, teaching and training. But it is much more than that. It is a chance to get to know and enjoy your colleagues. It is a chance to turn professional relationships into friendships. I hope all of you take advantage of this unique opportunity.

Are We Prepared for the New Millennium?

At the outset, let me congratulate all of you who have worked so hard to make this Professional Development Institute (PDI) a success. Your extraordinary dedication is especially important, given that this PDI ushers in a new millennium. I would like to express special thanks to Jim McCall, Helen McCoy, co-chairs Bill Hemberger and Dick Waibel, and the five chapters--Jersey Devil, Picatinny, Washington, Ft. Meade, and Chesapeake--who made this PDI a success.

This morning, I'd like to talk about whether the Department of Defense (DoD), generally, and the DoD financial management community, in particular, are ready to meet the challenges of this new era.

To answer this question, I want to come at it from three different perspectives:

* What Defense spending will be required for this new era?

* What financial management advances will be needed?

* What do our people and organizations need to do to be ready for the new era?

Together the answers to these three questions can tell us how well we are prepared for the new millennium and what we must do to become better prepared.

Defense Spending

First, the Defense budget. Here my thesis- is straightforward: DoD needs 1 to 2 percent real growth annually in spending in order to sustain our current security posture. This type of increase is needed to maintain our current levels of operational readiness while simultaneously modernizing for the future. Let me start with the requirements to maintain readiness.

For several decades now, the costs of operating the force have steadily increased. When measured as a function of Operation and Maintenance (O&M) dollars per soldier, we have seen 1 to 3 percent annual increases. This means that if we stand still in our operating accounts, we will lose ground on readiness. Several things are pushing up personnel and operations costs.

First, military health care keeps getting more expensive, rising faster than other costs. And now, the Department is beginning to expand health care for military retirees, which will push costs up even further.

Second, the increasingly difficult challenge of recruiting and retaining top-quality people for military service is creating pressure. Military pay will continue to need to stay ahead of inflation, and ensuring a good military quality of life will add pressure as well.

Third, the most direct pressure on operations costs will continue to be force readiness. With today's extensive global commitments and deployments, ensuring readiness will remain expensive. And for the foreseeable future, we also will continue to face increased maintenance costs from aging weapons systems.

The bottom line is that if we are going to maintain the high levels of readiness we have today, we will need some growth in O & M budgets, and pay raises must increase faster than inflation.

Turning from operations and personnel to the investment accounts, we also see a strong need for increased funding. During the latter half of the 1990s, it was a perpetual struggle to achieve a needed boost in procurement funding. The rapid pace of operations and the needs of readiness kept requiring us to postpone modernization. But we turned the corner in FY 1999. This year we finally reached our goal of $60 billion per year for procurement appropriations. But that sum is just a beginning, not an end. From here, we are going to need additional real growth for at least the next decade in order to fulfill the planned modernization of America's armed forces. We have increased procurement spending by about $15 billion. But that is roughly half the increase needed to recapitalize our existing force structure.

In sum, DoD faces significant upward budget pressures for both operational costs and weapons modernization. Because of these pressures, 1 to 2 percent real growth is needed just to preserve our current Defense sufficiency--just to fully prepare us for this new era.

What are the prospects for such real growth? Last year, President Clinton ended the post-Cold War decline in Defense spending by proposing a $112-billion, 6-year increase for Defense--the first real increase in DoD spending since the mid-1980s. The President's plan enables the Department to stay ahead of inflation. But we will need to continue these increases if we expect to meet the demands of the future security environment.

Financial Management Initiatives

Turning next to financial management in the Department, again the question is, Are we prepared for the new millennium? Are we where we want to be, where we need to be? Even without remarkable progress during the past decade, we still have much more to do.

First, we must continue to strengthen internal controls and fraud prevention. We must further refine the systems and safeguards that prevent and detect fraud in those few instances where it may occur.

Second, we must continue to improve the contract payment process-demonstrating that we can cut costs without jeopardizing accountability.

Third, we need to further advance the easy electronic exchange of financial information--fully exploiting the potential of new technology and the World Wide Web.

Finally, and most importantly, we must develop a seamless network that produces accurate, reliable, and usable financial data for the Department's managers and overseers. We have taken important steps toward this goal and have made great progress with our finance and accounting systems.

