The AGA Weblog

Update from the PMC's Final Day

The final day of AGA’s Fifth Annual Performance Management Conference opened Friday with a lively panel discussion on the relationship between chief information officers and chief executive officers, and how the partnership can drive innovation in government.

The panelists, who brought various perspectives to the issue of performance management, were Bajinder Paul, chief information officer of the U.S. Office of the Comptroller of the Currency, PK Agarwal, chief technology office for the state of California’s Department of Technology Services, and Rohit Verma, chief financial officer and head of strategy, Zurich North America.

The panelists talked about using information technology as a transformational force to improve government services. However, many organizations are spending too much time gathering data, or correcting data they receive, than analyzing the information.

Verma said deriving insights from data is “the next frontier.” Paul said 8,000 banks report data to his office quarterly. Prior to establishing standards for data collection, including XBRL, his financial examiners were spending 80 percent of their time validating the accuracy of the information. By the time the problems were resolved, the information was stale. Now, he said, they spend only about 20 percent of their time validating the information. “This is a real tangible example in the regulatory environment.”

The panelists were also asked to address those who work in organizations that have not achieved the kinds of successes being discussed. Where should they begin to make big changes?

Paul said, “It’s really about building trust and achieving a level of confidence.” He said he has a strong relationship with his chief financial officer, which was built over time by learning about his perspective on the agency. Agarwal said two things need to happen first: a clear sense of business goals and an understanding of how to measure success. He added that keeping the goals simple is important. He recalled discussing performance management with a pilot while he was on a flight. The pilot said his metrics are very simple: “Make sure the number of takeoffs match the number of landings.” 

Jonathan Walters, Governing magazine reporter and a local government official, gave attendees of  AGA’s Performance Management Conference tips on how to communicate effectively with the media.

He encouraged attendees to develop a media strategy. Think about what you’d like to accomplish: For example, is it moving a particular agenda, selling an idea or getting publicity for a key player in government? He told them that it’s part of their jobs to do some homework about which media outlets to target, and the most appropriate reporters and editors to contact. If you do that homework, he said, you can target your message.

“Do not run away from reporters,” he said. “Seek them out.” In fact, he went so far as to say that government officials should be the ones to tell reporters about negative stories. Walters, who is chairman of the planning board in Ghent, NY, and a volunteer firefighter there, said he told the local newspaper reporter that the planning board was being sued for approving a gravel mine in his rural community. Why? “It allowed me to get my side of the story out first.”

He said he had made regular, informed and direct contact with the reporter, who had become a friend. No story involving the planning board appeared in the paper without Walters knowing about it beforehand. When it comes to bad news, he said, “Break it yourself. Don’t wait for them to dig it up.”

Walters urged the government officials to allow all their employees to talk to the media. He said government officials should resist the temptation to control what is said about their agency. If you trust employees to work for you, you should trust them to talk to the press, he said.

He also encouraged government officials to avoid jargon and acronyms and to apply what he calls the “explaining it to mom” rule. Government officials should tell a story.

“You’ll have a shot at shaping the news.”

—Christina M. Camara

AGA's Performance Management Conference Under Way in Seattle

AGA’s Fifth Annual Performance Management Conference kicked off in Seattle Thursday with a discussion about successful performance management efforts in the state of Washington, which has been recognized by Governing magazine as one of the best-managed states in the nation.

Robin Arnold-Williams, director of the state’s Executive Policy Office, gave specific examples of how Gov. Christine Gregoire has pushed performance measurement and management as a way to improve services, dramatically in some cases, for Washington residents.

One graphic example was the improvement in services to at-risk children in Washington state. Arnold-Williams said Gregoire told her that the state in some cases took 10 days to respond to reports of abuse while pointing to a file that contained information on a child who died on the ninth day. “Talk about having an urgency for action,” Arnold-Williams said. With the conviction that the state had to improve its response rate, state officials set to work. The response goal was changed from 10 days to 24 hours in 2005. “We said to staff, this is a priority, and the staff said, ‘thank you.’ ”Arnold-Williams said.

While getting to the scene of reported abuse quickly was critically important, “you can’t just stop with measuring.” Maybe Child Protective Services personnel got there in time, but did they do the right things while there? The “ultimate outcome” was to prevent children from being victimized again, she said. Arnold-Williams showed a graph that illustrated the dramatic decline in the number of children who had been re-victimized in a six-month period after the first report of abuse.

“For me, this is closing the loop and connecting the dots all the way through,” she said. From there, the legislature and the governor supported an infusion of resources that paid for 400 more case workers, reducing case loads from roughly 24 clients to 15.

