investiledysfunction

From the patently absurd file, it was reported that “Federal employees charged millions of dollars for Internet dating, tailor-made suits, lingerie, lavish dinners and other questionable expenses to their government credit cards over a 15-month period” according to congressional auditors.  Lingerie and online dating charges by federal employees.  Quite a stimulus package, eh?

The article from the Associate Press goes onto highlight that “The review of card spending at more than a dozen departments from 2005 to 2006 found that nearly 41 percent of roughly $14 billion in credit-card purchases, whether legitimate or questionable, did not follow procedure — either because they were not properly authorized or they had not been signed for by an independent third party as called for in federal rules to deter fraud.”

Because I’m somewhat of a math genius, I determined that 41% of $14 Billion is a big freaking number.  $5.74 billion to be exact.  So I can understand if a dinner or two goes unauthorized, but how do you let $5.74 Billion go by without authorization.

In the private sector, people’s heads roll for screw ups much smaller than this.  The government needs a serious overhaul of its resource allocation practices because this type of stuff is pretty unacceptable.

The 57 page report issued by the audit committee went on to say “”This audit demonstrates that continued vigilance over purchase card use is necessary.”  You really think so?

The full article contains some examples of the fraud that has occurred by government employees.  Check them out.  They’re so egregious it’s almost amusing.

CFO Magazine’s March 2008 issue has an article titled “Thriller: The Federal Government’s Annual Report is Not for the Faint of Heart” which paints a fairly frightening story of our government’s fiscal condition based on its issuance of a 2007 Annual Report.  And the government seems to know this as evidenced by David M. Walker’s comment that “If the federal government were a private corporation and the same report came out this morning, our stock would be dropping and there would be talk about whether the company’s management and directors needed a major shake-up.“  What’s notable is that Walker is the Comptroller general of the United States and head of the U.S. Government Accountability Office (GAO).

The government ran a budget deficit of a mere $163 billion which is 1.2% of GDP.  This is supposedly good news as it is 1/2 of the forty-year average which stands at 2.4% of GDP.  But let’s not let forty-year averages make us feel good.  The story gets scarier as the article details.  The most alarming thing is that “For the 11th year in a row - that is, for each year the federal government has prepared consolidated financial statements and submitted them for an audit - the GAO could not express an opinion on the government’s books, primarily because of material weaknesses in financial reporting.”“Of the 24 federal agencies that fall under the aegis of the CFO Act of 1994, 19 did not produce a clean set of books…The worst offender by far is the Department of Defense.  The GAO said that the agency could not accurately account for its property, plant and equipment, which make up 69% of the government’s total.”

Walker who seems to be a straight-talking sorta guy adds, “It seems clear that our nation is on an imprudent and unsustainable long-term fiscal path that is getting worse with the passage of time.” And finally, the article’s author, Edward Teach, concludes by saying, “What the Financial Report of the United States Government makes crystal clear is that the growth of federal mandatory spending - now more than 62% of the total budget - is unsustainable in the long run.  The same clarity about the government’s discretionary spending, however, won’t emerge until the Pentagon drains its financial-management swamp.  Who knows what horrors lurk therein?”So here are some thoughts based on this pathetic situation:

• The government should hold itself as accountable as it aims to hold corporations.  While it won’t garner as many headlines as going after big bad corporations, it smacks of a bit of a hypocrisy to not practice what you preach.  And we’re all probably owed this accountability given our tax money goes into this blackhole.  (sorry - that is more political than I like to get in this blog but that is not a partisan perspective and it seems this fiscal dysfunction has been going on for a long long time)
• Our federal government needs portfolio management to understand this supposed non-discretionary and discretionary spend better.  Three things will be revealed:
  1. Much of what is non-discretionary probably is actually discretionary
  2. A good portion of this money is probably going to projects of uncertain or dubious value
  3. Overall, the government has a very poor resource allocation process which is highly decibel-driven and siloed

When I talk about portfolio management, I’m not talking about the software and other consultant elixirs out there which are mostly or almost all bunk.  I’m talking about portfolio management in the context of an overhaul of resource allocation practices with the aim of creating a discipline to consistently and continually making better decision-making.  It is not an easy 6 month journey where some simplistic scoring framework or software panacea will save the day but one which will require many if not all of the following:

1. Education within the government about the value of more optimal resource allocation and the losses/impacts of suboptimal resource allocation today
2. Active championing by senior government leaders who get it and not people who give the idea lip service
3. Arriving at a definition of what is a discretionary investment or project
4. Developing a standardized means of valuing projects and investments especially those with non-financial returns
5. Creating methods to track investment performance so that promise can be compared with performance and people held accountable
6. Enabling methods to move resources (money primarily) within and between departments in pursuit of the best opportunities.  This is what is known as optimizing the portfolio.

While much of the above may seem to be a pipedream, I’m encouraged by discussion about portfolio management which is going on with the public sector at least in small parts.  If the conversation veers towards better decision-making as a means to optimizing resource allocation, the government may benefit over the medium- to long-term and we might all know where and why the government is doing what they do.  That might be wishful thinking but maybe we’ll begin to at least understand where our money is being wasted to start.  Ultimately, we might actually make the spend more efficient.