Coming Clean

FAA goes from high risk to high profile with its financial makeover.

This is a new world for the Federal Aviation Administration. Five years ago, FAA had a budget office; today it has a chief financial officer. In 2001, its financial management made the Government Accountability Office's list of high-risk activities. This year, GAO held up FAA as an example for other federal agencies in reporting performance, budget and financial information to Congress.

"We are getting some recognition of the fact that we're starting to make change happen within the FAA," but that doesn't mean there are no challenges left, says CFO Ramesh Punwani, a veteran aviation and travel industry executive who Administrator Marion Blakey brought in to turn things around. "We have challenges," Punwani says, "big challenges which . . . overshadow some of these, you can call it, small improvements."

FAA runs the nation's multibillion-dollar air traffic control system, which served 739 million passengers and handled 39 billion revenue ton-miles of cargo in 2005. The system comprises more than 70,000 facilities and pieces of equipment, including 500 airport towers. FAA also is responsible for inspecting and certifying 220,000 aircraft and 610,000 pilots. It has about 45,700 employees nationwide.

When she interviewed Punwani for the job, Blakey told him she wanted her agency to operate like a business and to use the best practices of the private sector. Punwani-whose employment history includes top management positions at three airlines, a health care insurer, a travel dot-com and a hospitality services giant-took his private sector expertise public when he accepted the FAA post in March 2004. Since then, he has been working to instill fiscal discipline through a bureaucratic form of nickel-and-diming: building checks and balances into procurement, setting tough performance goals and frequently measuring progress, meticulously accounting for even the smallest expenditures and cutting costs wherever possible. During the past three years, the agency's air traffic organization has trimmed its nonsafety workforce by 10 percent, or 1,000 positions, and reduced executive staff positions by almost 20 percent. A recent ATO service area consolidation will save $450 million over 10 years. During contentious labor negotiations with air traffic controllers, FAA cut labor costs by an anticipated $1.9 billion over five years, which is 5 percent to 6 percent of the total payroll for the period. The payroll for controllers was $2.5 billion in 2005. Excellence in financial management is the best practice, says Punwani, and "trying to achieve [it], whether you're a government agency or a private organization, is a multiyear, long-term process."

Blakey challenged her new CFO to do three things: improve financial data, improve financial controls and improve cost efficiency. All three are works in progress. The early results, while not entirely traceable to Punwani, are evident. After adopting a complicated new financial management system and managing to score several consecutive clean audits in the process, FAA has gotten a reprieve from GAO and is gaining respect among its government and industry peers.

Tough Climb

GAO first designated FAA financial management as high risk in 1999. With serious weaknesses in its financial reporting, property and cost accounting systems, FAA lacked accountability for billions of dollars in assets and expenditures. In 2001, the agency had to make 850 adjustments totaling $41 billion to prepare financial statements for the fiscal year. It also could not account for $11.7 billion in property. Auditors with KPMG LLC rendered unqualified opinions on the agency's books in 2002 and 2003 but continued to express concerns about property and other internal controls. FAA used the Transportation Department's Delphi Financial Management System to prepare statements in 2004 and 2005 and got two more unqualified opinions from KPMG. Again, the auditors expressed several concerns, this time related to the new system.

GAO noted that FAA was making significant strides in addressing its financial management weaknesses by January 2003, largely because it was preparing to adopt Delphi. "FAA's progress in improving financial management overall since our January 2003 high-risk update has been sufficient for us to remove the high-risk designation," GAO said in its January 2005 high-risk series update (GAO-05-207).

Delphi was well under way when Punwani joined FAA. Transportation developed its suite of commercial, off-the-shelf software to integrate financial management and to save time and money across its 12 administrations. The Federal Railroad Administration was the first user in a 2000 pilot. Since then, all the agencies have converted to the system. But it hasn't been easy for FAA. It began processing payments on Delphi in November 2003. A year later, the agency implemented a Delphi general ledger system, which includes integrated property accounting. FAA tried to marry the general ledger system with a new purchasing system in 2004, and that made the adaptation of Delphi even more difficult. Since then, it has added a Delphi-compatible cost accounting system.

Although they gave FAA's financial statements a nod of approval last year, auditors accompanied their unqualified opinion with a slap on the wrist. So many errors were made entering data and assigning costs that FAA had to scramble to get its books ready for auditing at the end of the fiscal year. A November 2005 report from Transportation's inspector general noted that while FAA continued to refine its Delphi-related procedures and controls, it had difficulty processing transactions in a timely manner and reconciling accounts. FAA made more than $2 billion in adjustments to year-end balances to prepare complete and accurate financial statements. But they were not available until four weeks after the end of the fiscal year. "The numbers were right, eventually, is what our auditors said," Punwani recalls. "We did get a clean audit, meaning our financial statements are fair and accurate, but this took a while."