Arnold-Williams pointed out that success can be difficult to quantify. She pointed out that enrollment in Washington’s community college and technical institutions increased tremendously during the economic downturn, but how do you define success in worker retraining programs? Is it simply the number of enrollees in the program? Is it the number of certificates and degrees? If the program isn’t completed, is that a failure? What if a student left the program because he or she got a job? Was that a good use of state resources?  These are the kinds of questions that should be asked to determine how to define success for various programs,

One clear success was in the Department of Licensing, where budget shortfalls forced the state to close 11 under-utilized offices. Despite the closures, the state was able to decrease wait times by 30 percent, from 34 minutes to 25 minutes, by increasing hours at some of the remaining offices, adding self-service kiosks and other measures.

Keeping the momentum of performance measurement during an economic downturn is a challenge, she said, but added, “We do need the courage to act with the path is not clear.”

The second keynote speaker, Shelley H. Metzenbaum, Ph.D., associate director of Performance and Personnel Management, U.S. Office of Management and Budget, shared lessons of performance lessons from local, state and federal governments.

The bottom line, she said, is performance management can work remarkably well. She emphasized the word ‘can,’ and added that it is one of the most powerful tools to drive dramatic performance in government while strengthening citizen involvement in the democratic process. The key, she said, is to make sure government performance is focused on outcomes, rather than measuring the outputs of government as a compliance exercise.

People in government need to discuss the stories the data reveals, or the cost of measuring performance can swamp the progress, she said.

Some key lessons she’s learned is that performance measurements must be used to be meaningful, the connection between outputs and outcomes should be clear, analysis should be ongoing, inquiries should be interactive and the measures should be as simple as possible. She suggested, for example, that governments think about “bad things you want to slow, and good things you want to grow.”

Crime rates can be driven down, smoking can be decreased, recycling rates can be increased and river cleanups can show measureable improvements using performance management techniques, she said. In two decades in the field, Mezenbaum said progress can feel slow at times, “but it’s a whole lot better than it used to be.” —By: Christina M. Camara

Challenges in Government Securities

By: Anthony Rainey

Anthony Rainey is treasurer and CFO of Hyattsville, MD.

GOVERNMENT SECURITIES—Governmental securities are debt obligations issued by states, cities, counties, and other governmental entities to raise money to build schools, highways, hospitals and sewer systems, as well as many other projects for the public good. Municipal securities are the most important way that U.S. state and local governments borrow money to finance their capital investment and cash flow needs. An important distinguishing characteristic of the municipal securities market is the exemption of interest on most municipal bonds from federal income taxes. The implicit subsidy provided by the federal government permits municipal issuers to compete effectively for capital in the domestic securities market. There is currently in excess of $2.67 trillion in outstanding municipal debt. One of the requirements of the past was for a government to obtain a credit rating.

CREDIT RATINGS—In its simplest sense, a credit rating is an independent opinion by specialist on the chances that a government borrower will repay its debt as promised—on time, in full. It is an opinion based on an assessment of a government’s creditworthiness, which is the likelihood of making repayment, or conversely the risk of default, on a debt. The credit opinion, summarized in the form of a rating, is prepared by someone who understands the operations and environment of the government—a suitably qualified rating agency that investors will trust. It enables potential investors to decide whether to invest in the government’s issuance of debts, based on the level of risk they are willing to take and the likely reward associated with that risk.

Each credit rating indicated to the government  considering borrowing the rate of return it would need to offer to an investor, in the light of the level of risk assessed by the rating agency. There is a range of ratings – from very secure through to very risky—and the higher the rating the lower the interest rate a borrower would need to pay to attract an investment. Ratings could have many gradations, but rating scales typically had a break-point above which the ratings were classed as “investment grade.” This was for the benefit of those who only wanted relatively risk-free investments, such as pension fund administrators. However, some investors weree interested in borrowers below investment grade (normally known as “speculative”), since they may have wished to include a higher return (but higher risk) investment within their portfolio (that is, their collection of investments with a spread or mix of risk/return opportunities).

In the past issuers that met certain credit criteria could purchase bond insurance policies from private companies. Insurance guaranteed the payment of principal and interest on a bond issue if the issuer defaulted. Bond ratings were based upon the credit of the insurer rather than on the underlying credit of the issuer. The bond insurance mechanism began in 1971. Since then, the number of insured issues  expanded exponentially from only 3 percent of bond issues in 1980. Moody’s Standard & Poor’s Fitch IBCA Duff & Phelps Interpretation

 

The credibility of credit rating agencies has been questioned (a result of how they rated subprime mortgage securities), municipal  bond issuers have taken them to task for upholding them to a higher standard than corporate issuers, although they are less likely to default. Higher ratings mean less bond issuance costs, with the municipal bond insurer avenue to the same goal being affected by the credibility question as well in the credit crunch era of today. Some have noted that the crisis with the quality of credit ratings is rooted in the change in the incentive structure within the rating agencies. During the early 1970s, it was pointed out that the credit rating agencies abandoned their long-held practice of charging investors for subscriptions, and instead began charging issuers for ratings based upon the size of the issue. The failure of the rating agencies to keep abreast of market reality has been blamed by some commentators on the fact that this created a conflict of interest and a bias in favor of issuers over investors. Ironically, the old payment model also produced a similar result in 1929.

