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government pays States, are estimated to top $1 billion in FY 1992.

What if any changes would you recommend to get a handle on these administrative costs?

Answer. Because the reasons for the rise in administrative costs are complex and a series of actions are needed to contain these costs, we recommended in our August 1990 report that a temporary stopgap legislative remedy be enacted until processes can be put into place to control this area. The series of actions follows:

Continue to pursue legislative approaches to cost
containment, including reducing the time period
for filing claims. The final funding proposal
should be selected after a reevaluation of the
original intent of Public Law 96-272 and current
practices of the States. Any proposals should
recognize that the current definition of
"administrative costs" is a misnomer, since under
this rubric States can claim for a variety of
child placement services.

Modify the methodology for conducting administrative cost reviews to (1) associate a portion of administrative costs claimed with ineligible maintenance payments, and (2) examine the relationship between increased costs and expansion of services to foster children.

Develop alternative ways to more accurately count the number of children in the program. This area is being addressed through a September 1990 Notice of Proposed Rulemaking (NPRM) which mandates a new data collection system to replace the current system run by the American Public Welfare Association.

Proceed with requiring States to uniformly identify and account for administrative costs by individual administrative activities and the required child care protections.

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Conduct a systematic analysis of cost allocation plans, sampling methodologies and eligibility determination systems used by states, with an emphasis on those states that have employed the services of consultants.

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Develop a national protocol for use in the routine
evaluation of cost allocation plans with respect
to foster care. This effort will be coordinated
with the Department's Division of Cost Allocation.

Continue efforts to look for ways to contain
administrative costs. During this process,

the

options on the preceding pages of this report
should be considered.

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Consider expansion of the Quarterly Expenditure
Report (IV-E-12) from four cost categories of
"child placement services" to additional
categories, to allow for more discrete accounting
and to provide definitions for each of the cost
categories.

Earlier this fiscal year, Congress enacted requirements for States to separately report placement costs, but did not enact cost containment provisions. The President's FY 1992 budget proposes to contain costs by making "pre-placement costs" not allowable for Federal reimbursement, and by refocusing the program to target both maintenance and administrative payments only to eligible children in foster care. We endorse this proposal, which the Department estimates would reduce Federal costs by $1.7 billion over five years.

CHIEF FINANCIAL OFFICERS ACT OF 1990

Question. The Chief Financial officers (CFO) Act of 1990 aims to improve financial systems and functions across the government by requiring agencies to prepare and audit financial statements for all trust funds, revolving funds, and accounts that have substantial commercial activity.

What does the CFO Act mean for HHS how does it relate to service delivery and program performance?

Answer. The implementation of the CFO Act should result in significant improvements in the Department's financial management systems. The combination of management assessments of financial management capabilities, annual financial audits, the Federal Managers Financial Integrity Act (FMFIA) process, and the five-year plans should result in both a reduction of internal control weaknesses and improvements in the usefulness of financial systems for collecting and summarizing program information. Such improvements should have a positive impact on program operations.

Implementation of the CFO Act should also result in closer integration of financial and program performance information. Thus, management should have a more accurate and detailed understanding of the cost of services and different levels of outputs. This information on operations costs should be very useful to program managers in terms of day-to-day operations. It should also be useful for planning the future direction and budget level of programs.

In addition, since passage of the CFO Act there has been a high level of interest in the Federal financial management community regarding reporting on

service efforts and accomplishments in the annual financial statements. At this point it seems quite likely that there will be efforts made to develop this concept for reporting in the financial statements required by the CFO Act. In fact, a recent financial statement report on the Veterans Administration provides an initial effort in this direction that may prove to be trend-setting. We are developing this concept of "service effort" reporting for financial statements in HHS. This provision of information on program productivity will undoubtedly affect both perceptions of and the futures of these programs as Department management, Congressional committees and citizen groups react to what is reported.

Question. How is HHS progressing on preparing the required financial statements?

Answer. We believe that the Department has so far done rather well in working towards development of the financial statements required by the Act. of course, for several years now the Department has produced financial statements for the Social Security Administration (SSA) and the office of the Secretary's Working Capital Fund. Thus, the Department was quite farsighted in its understanding of the trend towards financial statements. The Department has also been working for some time towards financial statements for the trust funds in the Health Care Financing Administration which, together with SSA, constitutes the two largest financial statement challenges for HHS.

