What DoD Financial Managers Can Learn from Their Critics.
Occasionally critics are politically motivated, as when critics seek to discredit DoD in an effort to hold down its budgets. But some of the criticism is well informed and suggests lessons that can help DoD financial managers (FMers) do a better job.
This article identifies what the author believes constitute key criticisms and the lessons they impart. The author reviewed written criticisms of DoD FM over the past decade, including those in articles and Congressional documents.
The article also draws on interviews with about 10 senior personnel with extensive experience in DoD FM. The interviews include personnel with experience in the military Services and agencies as well as in the Office of the Secretary of Defense and Congress.
As you read this article, you need to keep in mind my personal biases. While serving as Under Secretary of Defense (Comptroller) from 2009 to 2014, and as the Air Force Assistant Secretary (Financial Management and Comptroller) from 1994 to 2001,1 created and implemented some of the policies and actions that are criticized. Throughout this article I identify areas where the article reflects my personal judgments.
The remainder of this article highlights criticisms, and the lessons to be learned, in several key areas.
FINANCIAL STATEMENT AUDITS
In recent years the absence of auditable financial statements at DoD has attracted the most criticism. The Government Management and Reform Act of 1994 required that all large federal agencies subject their financial statements to an independent audit and receive an unmodified opinion. All large federal agencies except DoD have passed this test.
Know Where Money Is Spent
Critics have asserted that the absence of auditable financials means that DoD does not know where it spends its money. For example, Senator Tom Carper (D-Del) asserted in a 2011 letter to the Secretary of Defense that it is "impossible to know for certain how and when the DoD spends its money." (1)
All those with audit experience who were interviewed for this article, and the author himself, believe that DoD can, which high accuracy, account for its spending in the financial categories appropriated by Congress. DoD cannot yet verify the accuracy of its spending through an independent audit. However, the Department has processes in place to ensure accuracy, including requiring documentation before paying bills and using pre-validation to ensure that funds are available. Compared with other federal agencies, the Department has low levels of improper payments measured in terms of the percent of its budget, which suggests accuracy in spending. DoD also has proportionally fewer violations of the Antideficiency Act (ADA) compared with other federal agencies. Over the past five years DoD received about half of all discretionary appropriations but, based on the dollar value of the violations, the Department committed only about one third of total ADA violations.
Knowing where it spends its money does not mean DoD should skip the audit. The law requires a successful audit. Also, the process of passing the audit will force the Department to improve its accounting and may help DoD make better use of available resources. Finally, and most importantly in my view, DoD needs to pass an audit to reassure Congress and the public that it is a good steward of public monies.
DoD has been pursuing auditability for many years and has had some success. Several defense agencies have had clean opinions for many years. After Congress relaxed restrictions on audits, limited DoD-wide audits began in 2013, with a focus on budget statements. In late 2013 the Marine Corps received a clean opinion on its budget statement, a first for any military Service. The DoD Inspector General later revoked that opinion because of possible audit problems but then, upon further review, decided that the problems were not material according to interviewees for this article. Even after reaching this conclusion, the Inspector General chose not to reinstate the clean opinion. I believe this choice represented an unfortunate mistake because it robbed the Department of a small but important victory that would have boosted morale and helped in efforts to achieve more clean opinions.
Track Progress and Restrain Costs
The current Comptroller and Chief Financial Officer, David Norquist, has now instituted audits of all DoD financial statements. But it is clear that much work remains to be done before all DoD statements can be successfully audited. Most interviewees felt that it will be many years before DoD reaches that goal, and Norquist himself said it would require at least ten years. (2) In the interim, critics have argued that DoD needs better ways to track audit progress. Mr. Norquist plans to focus, not just on achieving clean opinions, but on resolving specific problems identified by the independent auditors in their Notices of Findings and Recommendations (NFRs). This approach seems a good one, with one important caveat. Not all NFRs are equal in terms of time required for resolution. DoD could resolve 90 percent of its NFRs but still be much more than 10 percent away from clean opinions. In reporting on NFR progress, DoD needs to find a way to reveal how much effort will be required to resolve remaining audit issues.