An important feature of ratings was that they helped investors maintain a diverse portfolio without in-depth knowledge of each of their holdings because the rating agency maintained surveillance over individual borrowers. Thus, the rating agency helped “pool” market knowledge, which made tracking of a large number of investments much easier and less expensive.

While the historic risk involved in municipal bond investment has been negligible (the municipal default rate is about 20 times lower than investment grade securities in the corporate sector), local governments that issued municipal bonds often choose to purchase "bond insurance"  to enhance the security of the bond to bond purchasers and because of the exceptional ratings of bond insurers lower their borrowing costs. For example, a bond that was insured would have a higher credit rating than a non-insured bond. The higher credit rating (AAA for example) enabled local governments to pay a lower interest rate on the bonds when they are sold.

Q1. Do you know what the credit ratings are for the state and municipality that you reside?

Q2. Do you think that the financial bubbles of past and present times led the rating agencies to become lax in their vigilance when they should have been extra vigilant in their scrutiny?

Q3. Should rating agencies for state and municipal debt issues be regulated?

BOND INSURANCE—While the purchase of bond insurance by local governments has been a routine practice to lower the cost of borrowing and fund critical local projects, this practice has been severely impacted by the subprime mortgage crisis. Nearly all of the bond insurance companies that local governments relied on to provide highly rated insurance are the same institutions that also guaranteed the payments on securities backed by subprime loans. As a result those insurance companies have seen a downgrading of their investment rating or have ceased business operations entirely. Thus, the benefits of insurers' bond insurance are lost and the cost of borrowing for local governments utilizing bond financing increases. Further, with few highly rated insurance providers available, local governments, who are already facing severe budget constraints and fewer investors in the marketplace, must now assume increased borrowing costs.

SOLUTIONS 

A. One solution is for the U.S. Department of Treasury to act as a temporary guarantor of municipal bonds exercising authority granted to Treasury under the Emergency Economic Stabilization Act of 2008 (P.L. 110-343)

B. Another solution is the creation of a mutual guarantor for municipal bonds. The new entity could insure new, fixed-rate securities covering general obligation bonds and revenue bonds issued by cities, ccounties and school districts and revenue bonds sold to finance essential governmental services such as water and sewer facilities. Such a voluntary, national mutual insurance company owned and operated by local governments would have many advantages. It would be mission-driven rather than profit-motivated with the objective of minimizing borrowing costs paid by its members. Federal capital support would be needed to establish such a guarantor.

C. Another solution is to provide bond security in place of highly rated bond insurance is a letter of credit (LOC). Under this arrangement, a bank providing a LOC lends its own credit rating to the bond issuer. However there is only one bank (Union Bank of California) that will extend a LOC and they will only provide such a letter to cities and counties with a Moody's Investment Grade rating  or better. However this would mean that a number of local governments—in many instances those with the greatest need for bond financing assistance—would not be extended support. In addition, costs will be higher for those cities and counties that are able to participate, as the cost of obtaining a LOC versus securing bond insurance is higher.

Q4. How should we resolve these issues?

Whether you are a municipal, state or federal government employee, the answers to these questions will affect you.

The Dance of Dominos

By: Sunil Datt, MS, MBA, MA, CGFM, PMP

Sunil Datt, MS, MBA, MA, CGFM, PMP, is Senior Managing Consultant, IBM Global Business Services.

When Mervyn King, Governor of the Bank of England, recently said: “Break up the banks,” I was inclined to hand him the hatchet; and set up a small business distributing hatchets to Ben Bernanke (chairman of the Federal Reserve) and other central bank chiefs around the globe. Since my writing about inattention to systemic risk in this weblog exactly 10 months ago, much noise and little action has taken place for addressing the issue (you see, secretly I was hoping that all central bank governors read this weblog). And more noise there was, as Alistair Darling, the Chancellor, opined with a stiff upper lip that “the situation was more complex” than what the Governor suggested, and his solution was “not right for the 21^st century.” That last comment, of course, referring to the separation of banking from trading activities via the Glass-Steagall Act after the Great Depression. I was inclined to cheer for Darling’s modernist outlook, but then I realized that it is the practice to chose one side and cheer for it irrespective, as a ball is being kicked around, in the great British sport of soccer! But I digress; back to King’s argument.

Says King: “There are only two ways in which the problem can—in logic—be solved. One is to accept that some institutions are ‘too important to fail’ and try to ensure that the probability of those institutions failing, and hence of the need for taxpayer support, is extremely low. The other is to find a way that institutions can fail without imposing unacceptable costs on the rest of society. Any solution must fall into one of those two categories.”

