downsizing. The demands for us to do work in the area of oversight of international and multinational organizations has also been growing over the last couple of years. We are facing exploding demands for work in the area of Medicare financing, particularly since the creation of the commission on the future of Medicare.

We know that resources are limited, and we are doing everything that we can to control costs. For example, at your suggestion, we entered into a lease with the Army Corps of Engineers for one floor of our headquarters building so that we can reduce the cost of maintaining that facility. We are also working hard to improve productivity and, through process reengineering, have made significant gains in that area.

But notwithstanding these efforts, if we are going to continue to be a strong and viable organization that can fulfill our mission of serving the Congress, we are going to again need an increase in our funding for the coming year. We are hopeful that it is going to be possible for us to get those funds.

PREPARED STATEMENT

Thank you very much, Mr. Chairman. I would be happy to answer any questions you have.

[The statement follows:]

PREPARED STATEMENT OF JAMES F. HINCHMAN

Mr. Chairman and Members of the Subcommittee: Thank you for the opportunity to be here today to testify on the General Accounting Office's (GAO's) fiscal year 1999 budget request. GAO's request reflects a continuation of our effort to stabilize agency operations following our downsizing. This year, with the resources provided by this committee, we have begun taking the steps necessary to achieve this end. In particular, we have embarked on a major modernization of our information technology systems and normalization of our hiring, promotion, and employee recognition programs. Our 1999 request will enable GÃO to sustain this effort and maintain its capacity to serve the Congress effectively.

FISCAL YEAR 1997 ACCOMPLISHMENTS AND HIGHLIGHTS

GAO is proud of its long tradition of service to the Congress and the contributions it has made toward improving federal government operations. The issues we examined during fiscal year 1997 spanned the breadth of national and international concerns, including aviation safety and security, financial management and accountability, health care financing, income security, information technology, national security, tax administration, and many others. Eighty-three percent of our work was done at the request of the Congress or in response to a statutory mandate.

As a result of our audits and evaluations, the legislative and executive branches took actions last year resulting in financial benefits of nearly $21 billion over $50 for every dollar that you appropriated to GAO. These actions included budget reductions, costs avoided, appropriation deferrals, and revenue enhancements that are directly attributable to or were significantly influenced by GAO's work. For example, the Congress and the Department of the Treasury reduced the Internal Revenue Service's proposed fiscal year 1997 tax systems modernization appropriation by a total of $514 million as a result of GAO reporting on problems associated with the modernization effort. As another example, the Congress terminated the Housing and Urban Development's mortgage assignment program after GAO found the program was not successful and was costly to run. The estimated benefits over 2 years are about $1.3 billion.

We also had other findings and recommendations that resulted in or contributed to improvements in the effectiveness and efficiency of government operations and services that cannot be quantified in monetary terms. Their impact is nonetheless significant because they lead to a better-run, more streamlined government. For example, as a result of GAO's work, the Federal Aviation Administration has increased its inspections of foreign air carriers to ensure that they comply with international safety standards. In addition, to help ensure compliance with the Govern

ment Performance and Results Act, we issued a guide for the Congress and agencies to use in reviewing agency strategic plans and reported on agencies' progress in implementing the act. Past experience shows that about 75 percent of GAO's key recommendations usually are implemented within 4 years, through the passage of implementing legislation and agencies' corrective actions.

Overall, we produced 1,337 audit and evaluation products during fiscal year 1997. These products included 975 reports to the Congress and agency officials, 149 formal congressional briefings, and 182 congressional testimonies delivered by 65 GAO executives before 81 congressional committees or subcommittees. We also provided 14 statements for the record to congressional committees and subcommittees. In addition, we produced 2,386 legal decisions on matters involving government revenues and expenditures, such as protests against the award of federal government contracts.

During fiscal year 1997, we undertook a wide range of initiatives aimed at making GAO more responsive to the Congress and enhancing the quality and timeliness of our products and the efficiency of our services, while also expanding staff capability and improving human resource management. In addition, we have further refined our quality control program to ensure that high-quality products are consistently produced and meet professional standards. We also fully implemented a reengineered job process management system that has increased the efficiency in which we conduct our reviews and the quality and timeliness of the products created. Compared to fiscal year 1996, the cost of our assignments in fiscal year 1997 was reduced by nearly 25 percent and their duration by about 20 percent.

FISCAL YEAR 1999 BUDGET REQUEST

GAO's fiscal year 1999 request is necessary to maintain our capacity to serve the Congress effectively and to support our efforts to stabilize agency operations following our downsizing. We are asking that the committee consider a fiscal year 1999 budget of $369.7 million. The increase included in this request is for three principal purposes: mandatory pay and benefits and uncontrollable costs increases; technology modernization and upgrades to replace outdated technology and ensure year 2000 compliance; and funding to move closer to our employment goal of 3,450.

Mandatory pay and benefit increases are the most important and account for the largest part of our request. These increases are necessary to cover uncontrollable costs, such as cost-of-living, locality pay, and personnel benefits increases. GAO's staff, its most valuable resource, accounts for about 80 percent of its budget dollars. It is also important to offset other uncontrollable inflationary increases, such as the higher cost of contract services, travel, printing, supplies, and other mission essential support services. Without additional funding to cover these costs, our capacity to function effectively will be impaired.

