Fin


2016 Financial Report of the United States Government


Management's Discussion & Analysis

Financial Management Progress and Priorities

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. For FY 2016, 21 of the 24 CFO Act agencies obtained an opinion from the independent auditors on their financial statements.39 In addition, 40 auditor-identified material weaknesses were reported at the beginning of FY 2016 (see Table 10 on the following page). 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 three of the CFO Act agencies, and the Government as a whole, from achieving an audit opinion.

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 the federal government is not only responsible stewards of taxpayer dollars, but frugal stewards as well, looking for every opportunity to save money and create greater efficiencies. 

The federal government has come a long way since the passage of the CFO Act in 1990. Today, the federal financial management community is focused on three important improvement initiatives:

  • Improving the quality, utility, and transparency of financial information;
  • Protecting against waste, fraud, and abuse; and
  • Helping agencies maximize the impact of their limited financial resources.
Table 10: Auditor-Reported Material Weaknesses: FY 2016
Agency Beginning New Resolved Consolidated Ending
Department of Agriculture (USDA) 2 0 0 0 2
Department of Commerce (DOC) 0 0 0 0 0
Department of Defense (DOD)* 13 Pending Pending Pending Pending
Department of Education (Education) 0 0 0 0 0
Department of Energy (DOE) 0 0 0 0 0
Department of Health and Human Services (HHS) 1 0 0 0 1
Department of Homeland Security (DHS) 3 0 0 0 3
Department of Housing and Urban Development (HUD)* 9 Pending Pending Pending Pending
Department of the Interior (DOI) 2 0 2 0 0
Department of Justice (DOJ) 0 0 0 0 0
Department of Labor (DOL) 1 1 0 0 2
Department of State (State) 0 0 0 0 0
Department of Transportation (DOT) 1 1 0 0 2
Department of the Treasury (Treasury) 1 0 0 0 1
Department of Veterans Affairs (VA) 4 3 1 0 6
Agency for International Development (USAID) 1 0 0 0 1
Environmental Protection Agency (EPA) 1 1 0 0 2
General Services Administration (GSA) 0 0 0 0 0
National Aeronautics and Space Administration (NASA) 0 0 0 0 0
National Science Foundation (NSF)* 0 Pending Pending Pending Pending
Nuclear Regulatory Commission (NRC) 0 0 0 0 0
Office of Personnel Management (OPM) 1 0 0 0 1
Small Business Administration (SBA) 0 0 0 0 0
Social Security Administration (SSA) 0 0 0 0 0
Totals 40 6 3 0 43
*Audit results for DOD, HUD, and NSF were not available as of the issuance of this Financial Report.
Ending Totals assumes DOD, HUD, and NSF have 13, 9, and zero material weaknesses (Beginning Totals) as of September 30, 2016, respectively.

Improve the Quality, Utility, and Transparency of Federal Financial Information

DATA Act

The Digital Accountability and Transparency Act (DATA Act), signed on May 9, 2014, sets forth a clear vision for the future of Federal spending transparency. The Act amended the Federal Funding Accountability and Transparency Act (FFATA) by requiring that all federal spending be displayed on a website in searchable, downloadable, and machine-readable format.  This data includes obligations, outlays, budgetary authority, unobligated balances, and other budgetary resources for each appropriations account.  It also expands federal award reporting previously required under FFATA.  In May 2015, OMB, in coordination with Treasury, issued financial data definition standards and policy guidance outlining the first set of DATA Act implementation requirements.  By 2017, all agencies must report this data to a centralized website and adhere to the data standards and guidance issued by OMB and Treasury. Posting this financial information will allow spending comparisons across and within agencies that have never been possible before as well as unlock spending data for use by the public.

Since the DATA Act was signed into law, OMB and Treasury have been partnering to lead governmentwide implementation.  They have established a robust governance structure with representatives from agencies and functional communities fostering collaboration on data standards, policy changes, USAspending.gov improvements, and agency implementation.  The implementation approach was developed to be collaborative, iterative, incremental, and agile, with a data centric focus.