His arguments against the first approach are convincing, and I will come to those. So logically, says he, we should let certain institutions fail, and his approach is to divide the large banks into the ‘utility’ bank and the ‘casino’ bank. The utility bank effectively provides for payments, deposits and loans; the casino bank undertakes some of the riskier financial activities such as proprietary trading. As we have a common interest in ensuring continuity of utility services, those banks can be considered too important to fail. The casino banks, on the other hand, can bear the consequences of their own actions. “The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion."

One method under the first approach, says King, is of course higher capital requirements. But these reduce, not eliminate, the need for taxpayers to provide catastrophe insurance. Also, the “riskiness” of a bank’s activities and the liquidity of its funding can change suddenly and radically as market expectations shift. This means that what appeared to be an adequate capital or liquidity cushion one day appears wholly inadequate the next. “Indeed, the Achilles heel of the Basel regime is the assumption that there is a constant capital ratio which delivers the desired degree of stability of the banking system.”

The second method under the first approach would be to require banks to take out insurance in the form of ‘contingent capital’, that is capital in a form that automatically converts to common equity upon the trigger of a threshold that kicks in before a bank becomes insolvent. This is different from subordinated debt, which banks have been permitted to count as capital under the Basel regime, but which do not provide a reliable capital buffer until too late—after the bank has failed. 

I think the insufficiency of Basel-type requirements by themselves containing contagion is by now widely accepted. The problem is that King’s proposal for the ‘utility bank’ and the ‘casino bank’ is fairly arbitrary too. Take for example, mortgages. If the utility bank originates the mortgage, and the casino bank buys the mortgage to develop and trade structured products (mortgage backed securities), what prevents the utility bank from generating ‘weak’ mortgages exactly as it happened recently, and the same problem starts all over again. 

The real issue is the interconnectedness and the tight integration of global financial markets in today’s world. The dominos don’t stand individually and get knocked down one by one. They hold hands and dance together. And they infect each other virally. From that perspective, ‘smart’ regulation lies in a combination of better reporting requirements from all major financial players, highly automated processing of submitted data,, and sharp quick analysis to detect seeds of systemic risk. Stress testing all new financial instruments would be part of such a regime. Of course, the devil is in the detail, and a weblog is no place for that. So suffice to say, bury the hatchet King, there still is work to be done!

 

 

As a Citizen...

By: Rebekah Stevens

Rebekah Stevens is Strategic Management Coordinator, Metropolitan Government of Nashville and Davidson County.

For this month’s blog I write, not as part of the Strategic Management Team for the Metropolitan Government of Nashville and Davidson County, not even as an employee of the city of Nashville in general, but as a citizen. I write as someone who invests in the future of my neighborhood, my city, my state and my county. For that reason, I want to see results. I want clear, concrete proof that the dollars that are spent, my tax dollars, are being put to good use.

Isn’t that what we all want, not as employees of local or state governments, not as managers or front-line staff, but as citizens of the city, state or country in which we live? By being a public servant, aren’t we investing in ourselves?

What information do we, as citizens, want to see from our government? 

Do we want to know if the water that we drink is safe? Do we want to know that the air that we breathe is clean? Do we want to know how safe our streets, our blocks, and our neighborhoods are? Of course we do, and so do our neighbors.

However, we are not just citizens, we are public servants. We can use our unique perspective as we think about ways to engage the citizens, our neighbors and friends, in discussions about government performance. By being able to “see both sides of the coin” we have the advantage of not only producing results that are important to citizens, but also being able to share them with the public. Whether it is speaking at community meetings, posting performance information on the Internet or mailing information to residents, we should keep in mind the following questions:

• Is this information that I would want to receive?
• Is this information going to inform my opinion about government performance?
• How can I, as a citizen, use this information to make a difference?

These are the same questions that are asked by citizens across the country. As we communicate to the citizens of our community the successes and challenges of our city, I wonder how often we stop to recognize that we are also communicating these same results to ourselves.

Think Big! Act Courageously! Make a Difference! Performance Management is Key!

By: William A. Morehead, Ph.D., CGFM, CPA, Chair of Accountancy, CIS & Finance, Delta State University; AGA National President, AGA Past National Treasurer and Member, AGA National Executive Committee

AGA’s Fifth Annual Performance Management Conference is coming up in less than three weeks in Seattle. We gather to highlight the advances and best practices occurring in governments around the country as they measure their performance, and, most importantly, manage themselves based upon that data. There's still time to register. 

Throughout the 25 years I have served the citizens of Mississippi through government financial management in state agencies and academia, I have witnessed both effective and ineffective performance management systems. As a leader, one thing I have always sought to do was find ways to encourage those who have been part of my work team. This has not always been easy when resources were scarce. 