The inventory of over 300 disparate, non-CFO-compliant finance and accounting systems that were inherited by the Defense Finance and Accounting Service (DFAS) is well on its way to becoming an integrated network of approximately thirty CFO-compliant systems operated by DFAS. This is a great achievement, but it is not enough. We need to cackle the feeder systems. Until the systems that feed acquisition, logistics, personnel, and other data into our networks are CFO-compliant, we will be unable to produce the kind of accurate and complete financial data needed for efficient management.

To achieve this ambitious information overhaul, the Department has initiated a process to achieve compliant financial and feeder systems. Our process stresses rigorous diagnosis of problems and careful confirmation of results.

These and our other financial management goals will not be reached by next January, when our current Pentagon leadership will leave office. But we need to establish a sound foundation to allow completion of these reforms.

But even if reform remains a high priority, the new DoD leadership may find it hard to devote a lot of time to sorting out difficult reform challenges. Therefore, the key to financial management success is that the new Defense leadership sees a reasonably achievable path to the highly desirable goal of top-notch, world-class financial management.

Specifically, we need to be within reach of a clean audit opinion on the Department's financial statements during the next presidential term. This goal is not important because people use our financial statements to manage the Defense enterprise. They do not. It is important because a clean opinion would signify the reliability and accuracy of our financial systems. If we can get a clean opinion, we will have demonstrated we have successfully linked our feeder and financial systems to produce accurate, reliable, and useful financial management information for the Department's decision makers.

Getting Organizations and Personnel Ready for the New Era

The third question to address is, Are our financial people and organizations ready for the new millennium?

Focusing first on people, I want to draw special attention to the importance of professional development. Increasing the skills and experience of our professionals is essential to continued improvements in DoD financial management. And virtually everyone in our financial community has a responsibility to contribute to this needed professional development:

* Managers must make every effort to give their staffs challenging training and assignments;

* Individuals must seek out and take full advantage of developmental opportunities; and

* Organizations such as the American Society of Military Comptrollers (ASMC) and the Association of Government Accountants must continue to offer stimulating professional development, such as this PDI.

Also appropriate are formal training classes such as the one-week Enhanced Defense Financial Management course, developed specifically to meet DoD needs and taught by the Department of Agriculture Graduate School. It is an excellent comprehensive course that focuses on financial management and related areas of knowledge that are essential for a well-rounded DoD professional workforce. In FY 2000, approximately 2000 members of our financial management community will take the course. We plan for a similar number to take the course each year in the FY 2001-2005 time frame, and I encourage you to sign up for this course.

An essential part of this professional development agenda is certification. We must continue to encourage our professionals to earn appropriate professional credentials such as those of a certified public accountant, certified government financial manager, and the like. I especially want to endorse our new Certified Defense Financial Manager Program, which was developed in cooperation with the ASMC. This is a terrific vehicle for developing the financial managers that the Department will need in the new millennium.

Finally, let me turn to preparing our organizations for the new millennium. Most of our organizations are much the same as they have been for decades, and that may be fine. But all of our organizations would benefit from a fresh look at changes that could increase productivity save money, and better support the rest of the Department.

With organizations like DFAS, there is a special opportunity and obligation to get things right. Today, under Tom Bloom's leadership, DFAS is headed in the right direction, toward becoming a world-class provider of finance and accounting services. Our DFAS leadership is enhancing the organization's corporate identity, sharpening the emphasis on customer service, and improving systems management--all aimed at providing competitive, best value to the Department.

To advance that goal, I fully support Tom Bloom's intent to shift DFAS from a geographical focus to a "business line" focus, similar to what many leading global corporations have done. DFAS's reorganization along the three business lines of Accounting, Personnel Pay, and Commercial Pay Services also will help the Department improve its business practices, while ensuring that we know what customers want and need. I am confident that this new DFAS direction will earn strong support from its customers.

Closing

To sum up then, are we in the Department of Defense ready for the new millennium? In my view, we are much better prepared than we were just a few years back. But more work is required. We need to make sure we can allocate sufficient defense spending to stay ahead of upward pressures in the areas of people, operations, and modernization. We need to complete our financial management overhaul. And we need to achieve new levels of excellence in our financial professionals and organizations.

I am confident that our financial management community can fulfill its responsibilities in this ambitious agenda. To date we have made tremendous progress on some really rough challenges. Through the talent and dedication of financial management professionals such as you, we can and must finish things right.

Thank you.