USASpending.gov

USAspending.gov was established to provide clear information on federal award spending.  Continuing to improve the quality, utility and transparency of this federal spending information is a foundational government commitment to openness, as identified in the U.S. Government’s National Action Plan for Open Government.  To continue its efforts to improve the quality of spending data, OMB, in coordination with Treasury, issued additional policy guidance to adjust USAspending.gov reporting requirements and procedures pursuant to the DATA Act.

To align our federal spending and financial management transparency efforts, the Administration has transferred responsibility for USAspending.gov from the General Services Administration (GSA) to Treasury.  In March 2015, Treasury released a new version of USAspending.gov with improved search capabilities and visualizations of data.

Moving forward, in concert with Treasury, OMB will continue to collaborate with federal and non-federal stakeholders to evolve the Administration’s governmentwide spending transparency framework to effectively provide the public with transparent information about how taxpayer dollars are being spent.

Protect Against Waste, Fraud, and Abuse

Improper Payments

Addressing improper payments is a central component of the Administration’s overall efforts to eliminate waste, fraud, and abuse.  When the President took office in 2009, the improper payment error rate was 5.42 percent, an all-time high.  Since then, the Administration, working together with Congress, has made progress by strengthening accountability and transparency through annual reviews by agency Inspectors General, and expanded requirements for high-priority programs.  As a result of this concerted effort, in FY 2013 the Administration reported an improper payment rate of 3.53 percent.  In FY 2015, the governmentwide improper payment rate was 4.39 percent, which corresponds to an improper payment dollar amount of $137 billion and in FY 2016, the governmentwide improper payment rate was 4.67 percent, which corresponds to an improper payment dollar amount of $144.4 billion.40 This increase between FY 2015 and FY 2016 can be attributed to percentage and dollar increases in the Medicaid Program, the Direct Loan Program, the Medicare Part C Program, the Pell Grant Program, the VA Community Care Program, and the Earned Income Tax Credit (EITC) Program.  The Medicare Fee for Service (FFS) program continues to account for the largest portion of the governmentwide total in FY 2016 ($41 billion or 28 percent of the governmentwide total), whereas Medicaid accounts for the second largest portion of the governmentwide total ($36 billion or 25 percent of the governmentwide total).  The EITC and Medicare Part C combined account for the third largest portion of the governmentwide total ($33 billion or 23 percent of the governmentwide total).  In addition, agencies recovered roughly $20 billion in overpayments through the payment recapture audits and other methods in FY 2016.

Prior to FY 2015 reporting, agencies were required to categorize their improper payment estimates based on three categories of improper payments: (1) documentation and administrative errors; (2) authentication and medical necessity errors; and (3) verification errors.  However, those categories proved to be limited and not necessarily applicable to most programs.  Therefore, OMB—in consultation with agencies—developed new improper payment categories.  FY 2016 marked the second year of the OMB reporting requirement for root causes reporting as shown in Chart H. Approximately $44 billion of the government-wide improper payments in FY 2016 are caused by insufficient documentation.  A lack of supporting documentation could be a situation where there is a lack of supporting documentation necessary to verify the accuracy of a payment identified in the improper payment testing sample such as a program not having the documentation to support a beneficiary’s eligibility for a benefit.  Approximately $34 billion of the government-wide improper payments in FY 2016 were caused by the inability to authenticate eligibility. The inability to authenticate eligibility is a situation in which an improper payment is made because the agency is unable to authenticate eligibility criteria such as no database or other resource exist to help the agency make a determination of eligibility or statutory constraints exist preventing a program from being able to access the information that would help prevent the improper payment.  This additional detail behind the root causes of improper payments provides more granularity on improper payment estimates and will be used to inform more effective corrective actions and more focused strategies for reducing improper payments.