During the last nine years of my career, I have served at Delta State University in Cleveland, MS, and I have followed my AGA presidential theme and goal of “Think Big! Act Courageously! Make a Difference!” Delta State has been an organization that “thinks big” and has set lofty goals for progress during the time I have been at the university. Doing so has required bold action, and sometimes, significant risk. It was necessary to “act courageously” to bring about meaningful change. Looking back over the past nine years, I truly can see where we have “made a difference.” The journey has not always been easy, but it has been rewarding—especially when the lives of our students, faculty and staff have been positively affected.

A performance management system is only as effective as the organization’s ability and willingness to collect data, effectively measure it and make improvements based upon the knowledge gained. It is our responsibility as leaders to establish realistic strategic goals that stretch our organizations. Leaders must ensure the goals are effectively communicated to all staff so they become engaged in the process. These goals must be measurable and clearly linked to the organization’s mission, strategies and budget. The performance results not only need to be measurable, they must be evaluated on a regular basis; and, we leaders must use the feedback to make meaningful change and improve strategic planning when performance gaps are revealed.

When we set out to affect change at Delta State based upon previous and subsequent performance, we began our efforts by examining our short-and long-term strategies, our mission and our vision. We had to ensure our goals and objectives were directed to improve our university. We did so by focusing our efforts on performance management, both measuring our efforts and subsequently making decisions from our data. 

One key issue, if not the most important issue, in any performance management system is “people.” It is the people of the organization who must embrace the change necessary to make the performance management system successful. Often, these same people must be educated regarding the issues, goals, strategies and processes that make the organization “tick." And, it is these people who cause the change to occur or prevent it from succeeding.

Like many organizations, we discovered an absence of an “attitude of change” at Delta State as we began to examine processes. Unfortunately, one of the main issues we faced was that processes and procedures had been passed down from one employee to another without any question of “why do we do this?” Many folks would say, “we’ve never done it that way before” or “it works okay now, why do we need to change anything?”  Many of these statements stemmed from the uncertainty of the outcome of examining processes. Fears of losing positions or not being needed by the organization fueled the uncertainty and resistance.

We tackled many performance management projects during my tenure as vice president for Finance and Administration at Delta State, and I have written about them in the upcoming book on leadership and performance management being released by Oracle at the PMC in Seattle. As I highlight these projects, I note the common factor in each performance management project tackled by the university has been its people. Improving processes required extensive collaboration among many stakeholders. While not always easy, quick or painless, it is and has been very rewarding to be a part of continuously improving our university. It is exciting to watch staff grow through these process renovations and become a team affecting positive performance management. I challenge you to do the same in your organizations.

Performance management is all about people and it involves change.

All along the way, AGA has been there helping me to, “Think Big! Act Courageously! and Make a Difference!”

Just Say No to Day-to-Day Transaction Processing

By: Jeffrey C. Steinhoff, CGFM, CPA, CFE

Jeff Steinhoff is a Past AGA National President and the Executive Director of the KPMG Government Institute.

AGA’s 2008 CFO survey[1] showed that federal finance organizations feel they face steeper compliance requirements with smaller rewards; whereby mission priorities get a back seat to compliance. They feel they are pushed into a chief accountant role as opposed to an executive leadership role. They expressed a desire to spend more time on strategic decision-making activities and less time on day-to-day transaction processing activities.  

High-performing finance organizations effectively manage and reduce the time they spend on routine transaction processing. But what does this mean in real-life terms? The Government Accountability Office (GAO) found that leading finance organizations try to spend no more than 20 percent of their time on routine transaction processing.[2]

Research by the KPMG Government Institute[3] found that the finance work force that supports the transaction processing needs of today may not be well-positioned to support the analytical needs of tomorrow. It is expected that finance organizations of the future will have fewer people, with a much greater percentage of financial analysts than accounting technicians involved with routine transaction processing. To reduce the cost of finance operations and better support agency program objectives, a leading finance organization manages the cost of performing routine transaction processing and accounting activities. It does this through a variety of means such as:

• Moving to shared services centers
• Outsourcing to transaction processors
• Consolidating, streamlining, and/or reengineering existing transaction processing
• Standardizing transactions and adopting common transaction processes
• Using technology 

Leading finance organizations understand the need to establish the right balance and smartly carry out routine finance operations, especially transaction processing. They have a baseline of where they are and what they want to achieve. This is not conceptually difficult; but implementation and sustainability can be challenging. The 2008 AGA survey clearly showed that federal CFOs were not satisfied with the status quo.

There are some things you can do that KPMG’s research shows are a staple of high performing finance organizations.

Think about it in terms of the following questions:

Does your finance organization have a formal goal and an action plan to reduce the time spent on routine transaction processing so that it can instead focus its resources on strategic support activities, such as financial analysis and managerial cost accounting?

Does your finance organization know what percentage of its resources is spent on each of its major activities, such as routine transaction processing, financial analysis, and strategic and operational planning as a baseline that is periodically updated?