With all financial statements under audit, the cost of the audit and remediation efforts have risen substantially. In Congressional testimony Comptroller Norquist stated that, in fiscal year 2018 alone, DoD planned to spend more than $900 million on audit efforts. (3) About 60 percent of the funds will go toward remediation of problems, with the remainder paying for the audits themselves.
Critics now contend that DoD is spending too much on the audit. For example, Senator Chuck Grassley (R-lowa), a long-time critic of DoD financial management, stated on the Senate floor, that "spending so much on audits doomed to failure would be a gross waste of taxpayer dollars." (4) Senator Grassley recommends focusing on fixing the so-called feeder systems--personnel, logistics, and other systems that feed data into the general ledger--and, in Grassley's words, "the rest should be a piece of cake." Unfortunately, as interviewees for this article pointed out, there are many problems other than the feeder systems.
DoD could make changes to hold down audit costs. A thorough review of contractual spending for audit remediation might reveal some areas for consolidation. The Department could also focus its remediation efforts on the information most used to manage the organization. Of all the information on the financial statements, budgetary information, along with counts and location of assets (known in audit jargon as existence and completeness), is the information most often used to run the Pentagon. The valuation of assets based on historical cost, a key item on the balance sheet, will not significantly aid in managing DoD. In my opinion, focusing the audit on budget and asset count information would help hold down costs. A recent study of DoD financial audits published by the Institute for Defense Analyses agreed with this approach. (5)
PLANNING, PROGRAMMING, BUDGETING AND EXECUTION SYSTEM
The Planning, Programming, Budgeting, and Execution System (PPBES) has attracted considerable criticism. This section, which focuses on the planning, programming, and budgeting portions of PPBES, identifies a few key criticisms and what can be learned from them.
Senior-Leader Involvement a Must
Interviewees for this paper criticized the planning portion of PPBES for failing to provide sufficient and timely guidance to the remaining steps in the process. The programming step, which is intended to analyze and recommend options that best meet defense needs, was criticized for failing to tee up a sufficiently wide array of options. Critics argue their case against programming in part by noting that there has been little change in the shares of the defense budget allocated to the three military departments. Excluding wartime budgets and defense-wide budgets, the shares for each of the three departments have varied by only a few percentage points since 1980, with each department garnering approximately one-third of the budget.
While these criticisms have some validity, the planning and programming portions of PPBES can produce major change when senior leaders become involved. For example, Secretary of Defense Robert Gates expedited the purchase of Mine-Resistant Ambush-Protected vehicles designed to reduce casualties from improvised explosive devices. He also terminated or ended production of numerous major defense programs including the Army's Future Combat System, the Navy's DD-1000 program, and the Air Force's C-17 and F-22 aircraft. Through personal meetings with senior leaders, followed by direction to the planning and programming processes, Secretary Gates demonstrated that the system can produce significant change.
If senior leaders can use PPBES to bring about change, why have budget shares remained relatively constant? Critics contend that the constancy of shares reflects Service "turf" wars that are most easily resolved by providing all Services a roughly equal share of the budgetary pie. But at least one other factor--uncertainty about future defense needs could also explain constant budget shares. History offers many examples of unforeseen defense needs. For example, few analysts predicted the heavy demand for land forces in the aftermath of 9/11, especially after the successful use of airpower to resolve the Bosnian conflict in the late 1990s. Given this substantial uncertainty, it makes sense to maintain strengths in all types of military capabilities, which leads to evenly distributed and relatively constant budget shares.