Chart H: FY 2016 Improper Payment Root Cause by Category

This site requires the Adobe Flash Player to view the charts. If you don't have flash or Flash is not available, you can download the chart's data source here in XML format.

The Administration continues to use the Budget to build on congressional and Administration action to reduce improper payments. For example, the President's FY 2016 and 2017 Budget included a number of program integrity proposals aimed at reducing improper payments and improving Government efficiency.  The FY 2016 proposals included a robust package of Medicare and Medicaid program integrity proposals, strategic reinvestment in the Internal Revenue Service (IRS), and an equally robust package of Social Security program integrity proposals, in addition to many other proposals for other programs also aimed at reducing improper payments.  The President’s FY 2017 Budget also includes a number of new program integrity proposals.

The Government is also leveraging advanced data analytics and improved technologies to prevent improper payments before they happen. In doing so, as part of the President's Do Not Pay Initiative, the Administration established a Do Not Pay System of Records at Treasury.  The Treasury Working System provides agencies a single-point of entry to access data and matching services to help detect, prevent, and recover improper payments during the award or payment lifecycle. Furthermore, Treasury has begun analyzing data across agencies to identify potential duplicative benefit payments in programs with related missions and beneficiaries. In addition to Treasury, agency payment integrity tools include the (CMS) Center for Program Integrity (which has implemented CMS’ Fraud Prevention System [FPS]); the Department of Defense Business Activity Monitoring tool; and the Department of Labor’s Unemployment Insurance (UI) Integrity Center of Excellence, a federal-state partnership that helps prevent, detect, and reduce improper payments in the UI program.  The SSA has a process to intercept payments to beneficiaries who have died or been incarcerated, and has established an Analytics Center of Excellence which works on capturing real-time data and building more meaningful metrics, thereby allowing SSA to focus efforts on those projects or initiatives that yield the most promise.  As a result of the Initiative, agencies cumulatively identified and stopped over $5.9 billion of improper payments through the Do Not Pay Initiative as of the end of FY 2015.

The Administration looks forward to continued work with Congress on Administration priorities including the sharing of death data from states to prevent improper payments to the deceased while maintaining privacy to ensure program integrity and payment accuracy.

Combating improper payments within the federal government is a top priority for the Administration and it will continue to explore new and innovative ways to address the problem.  Each dollar paid in error represents a loss of public resources, and this Administration is committed to reducing waste, fraud, and abuse and continuing to improve payment accuracy with every tool at its disposal.

Improving Grants Management

The Federal government spends more than $600 billion in Federal financial assistance each year, and the effective and efficient management and use of these funds help agencies to achieve their missions while protecting these resources from fraud, waste, and abuse. The Uniform Grant Guidance, 2 CFR Part 200, issued in December of 2014, was the culmination of a three-year collaborative effort across Federal agencies and its non-Federal partners, to streamline eight existing OMB Circulars on financial assistance management into one consolidated set of guidance.

Since adoption of the Uniform Grant Guidance, OMB, the Council on Financial Assistance Reform (COFAR), and 28 federal awarding agencies have been diligently working to implement these requirements.  In support of this effort, the COFAR hosted a webcast in June 2016 “Uniform Guidance: Promising Practices in Implementation” identifying best practices. The webcast modules, as well as tools and resources related to each session, were posted at https://cfo.gov/cofar/.

In addition, OMB collected data on a suite of Administrative and Audit metrics, as outlined in the Memorandum M-14-17, Metrics for Uniform Guidance, to measure the effectiveness of the new policies.  The metrics are also published on the COFAR website at https://cfo.gov/cofar/ and OMB will continue to evaluate the metrics to determine whether any changes need to be made to gauge additional aspects of the Uniform Guidance implementation.

OMB and the Federal awarding agencies are committed to working together to continue to ensure that the government promotes effective stewardship over its Federal financial assistance funds.