Is the finance organization generally in line with the GAO finding that high-performing finance organizations typically spend no more than 20 percent (and hopefully less given significant technological advances since the GAO study) of their time on routine transaction processing and other routine finance activities?

Has the finance organization compared itself against other organizations to identify leading practices and opportunities to reduce routine transaction processing?

Does the finance organization continually explore opportunities to outsource and take advantage of emerging leading practices and advancements in technology?

Is transaction processing standardized, which entails having common accounting codes and common accounting processes?

Is it recognized that financial and other information needed for transaction processing can come from program systems and other information systems outside of the purview of the finance organization, which also need to be in sync with the common accounting codes and common accounting processes?

Has reengineering taken place to eliminate inefficient processes, consolidate transaction processing activities not outsourced and streamline operations?

Is technology fully leveraged in transaction processing, such as the through the use of electronic commerce, data warehousing, document imaging and other transaction processing techniques?

My questions to you:

• Has your agency’s finance organization implemented the leading practices highlighted in this essay to reduce the cost of routine transaction processing activities?
• If so, what has been the result? Has the finance organization been successful in reducing the cost of routine transaction processing? What practices have had the greatest positive impact on reducing costs? What practices have had the least impact on reducing costs?
• What are the areas that continue to present the greatest challenge to the finance organization in reducing the cost of routine transaction processing?
• What other ideas do you have for reducing routine transaction processing activities so that CFOs can focus more attention on strategic decision-making activities as called for in the AGA’s 2008 CFO survey?

The views in this essay are those of the author only, and do not necessarily represent the views or professional advice of KPMG LLP.

---

[1] Association of Government Accountants’ Annual CFO Survey, Financial Management—Providing a Foundation for Transition, July 2008

[2] GAO Executive Guide: Creating Value Through World-Class Financial Management (AIMD-00-134),

April 1, 2000

[3] The KPMG Executive Guide to High Performance in Federal Financial Management, 2009

Improving Accountability and Oversight in the Grants Process

By: Andrew Lewis, CGFM, CPA

Andrew Lewis is a senior manager with KPMG LLP’s government audit practice and a Fellow of the KPMG Government Institute. In addition, Andrew is president-elect of the Montgomery/Prince George’s Counties Chapter, and is an adjunct professor in the Masters of Accountancy program at The George Washington University.

In the FY 2010 President’s Budget, the administration has proposed spending over $652 billion in mandatory, block and discretionary grants to state and local governments, in addition to tens of billions of discretionary grants to private organizations and individuals for research, development, education and other programs. Without question, grant activity within the federal government has grown by leaps and bounds over the past 50 years. For example, consider the growth in federal grants to state and local governments.

Source: OMB, President’s FY 2010 Budget, Analytical Perspectives, Table 8-2. Trends in Federal Grants to State and Local Governments

Put another way, federal grants to state and local governments have grown fivefold in the past 20 years and twofold in the past 10 years. This certainly begs the question: “Is the federal government’s accountability community doing enough monitoring of these grant programs?”

In my experience, the oversight of grants includes three key phases or stages:

• Grant formulation and award—For discretionary grants, the federal agency’s grant officers, similar to a contracting officer, spends a considerable amount of time reviewing grant applications and determining whether the grantee’s idea meets the objectives of the overall grant program. These grant officers typically use a checklist to evaluate the grant applications, and ensure the necessary approvals from within the federal agency are in place before the grant is awarded. For formula and block grants, there is less involvement by the federal agency’s personnel since the formula or block grant award is determined by policy or legislative direction.
• Grant execution—For all types of grants, the federal agency personnel are responsible for evaluating payments to the grantee, and to review periodic reporting by the grantee on progress in meeting the requirements of the grant.  Federal agency personnel might monitor their grants through direct contact with the grantee, review of quarterly grant execution reports filed by the grantee with the federal agency, and/or review of the grantee’s Single Audit results.
• Grant closeout—Similar to a federal contract, steps must be taken to evaluate the grant after its execution to document the results achieved through the grant and to ensure that necessary documentation is gathered and reviewed by the federal agency. These closeout procedures may involve a physical visit to the grantee and inspection of the grant’s accomplishments, a retrospective review of payments made to the grantee over the life of the grant, a review of any undisbursed funds remaining on the grant award, and/or information from a third party (such as the Defense Contract Audit Agency or the state auditor) on cost models used by the grantee to determine eligible reimbursement amounts to the state or organization.

Often I’ve found that federal agencies dedicate most of their resources on the grant formulation and award and closeout phases, primarily due to the administrative burdens to award and close a grant, and far fewer of their resources on the grant execution phase. Although significant issues may be found during the grant closeout phase that might’ve been detected during the grant execution phase, typically these observations by the federal agency during the grant closeout phase are performed too late for any significant change to be made to what the grantee accomplished (or didn’t accomplish) through the use of the grant funds. 

