Agencies struggle to reduce improper payments

Agencies struggled to catch up with the Office of Management and Budget's standards for eliminating improper payments called for in the latest addition to the President's Management Agenda.

An OMB report issued last week said 95 percent of the $45.1 billion in improper payments made in fiscal 2004 involved seven programs, including Medicare, the Earned Income Tax Credit and Unemployment Insurance, and urged agencies to take steps to eliminate these errors.

The improper payments initiative debuted on the PMA score card for the first quarter of fiscal 2005. Ten of the 15 agencies rated received a red score, the lowest.

The Agriculture Department, one of the agencies ranked red, estimated that more than half of its $72 billion in payments for programs, including food stamps and the national school breakfast/lunch program, were at risk for improper payments, according to the OMB report.

USDA's low ranking has more to do with the department's lack of data on measuring which programs were at risk and failure to set targets for reducing improper payments than for the size of the improper payments, said Jon Holladay, associate CFO for financial policy and planning at USDA. Holladay could not estimate the size of the department's total improper payments. The food stamp program, with $1.6 billion of improper payments in fiscal 2004, is on OMB's list of seven targeted programs.

The delay in implementing a plan to reduce improper payments stems from the size and complexity of USDA payments, said Holladay. Each of 288 programs had to be assessed. That meant, for example, traveling to public schools that disbursed breakfast/lunch funds. "That's a lot of work to do to determine whether that school is giving to eligible students," he said.

Holladay said the department's goal was to earn a green score by the end of the third quarter of this year.

The Treasury Department, which also earned a red score, oversees the Internal Revenue Service's Earned Income Tax Credit, another program flagged by OMB. An IRS spokeswoman said progress is being made toward eliminating erroneous payments by speeding the processing of tax forms and asking recipients to certify their eligibility.

The Small Business Administration, which also received a failing grade, is meeting with OMB officials in March to review its systems. "We do not believe we deserve a red rating in this particular area," said SBA spokeswoman Jennifer Foley. She said SBA recently finished consolidating more than 100 field offices, which should reduce the number of improper payments, but those changes happened too recently to be included in the OMB report.

Weak internal controls are to blame for the majority of improper payments, said McCoy Williams, a director of the Government Accountability Office's financial management and assurance team. Internal controls include requiring more than one person to sign off on payments and providing hotlines for employees who notice errors.

Because the majority of mistakes are related to benefits programs, financial managers and program officers should work in tandem, said Ed Verburg, vice president of government services for Kelly, Anderson & Associates, Inc. and former deputy chief financial officer at Treasury.

"Not just financial people, but program officers have to have good internal controls. When you get [program officers] on board, you have better internal controls and a better process," he said.

Program discrepancies are calculated by adding overpayments and underpayments together. In a meeting with reporters last week, Clay Johnson, OMB's deputy director for management, said $40 billion of the $45 billion in improper payments was an overpayment, and $5 billion was underpaid.

OMB also posted online a letter sent to Vice President Dick Cheney detailing agencies' fiscal 2004 competitive sourcing efforts, another PMA initiative. As previously reported by the OMB, job competitions held in fiscal 2004 generated $1.4 billion in anticipated savings over the next three to five years. Federal labor unions have challenged the accuracy of that figure.

The letter, written by David Safavian, Office of Federal Procurement Policy chief, said that based on the number of positions identified by agencies as "suitable for competition," competitive sourcing could save $5 billion a year. Safavian also urged Congress to eliminate what he called "legislative barriers," such as health benefits regulation and limitations on money spent on job competitions.

Colleen Kelley, president of the National Treasury Employees, said OMB "is very carefully asking for information [from federal agencies] that will inflate what is already a false projection of savings.