Help Agencies Maximize the Impact of their Limited Financial Resources

FedStat/Benchmarking

Over the course of this Administration, OMB has used regular data-driven management reviews to advance many of its most important shared priorities. Through implementation of the GPRA Modernization Act of 2010 and the President’s Management Agenda, these reviews have led to a number of tangible improvements in the effectiveness and efficiency of individual agencies and the Government as a whole, and OMB will continue that work through ongoing PortfolioStat, Benchmarking, and Strategic Review engagements.

The federal government’s efforts to improve government efficiency aim to increase the quality and value of core administrative operations and enhance productivity to achieve cost savings or cost avoidance.  Establishing cost and quality benchmarks for these operations have helped to develop tools for the federal government to measure performance in key mission-support areas, including financial reporting and audit, charge cards, DATA Act, debt collection, Do Not Pay, electronic invoicing and quick pay, ERM and internal control, grants management, improper payments, real property and shared services.

During FY 2016, OMB designed and launched the “FedStat” review to bring these efforts and other emerging priorities into focus in a cohesive discussion of opportunities with the CFO Act agencies for improved performance and risk mitigation that will more closely align with the Budget process and inform program management and administration.  OMB met with agencies to discuss data-driven evidence on shared challenges across the Government, to identify potential areas for agency sub-component improvement, and to explore opportunities to pursue cross-agency solutions, including policies, processes, and leading practices of excellence for broader application.

In support of the President’s Management Agenda, agency implementation of these action items will improve agency management of mission-support functions and mission delivery, identify potential Budget, legislative, or other proposals early to inform the development of the FY 2018 Budget, as appropriate, and inform the FY 2017 FedStat process with a meaningful data-driven decision making process that supports each agency’s mission.

Improving Effectiveness and Efficiency in Financial Operations and Systems

The Administration continues to make significant progress in the effort to minimize the costs and risks associated with agency financial systems modernization.  While in the past the use of shared services was limited to smaller agencies, cabinet-level agencies have begun to realize the benefit of shared service and other similar agreements.. For example, during FY 2015, in the Government’s largest shared service agreement to date, the Department of Housing and Urban Development (HUD) successfully transitioned many of its core financial management functions – as well as select administrative and human resource functions – to Treasury. More recently, the Department of Homeland Security’s Transportation Security Administration and the United States Coast Guard are in the process of migrating to the Department of Interior’s Interior Business Center.

In October 2015, OMB and General Services Administration (GSA) established the Unified Shared Services Management (USSM) office to drive improvement in administrative functions through shared services. In May 2016, OMB issued M-16-11, Improving Administrative Functions Through Shared Services, which established an enterprise-wide shared service strategy for the federal government. The strategic direction of this initiative is set by the Shared Services Governance Board (SSGB) – a cross functional, cross government board of executives charted with adopting a new lens for decision-making that at times may require prioritizing the federal enterprise over the individual agency. Led by the SSGB and USSM, stakeholders from across the Government will work together to manage and oversee mission-support shared services with an initial scope of acquisitions, financial management, human resources, travel and information technology.  The SSGB also pushed to reduce the risk of costly, failed agency IT migrations and modernizations by publishing a playbook of best practices and lessons learned from across Government and aligning investment reviews to the Federal budget process through the Modernization and Migration Management (M3) Framework.

In addition, agencies continue to transition to electronic invoicing for appropriate federal procurements. The FY 2015 OMB Memorandum M-15-19, Improving Government Efficiency and Saving Taxpayer Dollars Through Electronic Invoicing, directed agencies to transition to electronic invoicing by the end of FY 2018. The Government is the largest single purchaser of goods and services in the United States, processing over 19 million invoices each year. The move to electronic invoicing can addresses cash flow issues for businesses, particularly small businesses, while also reducing administrative burden and costs to taxpayers.