Understanding that agencies face limited resources, I’ve found that a risk-based model is one of the most important tools an agency can employ in deciding which grantees to monitor closely during the grant execution phase. A risk-based model could evaluate such factors as past practice with the federal agency, how much experience the grantee has with the grant program, turnover by grantee personnel, and size and amount of grant awards.

Questions for Discussion:  What have you seen in terms of accountability and oversight of the federal grants process? Do you think improvements are needed? Have you seen a successful risk-based grant monitoring program? 

KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International. KPMG International’s member firms have 137,000 professionals, including more than 7,600 partners, in 144 countries.

This essay represents the views of the author only, and does not represent the views or professional advice of KPMG LLP. 

Five Big Trends That Are Affecting the Way Government Works

By: Jon Desenberg

Jon Desenberg is the policy director of The Performance Institute.

It’s a pleasure to be back and blogging for AGA. Rather than talking about one particular theme or issue this time around, I decided to go with everyone's increasingly short attention spans and time constraints and just briefly mention five trends that I'm seeing here in Washington this fall.

Government 2.0—A few years back it would have been hard to imagine Google opening a big office on New York Avenue in the heart of D.C., completely decked out with foosball tables, cappuccino machines and all the trappings of Silicon Valley. It would have been harder still to imagine the room full of government types who were not just keeping up with the Google people, but actually wow-ing them with new ideas on social networking and cloud computing. Yet, late this summer, there it was, FDA was talking about a virtual widget they created and then gave to thousands of websites, local governments were talking about their pioneering use of social networking for crime reporting. The true “father of the Internet” Vint Cerf was on hand to discuss his take on government and interactive networking. I found the work of Rita King in international affairs to be particularly innovative and fascinating; she is using virtual reality to discover the realities of the Muslim world, amazing work that has been awarded a 2.0 prize. Her main concepts have begun to be discussed in the State Department in just the last few weeks.

Program Evaluation Reborn—For many years those of us working in strategic planning and performance management were uneasy about the absence of an emphasis on truly rigorous program evaluation. The Government Performance and Results Act actually called for regular evaluation, as did the Bush Administration’s Program Assessment Rating Tool. Yet for years it languished, even as planning and measurement were greatly improved and ramped up throughout government. What was the sense of planning and measuring if the impact of the program was never understood? It was a mystery and something that we at the Performance Institute regularly worked on with federal, state and local government. Finally in the last couple weeks, we’ve seen a major policy announcement by Federal Budget Director Peter Orzag. By the way, Mr. Orzag was recently rated the fifth most powerful person in Washington, so this is a major shift. I had a chance to comment more fully on the new policy announcement last week on Federal News Radio.

R.I.P National Security Personnel System (NSPS)—Even if you don’t work for the Department of Defense (DoD), the congressional decision this month to end the controversial DoD pay for performance system will impact everyone who works for a government organization. Tying pay to performance is difficult and angers many people, particularly those who don’t feel they are getting fair treatment. Yet what is the alternative? Pay increases for every year of work? Increases for everyone, regardless of what was actually accomplished and by whom? What are we saying about our government and to the bright and innovative people we need to recruit if we stick with such outdated systems? More specifically, what was the return on all of our taxpayer money for the millions and millions of dollars spent training and converting tens of thousands of employees to NSPS, only to see it scrapped. Was this the change our country voted for last November?

The Quadrennial Review Boom—For years, the Department of Defense engaged in something called the QDR, or Quadrennial Defense Review, to assess the threats and challenges the nation faces and re-balance DoD's strategies, capabilities and forces to address those changes in four-year increments. This effort seemed particularly well-suited to the long-range planning needs of the massive DoD effort and complemented more traditional strategic planning exercises, and was tightly tied to budget. The whole effort must have sounded intriguing to other organizations, because today we are in the midst of a quadrennial review boom, with players ranging from the State Department to the Department of Homeland Security getting in on the act. It seems very logical; but do we need another layer on top of the mountain of plans and measures already in place? Aren’t the legally required strategic plans supposed to be three- to five-year plans? Why another plan? The result is more planning sessions and documents left to gather dust on the top of an already big pile. The QDR worked well at DoD for specific reasons, the jury is still out on its rapid spread elsewhere.

The Performance Improvement Council—We have many inter-agency councils, from CFO to CHCO to CIO and more, yet the newest council has been ramping up in the last few months and it’s a welcome addition. President Obama could have eliminated the Performance Improvement Council (PIC), after all it was founded under an executive order of President Bush. Yet, he put politics aside and both Budget Director Orzag and Chief Performance Officer Zients are emphasizing the importance of bringing agencies together to develop cross-programmatic measures, understand best practices and uncover which program strategies work and which don’t. This is some of the most unheralded work in Washington and importantly shows that performance management is a bi-partisan, long-term effort. The Performance Institute applauds the work of OMB and the PIC and look forward to more results in the months ahead.

