Chief financial officers are under enormous pressure to meet new reporting requirements with outdated financial systems.
For years, chief financial officers at federal agencies have been striving to provide the kind of vital performance data expected of their counterparts in the private sector-data that would earn them a seat at the table with other executive decision-makers. But if they haven't already been invited to the table on the merits of the data they can muster, the economic stimulus package passed by Congress in February is giving them a seat by fiat.
Ready or not, the American Recovery and Reinvestment Act is shining a spotlight on fiscal accountability, and CFOs are expected to provide it. The financial reporting requirements codified in the law, coupled with the expectations of lawmakers eager to show results for the debt they're assuming on behalf of taxpayers, is putting enormous pressure on CFOs, many of whom are struggling to replace decades-old finance and accounting systems that are incapable of producing the kind of data now required.
"This is a very different paradigm we're in," says Thomas Cooley, chief financial officer at the National Science Foundation. "The Recovery Act has a lot of political steam behind it, so there's a greater degree of reporting and communication both with the White House and Congress."
Agencies are required to report weekly to the Office of Management and Budget on the status of obligations under the Recovery Act-the amount of money going out the door and where it's going. Members of Congress want to know the same things, only with more granularity: How much money is going to their states, and who are the beneficiaries in which districts? There are to be quarterly reports to Congress, although in some cases congressional staffers have asked agencies to provide that information more frequently. And the money must be tracked separately from regular appropriations, which have different reporting schedules and requirements.
"The big issue with the Recovery Act is quarterly reporting," says Cooley. "There are workload and processing issues that have been standardized for decades [based on annual reporting requirements associated with appropriated funds], and then along comes the Recovery Act, and it says you have to report quarterly and you have to report on a couple of new elements, including jobs created and jobs retained."
The National Science Foundation received $3 billion in funding through the Recovery Act-an amount equal to almost half the agency's annual appropriation. About 90 percent of that money will be distributed to academic institutions and other research entities through the standard grant-making process. In fact, because NSF regularly turns down three-quarters of the more than 40,000 grant applications it receives every year, much of the money will go to worthy proposals heretofore unfunded. By tapping that existing process, the agency expects to be able to obligate funds quickly-a key goal of the law.
"We are estimating that we have a very good shot at getting 80 percent and maybe 90 percent of the Recovery Act funds out the door by September 2009," Cooley says. But the law also requires the agency to establish a couple of new programs, for which it has no precedent, such as a professional science master's degree program. "We've never done that before; we're making that out of whole cloth," he says. That program will take months of planning before the agency can solicit proposals, and then several more months to evaluate those proposals before making awards.
"We're using our standard operating procedures wherever we can. If you can keep the money in your normal processing mode, where you have the controls around the money at the program level and going out the door, then you're not doing anything different and you're not increasing the risk the money might end up going to the wrong person for the wrong reason," Cooley says.
There's no question there are considerable risks inherent in spending billions of dollars quickly, says Jeanette Franzel, managing director for financial management and assurance at the Government Accountability Office. Making grants and letting new contracts is always something of a gamble, and that's how most of the $787 billion in economic stimulus funding will be spent. But the sheer volume represents a risk in itself, she says.
Franzel cites data recently noted by Sen. Claire McCaskill, D-Mo., a former state auditor. "Basically, the folks in Missouri told her that the weatherization program that had received $6.1 million in 2008 would grow to $125 million [with stimulus spending]. That's a huge risk. Not to pick on Missouri or the weatherization program, but that really illustrates the growth in some of these programs."
That expansion is taking place when many states and academic institutions are laying off or furloughing employees, some of whom perform the administrative functions necessary to track the money these states and organizations are spending through Recovery Act grants and contracts. Federal CFOs, who must account for how states and other entities are spending money that flows through their departments, are nervous they won't have the administrative capacity to meet the reporting requirements. "That's a huge concern," says Franzel. "I think every state has mentioned that as an issue. The furlough stories are amazing-you hear where people are coming in to work on their unpaid days because otherwise they can't function on the days when they're paid to be in the office. Even if [the workforce] was stable this would be a strain. It's a huge risk."
In May, OMB issued guidance for recipients of stimulus funds that allows them to charge the federal government for administrative costs associated with meeting reporting requirements-welcome news to a couple of state comptrollers who spoke to Cooley later that week.
To head off potential reporting problems or the misuse of funds, NSF is using a model it developed about five years ago to flag high-risk recipients, such as those who have never before contracted with the government or received a federal grant. Cooley's staff reaches out to them to communicate the rules surrounding the use of federal funds. NSF also conducts what it calls a desk review-soon after funds are obligated officials ask the recipients to provide invoices for items that then can be checked against records on file at the agency, or perhaps request the time and attendance records of graduate students involved in NSF-funded research. If the recipient has trouble providing such things, the agency will send out a team to make a site visit.
"We will sit down with them and go through their policies, records, invoices and the guidance they issue to their people. We develop a written report [that functions as] a guideline for improving their operations," Cooley says.