Driving Real Property Efficiencies through Better Data and Data Analytics

The federal domestic building inventory is diverse and contains 275,000 buildings requiring approximately $18.7 billion of annual operation and maintenance expenditures, including approximately $7.1 billion of annual lease costs.  Within the inventory, there are opportunities to realize cost savings by utilizing space more efficiently and reducing the portfolio. In 2013, the “Freeze the Footprint” (FTF) Policy (OMB Management Procedures Memorandum 2013-02) was issued, requiring agencies to freeze their real property footprint.  From FY 2013 to FY 2015 when the FTF policy expired, agencies reduced their federal domestic office and warehouse space by 24.7 million square feet.  OMB estimates that the 24.7 million SF reduction will generate $300 million of annual cost avoidance for the government from FY 2016 onwards.  To improve the quality of federal real property data in annual PARs or AFRs, agencies were required to validate and report “Freeze the Footprint” square footage and associated operations and maintenance costs in their 2014 through 2016 financial statements.

In FY 2016, the Government issued the National Strategy for the Efficient Use of Real Property (Strategy) and its companion implementation policy, the Reduce the Footprint (RTF) policy.  The Strategy provides a strategic framework for agencies to measure the efficiency of their real property portfolios to identify and prioritize efficiency actions that reduces portfolio size.  The RTF policy requires agencies to set annual portfolio reduction targets to help implement identified efficiency improvements and to implement an office space design standard to ensure office space is designed for efficiency. Over time, the Strategy and RTF policy will improve utilization of government-owned buildings to reduce reliance on leasing, lower the number of excess and underutilized properties, and improve the cost effectiveness and efficiency of the federal real property portfolio.

For the first time, the RTF policy required that agencies reduce the size of the federal real property portfolios to improve program efficiency, and agencies have developed and finalized their first ever five year RTF reduction Plans to implement the policy. The agencies’ RTF Plans target an aggregate reduction of 61 million square feet (SF) over the Plans’ five year (FY 2016 – FY 2020) implementation time period.  The magnitude of the targeted 61 million square feet reduction indicates the Strategy and RTF policy will be effective tools to improve the efficiency of the Government’s real property portfolio.  Agencies will update their RTF Plans and annual reduction targets in March of each year with the goal of increasing the magnitude of targeted reductions year-over-year as agencies’ ability to fully utilize the policies matures.  The agencies’ final FY 2017 – FY 2021 RTF Plans target 71.8 million SF of reductions during that time period.

To support increased reduction targets, the GSA and OMB have developed a new management tool within the Federal Real Property Profile (FRPP) database that enables agencies to fully analyze their portfolios. The new management tool uses the real property performance metrics developed through the President’s Management Agenda to measure the performance of agencies’ portfolios and thereby enable the identification and prioritization efficiency opportunities. The management tool, combined with the improved FRPP data quality that will result from the implementation of GSA’s technical guidance in FY 2017 that establishes mandatory FRPP data validation and verification requirements, will enhance agencies’ ability to implement data driven decision making to develop their annual RTF reduction targets.  Focusing policy on reducing the portfolio, improving the quality of FRPP data through mandatory data validation and verification procedures, and the broad use of the new FRPP management tool will support higher RTF square foot reduction targets and efficiency gains in future years.

Conclusion

The federal government has seen significant progress in financial management since the passage of the CFO Act more than 20 years ago.  Yet significant challenges remain.  The issues that the federal government faces 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 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 the federal government enters a new era of transparency and open government.


Footnotes

39 The 21 agencies include the Department of Health and Human Services (HHS) and Department of Labor (DOL), which received clean opinions on all statements except the Statements of Social Insurance and the Statements of Changes in Social Insurance, (both of which received a disclaimer of opinion), and the Department of Agriculture (USDA), which received a clean opinion on its balance sheet only.  DOD, HUD, and NSF expect to issue their audited Agency Financial Reports following the release of this Financial Report.(Back to Content)

40 DOD's Commercial Payments were first included in the government-wide rate in FY 2013.  When the DOD commercial payments are excluded from the government-wide figures the FY 2016 improper payment rate is 5.08 percent and the improper payment estimate is $144.3 billion.(Back to Content)

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