KPMG's 2005 audit report also flagged FAA's management and oversight of contracts, monitoring of grants, and information technology controls over third-party systems and applications. It revealed three instances of noncompliance and made 18 recommendations for corrective action. FAA concurred and committed to fix the problems this year.

By the Numbers

The road to good financial management is paved with good financial data. The trip down that road has been painful for almost everyone at FAA. Delphi is more complex than any financial management system the agency used before. It is designed to track every dime FAA spends by expense category, location, project and task. It enables FAA officials to analyze expenditures for decision-making. The tracking basis is so minute that accounting codes for various transactions are 30 digits long. It's easy to mix them up. "This is a clear, perfect example of 'garbage in, garbage out,' " says Punwani. "What it really comes down to is we need to improve the integrity of the data entering the accounting system. We need to improve the discipline in our user community, which is everyone in FAA, to make sure the data gets in right." He is developing a plan to use the comptrollers or their equivalents in each of FAA's service units to provide refresher training to program managers.

Data coming out of the general ledger system is synthesized into a fully allocated managerial cost accounting system, known as CAS. FAA takes direct cost data from Delphi and allocates direct, indirect and overhead costs to organizations, products and services. It helps FAA show clients what it costs to provide a service. FAA used CAS analyses in 2003 to undertake the largest nonmilitary outsourcing initiative in government-the A-76 outsourcing of 58 flight service stations to Lockheed Martin Corp., at an anticipated savings of $2.2 billion through 2015. CAS is used in FAA's air traffic and commercial space organizations, which account for more than 80 percent of the agency's budget. Two other lines of business, aviation safety and airports, are implementing it this year. Like the general ledger, the cost accounting system is being refined. For instance, officials told GAO analysts for a December report, "Managerial Cost Accounting Practices" (GAO-06-301R), that labor cost data related to maintenance of older air traffic control equipment were unreliable and would be corrected in a CAS upgrade expected in January.

Accurate data from the new general ledger and cost accounting systems would help officials make vital decisions about how to overhaul the aviation trust fund, created in 1970 to help pay for airports, airways and other capital improvements. Increasingly, the agency is forced to draw from the fund, which resides with the Treasury Department, to pay operating expenses-more than $4.8 billion, or 44 percent of the fund, last year. Trust fund revenues-$10.8 billion in 2005-come from excise taxes levied on airline tickets, passenger and cargo flights, aviation fuel and international departures and arrivals. Revenues have not kept pace with funding commitments in recent years, and the trust fund's shrinking uncommitted balance-$1.9 billion in 2005, down from $7.3 billion in 2001-has been used to close the gap. It is a controversial plan, but FAA is working with the Office of Management and Budget on proposed legislation that would base trust fund revenues on a combination of user fees and fuel taxes starting in 2008. To do that, it will need a reliable way to figure out what users are costing the system and what to charge them for using it.

The Long Haul

The methods and techniques Punwani is putting in place are designed to last. "These are not one-time fixes," he says. "These are fixes that will stay within the agency and ensure that financial discipline stays here forever."

For instance, FAA has made major strides in building checks and balances into its financial controls. A committee of senior executives called the Joint Re-source Council reviews every major project. FAA has broken many projects into manageable segments to avoid committing to long-term expenditures in the millions or billions of dollars. Punwani has decreed that every contract over $10 million must receive the CFO's personal approval. Not that he knows better than a program manager, but it gives him an opportunity to ask about things the IG has criticized FAA for in the past: Was this contract competitively bid? Is there a lower labor rate available from another vendor within the agency? Is it a fixed-price or a cost-plus contract?

The agency also is addressing complaints from Transportation's inspector general about programs coming in late and over budget. FAA's strategic plan for 2006 requires 85 percent of major acquisitions to be on schedule and within 10 percent of cost, and the agency is beating that target. Some notable programs are having budget and schedule difficulties but "the important thing is, we're measuring it," Punwani says. One of the disciplines he hopes to instill is earned value management. Planned expenditures and target dates for major projects are laid out, and an analytical technique provides warning signals when they get off track, so corrections can be made quickly.

FAA is meeting the challenge of cost-effectiveness largely through consolidation. The initiative to outsource flight service stations was just one of many designed to put change back in the agency's pockets. Punwani has begun consolidating hundreds of different servers and almost 100 help desks. As extras are eliminated, so go the help desks. FAA is standardizing IT equipment, servers and processes. Along the same lines, the agency has centralized its many Web pages under its public affairs organization. They now have a uniform appearance and the Web site is easier to navigate, at a savings measured in the tens of thousands of dollars. Punwani also centralized oversight of real estate and other real property to better track inventory and get rid of unneeded equipment and office space. When FAA's Eastern Region accounting office moved to Oklahoma recently, it moved its nearby safety office into the vacated building and canceled a $200,000-a-year lease. "I'm not bashful. I'll take that," Punwani says. It wasn't a lot of money, but it paid his salary and then some.