We would also give the Department high marks for its more current efforts in planning its implementation of the Act. From our knowledge of the work being done in other departments, HHS has done quite a lot. Throughout its entire planning effort, the Department has worked closely with our office. We believe this cooperation with the Inspector General's office is important for a smooth and successful implementation of the financial statement requirements of the Act.

Question. Which HHS appropriation accounts meet the CFO Act criteria for financial statements, and what proportion of the Department's spending will be audited?

Answer. A total of 60 of the Department's 112 appropriation accounts are covered by the CFO Act. These accounts contain about 80 percent of the Department's outlays. The following memorandum to the Director of the Office of Management and Budget (OMB) provides a listing of all the HHS appropriation accounts and a designation of those accounts that are thought to be covered by the CFO Act.

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The Chief Financial officers (CFO) Act of 1990 (HR 5607) requires Executive Branch agencies to produce audited financial statements for all trust funds, revolving funds, and accounts having substantial commercial activity starting as of the end of fiscal year 1991. Included in the CFO Act is a provision, section 3515(e) (3), that allows the Director of the Office of Management and Budget (OMB) to waive the requirement for preparation and/or audit of fiscal year 1991 financial statements. Our Department has made an assessment of all accounts, programs and activities that fall within the scope of the legislation. It is attached at Enclosure A and requires coverage of 60 accounts which represent 80% of our outlays. We are making an early effort to aggressively engage in the preparation and audit of financial statements for those activities covered by the CFO Act. Our desire was to begin the process in FY 1991. Towards this end, we and our Inspector General have jointly developed a plan. However, the Administration's request for 1991 funding of this effort did not materialize.

Our present strategy takes into consideration major variables that affect early implementation of the legislation. The first is the absence of funding. The President's FY 1992 budget includes funding that will allow us to make major progress. A second variable involves the size and complexity of program activities.

We are now pursuing a phase-in strategy that will, by necessity, require some deferment in implementation. Accordingly, we must request OMB waiver for some of the CFO Act's requirements. revised plan is as follows:

Our

1.

For FY 1991 we will continue the preparation and audit of all seven program activities of the Social Security Administration which account for $253 billion. These include:

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Payments for Credits against Social Security
Contributions,

:
Federal old-Age and Survivors Insurance Trust
Fund,

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Federal Disability Insurance Trust Fund and

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2.

Limitation on Administrative Expenses (SSA). In addition, we will prepare and audit statements for the office of the Secretary Working Capital Fund. For FY 1991 we will begin lň FY 1991 to phase-in preparation and audit of financial statements in the Public Health Service. Initially, this will involve selected accounts (e.g., FDA Revolving Fund for Certification and Service, NIH Management Fund, NIH Service and Supply Fund and OASH Service and Supply Fund) and the balance of the accounts will be limited, both in number and in scope, because of limited existing resources. It wili, therefore, be necessary to obtain waivers for most of the 44 appropriation accounts of the PHS. In addition, we will be forced to delay and request waiver for FSA and ACFA programs.

Be assured we will do as much as we can with what we have but, as has been made manifest to you, funding and other resource constraints greatly limit our capacity.

3.

As new resources arrive in FY 1992, they will allow us to produce FY 1992 financial statements that will be audited for all HHS accounts (60) falling within the purview of the CFO Act.

It should be noted that for FY 1991, HHS will have audited financial statements incorporating a minimum of 56% of HHS outlays and in excess of $250 billion dollars. Por FY 1992 over 50% of HHS accounts will be included in audited financial statements. That will incorporate approximately 80% of the Department's outlays, the remainder of which falls outside the scope established by the CFO Act.

Based upon the aforementioned plan, and in accordance with the waiver provision of the CFO Act, I am requesting a waiver of the preparation and audit of the FY 1991 financial statements as described above and as itemized in Enclosure B.

If there are questions regarding our phase-in plan or waiver request, your staff should feel free to contact Dennis Fischer, Deputy Assistant Secretary for Finance (202-245-2084).

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