	Progress Made and the Key Challenges that Remain in Improving Federal Financial Management Practices

The federal government has made substantial progress in financial  management. Financial management systems and internal control have been  strengthened. Therefore, the Congress passed additional management reform legislation  to improve the general and financial management of the federal  government. The combination of reforms ushered in by these laws, if successfully  implemented, provides a solid foundation to improve the accountability of  government programs and operations as well as to routinely produce  valuable cost and operating performance information. The principal challenges remaining are  (1) transforming financial management and business practices at DOD,   (2) improving financial and performance reporting, (3) modernizing  financial management systems, (4) tackling long-standing internal control  weaknesses, (5) building a financial management workforce for the future,  and (6) strengthening consolidated financial reporting. Fully meeting these  challenges will enable the federal government to provide the world-class  financial management anticipated by the CFO Act and other management  reform legislation. The federal government’s financial condition and fiscal outlook are worse  than many may understand. We are currently experiencing strong  economic growth and yet running large on-budget (operating) deficits that  are largely unrelated to the Global War on Terrorism. The federal government faces large and growing structural deficits in the  future due primarily to known demographic trends and rising health care  costs. If, for example, as shown in figure 2, it is assumed that recent tax  reductions are made permanent and discretionary spending keeps pace  with the growth of our economy, our long-term simulations suggest that by  2040 federal revenues may be adequate to pay little more than interest on  debt held by the public and some Social Security benefits. Neither slowing  the growth in discretionary spending nor allowing the tax provisions,  including the tax cuts enacted in 2001 and 2003, to expire—nor both  together—would eliminate the imbalance.
Why GAO Did This Study

The foundation laid by the Chief Financial Officers Act of 1990 and other management reform legislation provided a much needed statutory basis to improve the accountability of government programs and operations. Such reforms were intended to produce reliable, timely, and useful financial information to help manage day-to- day operations and exercise oversight and promote fiscal stewardship. This testimony, based on GAO's prior work, addresses (1) the progress made and challenges remaining to improve federal financial management practices, and (2) the serious challenges posed by the government's deteriorating long-range fiscal condition and the Comptroller General's views on a possible way forward.

What GAO Found

Since the enactment of key financial management reforms, the federal government has made substantial progress in improving financial management activities and practices. Federal financial systems requirements have been developed, and internal control has been strengthened. Nonetheless, the federal government still has a long way to go to address the six principal challenges to fully realizing strong federal financial management: (1) transforming financial management and business practices at DOD, (2) improving agency financial and performance reporting, (3) modernizing financial management systems, (4) addressing key remaining internal control weaknesses, (5) building a financial management workforce for the future, and (6) strengthening consolidated financial reporting. From a broad financial management perspective, the federal government's financial condition and fiscal outlook are worse than many understand. We are currently experiencing strong economic growth and yet running large on-budget (operating) deficits that are largely unrelated to the Global War on Terrorism. The federal government faces large and growing structural deficits in future years due primarily to known demographic trends and rising health care costs. If it is assumed that recent tax reductions are made permanent and discretionary spending keeps pace with the growth of our economy, GAO's long-term simulations suggest that by 2040, federal revenues may be adequate to pay little more than interest on debt held by the public and some Social Security benefits. Neither slowing the discretionary spending growth nor allowing certain tax provisions to expire--nor both together--would eliminate the imbalance.