Flawed Fixes

The Eastern Region accounting office moved to Oklahoma City as part of a two-year program to consolidate eight such offices nationwide for an anticipated savings of $3 million to $5 million a year. The objectives are to standardize accounting practices and improve financial data, and maybe save a little money in the process. In July, the agency finished moving its routine transactions to the Enterprise Service Center it manages for the Transportation Department in Oklahoma City. The center operates and maintains the department's Delphi financial management system and provides accounting services to all of Transportation's agencies. It provides the same services to two other federal agencies, the National Endowment for the Arts and the Commodities Futures Trading Commission, through its Office of Management and Budget center of excellence designation. Not all is well with the plan.

During its audit of the agency's 2005 financial statements, KPMG identified several concerns with the consolidation of FAA's accounting operations. The criticisms dealt with the CFO's lack of internal and budgetary controls and unclear authority over policies and procedures. They also touched on the service center's inconsistent performance agreements with the Transportation Department administrations and the lack of metrics to measure the accuracy and completeness of transactions.

On these deficiencies, Punwani was the whistleblower. "The whole investigation began with my raising the red flag about the fact that I didn't have control over all the accounting budgets," he says. Agency documents show that some of the problems were corrected immediately. All of KPMG's concerns will have been addressed by the start of fiscal 2007, when Punwani takes budgetary control, he says.

The service center operates from a franchise fund that emulates private sector business functions. Congress allows FAA to try to reduce its fixed costs by selling financial management information system services to other federal agencies and storing the profits in the franchise fund. The idea is to gain efficiencies by operating like a business. Because the franchise fund is exempt from some restrictions of the federal budgeting process, FAA can carry the collections from year to year and build up as much as a 4 percent operating reserve. Last year, for the first time, KPMG looked at franchise fund balance as part of its routine examination of FAA's financial statements. Auditors expressed concern that the franchise fund was not collecting advances on the work it did for other agencies. They issued an unqualified opinion but made 17 recommendations for corrective action.

One Dollar at a Time

Savings of $3 million to $5 million isn't much compared with FAA's $14 billion budget. But take three here, 10 there, throw in a consolidation of some sort, and the money begins to add up. "I come from an environment in the airline world where there were no billion-dollar savings opportunities waiting to be had. We had to scrape," Punwani says. "But if you did it systematically and intelligently, you were able to build that into a significant impact for the organization." He forces every department in the agency to come up with creative ways to save, and keeps progress reports on every initiative in a quarter-inch-thick folder.

One of his proudest-and shrewdest- achievements is a plan to save the agency $10 million without spending a dime. FAA contracted with the management consulting firm A.T. Kearney to negotiate cut-rate contracts with its vendors. The agreement covers office supplies and equipment, printing and mailing, and information technology hardware and software. A.T. Kearney gets a small but undisclosed percentage of the savings after the supplies are bought and the savings are quantified. Here's the catch: A.T. Kearney specializes in reverse auctions in which bidders see competitors' prices online and lower theirs to increase their chances of winning the contract. "It's ruthless, but it's clever," says Punwani. "We're going to get what we believe is the best price for the level of service that we're looking for." If reverse auctions work with office supplies, FAA could decide to try them in more complex procurement categories.

Punwani says the KPMG auditors are pleased with the changes at FAA and the extent of its financial controls. "Our auditors told us that they thought that working with the FAA is like a dream compared to some of the other federal agencies: 'We think that you guys are more progressive and proactive than any other federal agency that we've worked with.' "

In a March report, "FAA Case Study Shows How Agency Performance, Budgeting and Financial Information Could Enhance Oversight" (GAO-06-378), congressional auditors took a positive view of FAA's strategic plan, with its long-term, outcome-oriented goals, and performance and accountability report, which charts progress and allows lawmakers to monitor performance. "Agencies' understanding of Congress' information needs is often limited," the report said, adding that FAA gets it right.

Another sign that FAA gets it right is its Certificate of Excellence in Accountability Reporting from the Association of Government Accountants for the third consecutive year. The award is the highest recognition for management reporting in the federal sector.

But high praise does not equal zero worries. Sometimes Punwani is unnerved by the glacial pace of change. "It's not easily done because we're talking about an organization that has existed . . . since 1958, and a lot of people are set in their ways," he says. "The challenge is not just to come up with new systems but to demonstrate to people that new systems, new processes, are good for you and for the agency, and that takes time."