Interviewees for this article generally agreed, however, that the programming step in PPBES should be changed to render it better able to raise broad issues. Specifically, to improve programming, more funds should be withheld from the military departments and allocated by the Office of the Secretary of Defense (OSD). This would foster greater competition among programs, especially those that affect multiple departments. During the author's tenure as DoD Comptroller and Chief Financial Officer, only tiny amounts of funds were withheld--usually significantly less than one percent of the total defense budget. If withheld funds were gradually increased to perhaps five percent of the budget, opportunities for raising broad issues that cut across military departments would be enhanced. Coupled with senior leader involvement, this shift could help PPBES produce more significant changes.
Provide Wartime Funding More Effectively
The President's budget for FY 2012 announced that wartime funding would henceforth be provided through the Overseas Contingency Operations (OCO) fund. Previously wartime funding had been made available through emergency supplemental appropriations--special appropriations bills that were often enacted late in the fiscal year. OCO is only supposed to cover the added costs of wars. Congress receives OCO requests along with the regular budget but, because of the uncertainty about future wartime funding needs, requests cover only the budget year.
Initially OCO worked better than emergency supplemental, which offered Congress limited time for review and sometimes were enacted so late that they left DoD on the verge of financial insolvency. But the Budget Control Act of 2011, which placed caps on funding for DoD and other federal agencies, effectively exempted OCO funding from the caps, offering as justification, that only wartime needs should determine wartime funding. With the caps in place, Congress and later the President's budget began placing funding that did not qualify into the OCO accounts in order to evade the budget limits. With the end of the Iraq war and the drawdown in Afghanistan, some funds that arguably belonged in OCO at the height of the wars (for example, troops in the Middle East who provided wartime backup even though they were not stationed in Iraq or Afghanistan) remained in OCO even after the rationale for that special status had largely disappeared. Today several tens of billions of dollars of OCO funding should be in the "base" or non-OCO budget, but remain in OCO. These funds constitute a significant share of total OCO funding (which equals about $68 billion in FY 2019).
Critics, including some senior members of Congress, have blasted this misuse of OCO. Representative Paul Ryan, the outgoing Speaker of the House, once termed OCO "o backdoor loophole that threatens the integrity of the budget process." (6) Senator John McCain called it a "gimmick." Some members of Congress have sought to reduce or eliminate OCO by law, though so far without success. Congress and the Administration missed an opportunity to transfer misplaced funds from OCO to the base in the FY2018 DoD budget. That budget featured an increase of $80 billion in the caps for DoD, but no OCO funds migrated back to the base budget. Given the large deficits facing the United States, another opportunity to use substantial DoD budget increases to resolve the OCO problem seems unlikely.
The misuse of OCO arguably does harm. As Ryan stated, it damages the integrity of the budget process and leads to outrage among critics who feel, rightly, that DoD has an unfair advantage in the budget debate. OCO also covers only one year, which negates one strength of the PPBES process--the ability to examine the budget-year request in light of funding likely to be available in later years. Perhaps most important, OCO funds do not compete against base-budget funding during internal DoD reviews. This lack of competition would make sense if OCO only contained funds for wartime costs. But when OCO contains base-budget funding, the absence of competition negates one of the biggest strengths of PPBES, the competition among programs that helps create an effective defense budget.
So what to do about OCO? The President and Congress could agree to appropriate funds whose sole use would be to correct OCO misuse. That seems unlikely because this course of action would use up several tens of billions of limited defense funds that DoD feels should be used to meet program needs. The President and Congress could use limited amounts of defense funds (perhaps starting with $5 billion and growing gradually) to correct the most egregious misuses of OCO. I believe that the harm created by the misuse of OCO argues for this limited approach as the minimum acceptable course of action.
Cut Back on Staff Time
DoD leaders rely heavily on budgets to manage the Department, which makes the process used to allocate resources important. The process also involves numerous steps, each requiring substantial time for preparation and decisions. These factors drive many DoD personnel to devote substantial time to the steps in the PPBES.
To reduce the time required for PPBES, critics have suggested biennial budgeting--that is, preparing a full budget only every two years with off-year activities limited to modest updates. The time saved through use of biennial budgeting could reduce staff overhead or free up hours for use in evaluating programs. The benefits would be realized both in DoD and Congress.