As challenging as the National Science Foundation is finding the Recovery Act requirements, other agencies face far greater problems. NSF's financial accounting system is completely integrated with its other business systems that track proposals and grant awards, but many agencies are in the midst of multiyear projects to replace legacy finance and accounting systems that were never designed to provide the kind of information now required in tracking regular appropriations, never mind Recovery Act mandates.
Already struggling to balance the books under normal circumstances, agencies are finding the new reporting requirements daunting.
"For the Interior Department it's a significant challenge," says acting CFO Pamela Haze. (In late May, Congress confirmed Rhea Suh as assistant secretary for policy, management and budget, and CFO.) The department is five years into deploying a new integrated business system that will electronically link its administrative functions, including acquisition and financial management. Three of Interior's eight bureaus are on the new system, while the other five and a number of offices, including the office of the secretary, remain on a financial system that is two decades old and so outdated the vendor no longer even supports it.
"At this point, it's very challenging to provide departmental reports that integrate the activities of what all the bureaus are doing," Haze says. "We find ourselves trying to comply with the Recovery Act reporting requirements by trying to balance not having to go in and spend a lot of money on our old system to generate the kind of information we need."
Reporting capabilities differ significantly across Interior's bureaus. Of the three on the new integrated system, only the Bureau of Land Management is handling Recovery Act funds. (Other Recovery Act funds are being managed by the National Park Service and the Bureau of Reclamation, both of which remain on the old financial system.) But BLM has only recently moved to the new system, and employees are still learning how to use it to manage appropriated funds and generate the kinds of reports they need to conduct day-to-day operations.
"For BLM it's really a challenge. It's a very geographically dispersed field organization across the West, and they're very active users of financial information at the field level and the regional level," Haze says. Just as employees are trying to figure out the new system they are being asked to meet a completely new set of requirements in addition to their normal duties.
Like a number of other agencies, states and academic institutions, Interior is struggling to hire personnel with skills in a host of areas, including financial management, auditing and budget functions. The Recovery Act authorized Interior to use up to 5 percent of the stimulus funding for administrative costs, and the department has issued guidance on using that to fill some gaps.
"We're early in the implementation, [where the focus is on acquisition and procurement], but I can see as we get later in the process there's going to be a big pent-up demand for project inspectors, auditors and other skills," Haze says. As with a number of other agencies, the funds Interior received under the Recovery Act-$3 billion-represent a huge infusion of capital. Obligating those funds by September 2010 as required is a major challenge, Haze says. "Normally the lifeline of a construction project from the time you get the money to the time you obligate it is usually a couple of years. Our concern is to get the monies obligated and to do it well."
The accelerated pace of spending leads to some hurdles for the people responsible for ensuring that money is spent wisely-not that agencies are openly complaining about the influx of cash through the Recovery Act. At the General Services Administration, the Public Buildings Service received $4.5 billion to upgrade and repair federal facilities and make them more energy efficient. Officials were thrilled to be able to tackle the long-standing backlog of unfunded maintenance and other projects. But the new money represents a 500 percent increase in spending, something that has required the organization to establish a new office and staff to handle the growth.
"The funds will be obligated through the normal process," says Kathleen Turco, the General Services Administration's CFO. Funds are obligated through the buildings service's contracting system and GSA's overarching financial system will track them.
"We have a robust financial system, so when people get the data in we can report out our expenditures and outlays. From just the pure mechanical side, we're in good shape," she says.
But Turco's office had to create a process for handling other funds received under the Recovery Act-such as $300 million to upgrade the federal fleet with more energy-efficient vehicles. Because the Federal Acquisition Service, the GSA entity charged with spending that money, operates as a revolving fund and doesn't normally receive appropriated funds as it did under the Recovery Act, her staff developed a system to manage that money independently of the acquisition service's normal operations.
While Turco's office has been able to handle the increased workload thus far, she anticipates a need to hire more accounting staff once the contracts are under way. The buildings service expects to obligate $1 billion in new contracts under the Recovery Act by August, and another $1 billion by December, followed by another $2 billion by the end of March 2010.
"The biggest challenge is the whole setup on top of our normal day-to-day operations [and also] the large volume of data we have to manage," she says.
Meeting the new requirements coincides with ongoing efforts to address a material weakness and a significant deficiency uncovered in audits of the agency's financial statements. At issue is how GSA's various computer systems talk to each other and how user access is controlled. Auditors also questioned the way GSA's financial management system interfaces with other business systems and the strength of internal and reporting controls. While Turco's staff works to address these problems, the agency also is upgrading its financial system to improve invoice tracking and billing.
"Whenever you bring on a new module on a financial system it is high risk in terms of the data input, maintaining the data, reporting the data and keeping the opinion clean," Turco says.
OMB has worked to standardize requirements for all federal finance and accounting systems. Ultimately, this will give both agencies and vendors a clear guideline for meeting requirements. By 2012, all agencies are to be compliant with the new standards. In the meantime, getting there "is a big haul," says Turco. "It's what keeps me up at night-the financial systems."