 

Performance Reporting/Management Guidance: One Skeptic’s Views

By Kenneth A. Smith, Ph.D., CPA

Kenneth A. Smith, Ph.D., CPA, is a founding member of AGA’s Mid-Willamette Valley Chapter, a founding member of the Oregon Public Performance Measurement Association (OPPMA.org), and an assistant professor of accounting and information science at Willamette University.

Performance measurement and external performance reporting have been hot topics for the past 20 years. Today I’ll discuss recent proposals by three organizations:

• Governmental Accounting Standards Board's (GASB) “suggested voluntary” guidelines
• Government Finance Officers Association (GFOA)/National Performance Management Advisory Commission’s (NPMAC) “Performance Management” framework
• AGA’s Citizen-Centric reporting

The framework for my comments is skepticism—like many accountants, I am a skeptic. I doubt the numbers that people report along with the words or stories they tell. It’s not that I can’t or don’t trust—it’s that I trust most people are surrounded by intense pressures and that some people succumb to these pressures. Both history and personal experiences reinforce my skepticism. The professional standards tell me my skepticism is a good character trait, while my wife, my students and several social acquaintances often tell me otherwise. 

It is with increasing skepticism that I approach the topic of performance measurement and those who set standards or provide guidance on reporting and management. Two questions continue to haunt me:

A)   Can we create a set of performance reports that allow comparisons of different governments?

B)   What is the proper role of accountants in preparing and providing assurance on these reports?

My gut has always told me the answer to “A” is YES. Back in the late 1980s the GASB enlisted over 30 scholars and practitioners to research the state of the art. It concluded with a series of reports on 12 service areas that “Its time has come” for external reporting. These reports included what could form templates for such reporting. I’ve watched and researched the actual reporting behavior of cities and states over the past 20 years, and relatively few local governments externally share high-quality reports under the current voluntary scheme. The skeptic in me says the quantity and quality of reporting will not improve without a substantial change in the incentives faced by preparers. Professional guidance can change those incentives, so let’s look at what is new.

The GASB recently issued its second draft of “Suggested Guidelines for Voluntary Reporting SEA Performance Information” with comments due Oct. 30, 2009. I believe this document is a solid improvement upon the exposure draft of the same title the GASB issued last year. The main points include: performance reporting is voluntary, each jurisdiction is unique, GASB is not suggesting any specific measures giving large discretion to preparers, the number of “criteria” are reduced from 16 to 10 and more closely follows earlier accounting theory (e.g. relevance and reliability).

A different approach comes from the GFOA-staffed National Performance Management Advisory Commission’s draft report “A Performance Management Framework for State and Local Government: From Measurement and Reporting to Management and Improving”. Comments were due Sept. 30 and are still being accepted. The main points include:  collecting and reporting performance data is important but not sufficient to produce sustainable performance improvements, there are many management models to choose from (e.g. Stat, benchmarking), the framework is theoretical rather than a “how-to” guide and the prime audience is public managers and public officials.

Neither report is short, with GASB using 58 pages and NPMAC taking 38, though both provide summaries and illustrations along with text. The NPMAC cites recent relevant publications (including articles from the Harvard Business Review) while the GASB report mostly refers to its own research and activities. I find the NPMAC report is easier to read and more thought-provoking, it is definitely worth reading.

One of the things that bothers me is that neither approach is (as of yet) “elegant” in the way that financial reporting is elegant. This gets me back to question “B” – what is the role of us accountants? I tell my students that financial accounting is elegant in its ability to generate comparable single-page reports that summarize the financial results and position of organizations both large and small. The AGA’s four-page Citizen-Centric reports are elegant in the sense they are short, but the skeptic in me wonders if the quality, completeness and comparability of the content is sufficiently high to be elegant.

So what makes me skeptical? I am skeptical that the NPMAC is only interested in the positives of performance management. Is it possible the NPMAC is a counter-attack on the potential pressure from GASB to increase external performance reporting? Since the NPMAC report is clear and thought-provoking, I am less worried but not completely satisfied. I am also skeptical that GASB’s report will have a noticeable impact on improving the quantity or quality of performance report preparers. My fear is we will continue to have a very small group of decent reporters with the majority failing to provide useful information.

Beyond the goals or consequences of these reports, I am beginning to become skeptical about the cost/benefit relationships regarding performance measures—due mostly to the capacity and interest of citizens, leaders and elected officials to truly engage in the hard work of understanding difficult government problems and being willing to enter into pragmatic discussions about what can be done. An underpinning argument in both GASB and NPMAC is that some important stakeholder wants the organization to be transparent and improve (GASB proxies for citizen and NPMAC for the elected and appointed leaders). It’s sad to say, but the skeptic in me wonders if large numbers of either group really cares enough to make and sustain improvements….what do you think?