Unfortunately, a major experiment with biennial budgeting for DoD did not succeed in the 1980s. At that time the defense authorizing committees of Congress began enacting two-year DoD authorizations. The defense appropriations committees continued to enact annual appropriations. DoD responded by submitting full budgets only every two years, with updates in the off-years. Interviews with DoD comptroller staff involved in this experiment suggest that, at least for those who put together the budget, the off-year updates required about as much time as did the full budget. To some extent, the high volume of off-year changes reflects DoD's inability to avoid tinkering with documents as important as the budget. However, external events drive many changes that can only be accommodated by budget shifts proposed by the President and approved by Congress. Externally driven changes include slowdowns or unanticipated progress on defense weapon and construction projects, the need for changes in levels of services (especially in times of war), changes in inflation and other economic variables, and shifts in the total funding made available to DoD. Because it did not save time for those creating the budget, and because only the authorizing committees participated, the experiment with biennial budgeting ended in the late 1980s and was labeled as unsuccessful by the Congressional Research Service. (7)
But proposals to implement biennial budgeting continue, garnering the support of respected fiscal leaders. In 2015, for example, Alice Rivlin (former Director of the Office of Management and Budget and the Congressional Budget Office) and Pete Domenici (former Senator from New Mexico who chaired the Senate Budget Committee from 1995 to 2001) authored a paper supporting biennial budgeting along with many other changes to the Congressional budget process. (8) Discussions with Congressional staff suggest that the Joint Select Committee on Budget and Appropriations Process Reform, whose deliberations are ongoing as this article is being written, is seriously considering biennial budgeting. Unfortunately, history suggests that biennial budgeting would not succeed, at least not in DoD.
Substantial time could be saved if Congress were willing to combine its authorizing and appropriating committees. Today there is a great deal of overlap between the two types of committees, especially because the authorizing committees have gradually enacted detailed authorizations for the entire defense budget. The overlap means that DoD must provide extensive information, answer questions, and implement two sets of laws that often cover the same issues. The large size of Congressional staffs adds further to the time required.
While combining the authorizing and appropriating committees would save substantial time, it almost surely will not happen. Combining committees would lead to many fewer committee and leadership positions, which in turn would generate staunch opposition from members of Congress. Nonetheless, if there is a desire to cut back on the time required to prepare and execute DoD and other budgets, the author believes that this option represents the best approach.
The PPBES system has stood the test of time, in part because it ensures that all voices are heard before a decision is made on major issues. Interviewees agreed that it is one of the best resource allocation systems in the Federal government. PPBES can be improved, perhaps based on some of the suggestions described above. But in my view its basic processes should remain in place.
In addition to audit issues, critics have identified several other key issues related to the execution of budgets. In several cases there are important lessons to be learned.
Reduce year-end spending
Every Administration attempts to make reforms in DoD, and the Trump Administration is no exception. Indeed Secretary of Defense Mattis has placed a high priority on these reforms. While many DoD business reforms are difficult to implement, changes in carryover rules designed to moderate the yearend spending spree would be easy to implement and would substantially improve the effectiveness of defense spending.
Under current fiscal rules, all funding in the appropriations for military personnel and operation and maintenance must be obligated in the year they are appropriated. If that does not happen, the funds can no longer be used (except in very limited circumstances). As a result, spending on the operating accounts skyrockets in the final week of the fiscal year because managers feel that, if they do not obligate almost all available funds, they will receive less funding in future years. In the operation and maintenance appropriations, for example, the level of DoD obligations in the final week of the fiscal year was four times higher than average spending in the other weeks. The phrase "use it or lose it" captures the incentives commanders and managers feel they face. While year-end funding is not wasted, the author's experience suggests that it often pays for lower-priority projects--office furniture rather than training, for example. The surge in spending also leads overworked contracting officers to push out lower-quality contracts. (9)
Congress could moderate year-end spending by permitting DoD to carry over a small portion of its operating funds and obligate them in the year following their appropriation. Carryover of 5 percent seems reasonable. At year's end, commanders and managers could then decide whether to buy new office furniture or hold the funds and spend them the next year on higher-priority projects. This business reform would be easy to implement and would substantially improve the effectiveness of DoD spending.
While serving as DoD Comptroller, the author asked the Congress to permit carryover of 5 percent of operating funds. The House agreed (though only at the level of 1 percent) but the Senate would not accept the change. This Administration should try again to persuade Congress. Operating account carryover authority designed to limit year-end spending imposes little pain and offers lots of gain and, in this author's view, should be a centerpiece of DoD financial reforms aimed at improving budgetary effectiveness.
Acquire Better Cost Data
DoD generally has good data on the amount of funds that it budgets for programs, but the Department often lacks data on what is actually spent on those programs. In the author's experience, when cost data are needed, they often must be produced using ad hoc analyses that require significant time and resources.
Better and more widely available cost data would help DoD make wiser choices among competing programs. Comparing costs for programs across units within a military Service, or even across military Services, can also prod commanders and managers to switch to more efficient practices that hold down costs. Accurate comparisons require that the programs being compared be similar in their nature and scope, which is no small task. But with effort, reasonable comparisons can be achieved, especially among support programs.
As it seeks better cost data, DoD should avoid creating new systems and, in most cases, should avoid formal cost accounting systems. Such systems are expensive and would take years to install. Instead DoD should rely on its new Enterprise Resource Planning systems, which often can be used to identify cost information. Data mining and similar techniques can also help provide better cost data.
The previous Administration began efforts to create better cost data, and the author understands that those efforts continue under the current leadership. Achieving auditable financial statements is important for noted above, but successful audits probably won't save any money. Better cost data, if used as a prod to move to more efficient practices, could save substantial sums.
Reduce budgetary turmoil
Since enactment of the Budget Control Act of 2011, DoD's budgets (and those of most federal agencies) have been in turmoil. The problem stems almost entirely from problems in the Congressional budget process, which has become dysfunctional. A few highlights make this point clear. From 2011 to 2017, Congress was never able to pass DoD appropriations before the start of the fiscal year, resorting instead to continuing resolutions. In five of those years, the continuing resolutions extended for more than 90 days.
Late DoD budgets are nothing new, but since 2011 there have been other problems. In several of those years, DoD's uncertainty about likely funding has forced the Department to prepare two separate budgets for a fiscal year, a time consuming and wasteful practice. In 2013 DoD experienced substantial mid-year sequester cuts, which forced some Services to curtail much-needed training and led to a furlough of civilian employees. DoD and most other federal agencies have had to plan for, and in multiple cases, shut down some of their operations because Congress and the President could not agree on appropriations bills. In 2013 the partial shutdown lasted for 16 days. These problems did not occur in 2018 when Congress passed the DoD budget on time, but it remains to be seen if this merciful absence of turmoil will continue in future years.
This budgetary turmoil prior to 2018 harmed DoD in many ways. It wasted the time of senior leaders, who had to spend much time finding ways to maintain operations despite the turmoil, thus reducing time available for more productive activities such as implementing DoD business reforms. The turmoil wasted money, including $400 million paid to civilians in 2013 for work they were prohibited from carrying out. The turmoil also led to declining morale, especially among civilian employees. Pay freezes, extra work, and furloughs have caused many civilian employees to wonder whether they remain valued members of the DoD team.
Process changes, perhaps including easing limitations on reprogramming, might help mitigate the effects of this turmoil. But a more complete solution requires a long-term budget agreement that specifies levels of funding for DoD and other agencies, along with changes designed to hold down spending on so-called mandatory expenditures (such as Medicare and Social Security). An agreement that could pass in Congress would probably also have to include increases in revenues. If such a long-term agreement is ever to become law, the major political parties must find ways to reach compromises on intensely controversial issues and then work to convince the American public to accept those compromises.
FINANCIAL MANAGEMENT WORKFORCE
More than 50,000 DoD employees, mostly civilians, work to manage finances for the Department of Defense. They formulate budgets, execute spending, perform accounting services, assist on audits, pay personnel and contractors, and do much more. In my experience, DoD's senior leaders view the Department's financial managers as important and productive members of the DoD team.
But I also believe there are lessons to be learned that can further strengthen this workforce. Commanders and senior managers will increasingly need not just financial data, but analyses that use that data to identify solutions to business and operational problems. The DoD financial community needs to continue to provide financial data while also strengthening its ability to use analysis to solve problems. The Services and agencies already offer some analytic training, but it should be strengthened and, as appropriate, made available to financial employees at bases and installations.
The DoD financial community also needs a more structured program for developing personnel, especially as large numbers of senior financial managers retire. A structured program should require completion of key courses throughout a financial manager's career as well as specifying experience that must be gained. The courses can be used to provide training in critical areas such as audit and analytical skills. The DoD Financial Management Certification program offers just such a structured program. Test-based certification programs, and especially the Certified Defense Financial Manager (CDFM), also contribute significantly to professional development by encouraging employees to acquire a thorough understanding of the processes and rules that govern defense financial management. DoD senior leaders, and especially senior financial leaders, should continue to provide strong support for the DoD Financial Management Certification program and the CDFM.
Nobody likes to be criticized, and sometimes the criticism directed at the DoD financial community has been unfounded and even hurtful. While DoD FMers should ignore the unfounded critiques, they should pay attention to others in order to learn how to provide even better financial services to the Department of Defense and the nation.
Honorable Robert Hale
The Honorable Robert Hale is a Senior Executive Advisor at Booz Allen Hamilton. He served as the Under Secretary of Defense (Comptroller) / Chief Financial Officer from 2009 to 2014 and as the Assistant Secretary of the Air Force (Financial Management & Comptroller) from 1994 to 2001.
(1) Letter from Senator Tom Carper to Secretary of Defense Leon Panetta, reported by John Bennett, "The Hill," October 6, 2011, p. 3.
(2) Tony Bertuca, "Pentagon comptroller: Clean audit could take 10 years," Inside the Pentagon, March 7, 2018.
(3) Testimony of the Honorable David L. Norquist before the House Armed Services Committee, January 10, 2018, p. 4.
(4) Floor speech of Senator Chuck Grassley, September 12, 2017.
(5) Peter K. Levine, "Auditing the Pentagon: A Road to Nowhere?" Institute for Defense Analyses, September 2018, pp. 137-138.
(6) Robert Hale, "The future of OCO Funding in the Department of Defense," Nationallnterest.org, September 5, 2016.
(7) Congressional Research Service, "Biennial Budgeting: Options, Issues, and Previous Congressional Action," February 2, 2015, p. 7.
(8) Pete Domenici and Alice Rivlin, "Proposal for improving the congressional budget process," Brookings, July 2015, p. 16.
(9) Robert Hale, "Why DoD's Year-End Spending Needs to Change," Breaking Defense, September 23, 2016. For more details see Robert Hale, "Budgetary turmoil at the Department of Defense from 2010 to 2014: A personal and professional journey," Brookings, August 2015.
Highlights of Lessons Learned Increasing Public Confidence a Key Reason for Audit Hold Down Audit Costs by Establishing Priorities Fix Most Egregious Misuses of OCO Support Current Training Programs for DoD FM Workforce Operating Account Carryover a Much Needed Reform Effective PPBES Requires Senior-Leader Involvement DoD Knows Where It Spends Its Money
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|Author:||Hale, Honorable Robert|
|Publication:||Armed Forces Comptroller|
|Date:||Jan 1, 2019|
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