We need to continue efforts to modernize our technology to maintain the productivity and timeliness gains that such technology has thus far made possible. Investments required in fiscal year 1999 will replace outdated software and hardware and will ensure that GAO is year 2000 compliant.

This year, GAO has begun efforts to correct the skill imbalances resulting from our downsizing. Our recruiting plan calls for us to replace attrition and gradually move closer to the agreed upon 3,450 employment level by the end of fiscal year 1999. We are requesting funds to provide for personnel compensation, benefits, and related costs to make this possible.

GAO's fiscal year 1999 budget request does not include funding for the GAO headquarters building renovation program. Last year, at your request, we analyzed our facilities requirements to determine whether we could lease any excess space in our headquarters building and use the revenue generated from that lease to renovate the two remaining unrenovated floors and supporting infrastructure of the building. On the basis of that analysis, negotiations are now underway for the Army Corps of Engineers to lease the entire third floor of the building. This lease should provide the funds necessary to permit completion of our renovation program.

CONCLUDING REMARKS

GAO's fiscal year 1999 budget request will position the agency to move into the 21st century with the staff, technology, facilities, and other resources needed to effectively and efficiently serve the Congress and to contribute to the improvement of government operations and services. The increase in our budget is essential to cover mandatory increases in people-related costs and inflationary increases in the prices of the goods and services we buy, continue GAO's efforts to upgrade its technology and information systems, ensure year 2000 compliance, and stabilize GAO's workforce.

This concludes my statement. I would be pleased to answer any questions the Members of the Subcommittee may have.

YEAR 2000 COMPLIANCE

Senator BENNETT. Thank you. It will come as no surprise that with my dedication to the year 2000 issue I will do what I can to see to it that you do not get shortchanged there, because we repeat the obvious, we have no flexibility at the back end of that.

Do you have a sense of the total cost it is going to take for your 2000 problems?

Mr. HINCHMAN. I think the incremental cost above work that we would do anyway is about $500,000, it is not a large cost. This is principally because the biggest part of our compliance plan is the replacement of our personal computers, the hardware for the local area network, which links those computers, and replacement of the software that operates on those computers.

We need to do this anyway to provide the level of information technology support which our staff needs; that has been the plan on which we have been working. Our current system is not year 2000 compliant, but the new one will be, and that is part of our information technology budget.

But there are other things that we have to do as well. As you know, we need to repair other systems throughout our agency. We need to do some work with other agencies and provide for interfaces and data exchanges. In total, these efforts are going to cost us about $500,000.

DESKTOP VIDEO

Senator BENNETT. Last year you told us you were doing a pilot program on desktop video in the Seattle field office and in three sublocations. How did the pilot work out? Is it going to save you any money?

Mr. HINCHMAN. The use of our video conferencing system continues to grow. I think there are going to be questions, but the use of those video systems is a success and has produced significant savings in our travel budget, in addition, of course, to staff time, which does not have to be spent on airplanes.

Senator BENNETT. Do you want to say anything specific about the desktop?

Ms. DODARO. The use of desktop video conferencing is inconclusive at this point. Video conferencing in and of itself, as Mr. Hinchman has said, has been very successful and has been saving money. We have not yet reached a conclusion on the desktop portion.

Senator BENNETT. So you have not decided

Ms. DODARO. No.

Senator BENNETT [continuing]. That it does not work, and

you

Ms. DODARO. No; we have neither decided it is nor have we decided that it is not in any way appreciably better than our agency facilities, the broad facilities that we have rather than people having them locally at their desks.

COMPUTER LEASING

Senator BENNETT. OK. You have been very creative about leasing computers. Perhaps you could give us a comment about that as an example for other agencies who are facing similar kinds of problems.

Mr. HINCHMAN. When we decided we had to embark on a replacement for our current computers, we, in consultation with experts in the field, concluded we needed to study whether it would be more cost efficient to buy new computers or lease them. I think that it is fair to say that virtually all of our consultants told us that the fiscally prudent thing to do is to lease those computers so that you can avoid the substantial investment in equipment that becomes obsolete so quickly.

When we lease equipment, it continues to belong, obviously, to the lessor. When it becomes obsolete, it is the lessor's problem and not ours; and we are free to move on to new systems.

As you know, Mr. Chairman, part of the reality of the information technology business today is that systems and the software that operates on them are changing so rapidly. It is very difficult to choose not to move with that change, because you quickly find yourself in a situation in which you cannot maintain your systems. After that study, we concluded that we needed to lease our new equipment, and that is what we are doing.

Senator BENNETT. I concluded with my family, I just do not need to buy it, it will be obsolete by the time we pay for it, so then I do not need to buy the next one, because it will be obsolete. My children disagree with that.

ADDITIONAL COMMITTEE QUESTIONS

Thank you very much. Again, Senator Dorgan's comments, as well as my own, demonstrate the confidence this subcommittee has in your stewardship, and our gratitude for all the work you are doing, and we will try to get a permanent title, either for you or somebody else, between now and the next time we meet.

Mr. HINCHMAN. Thank you, Mr. Chairman.

Senator BENNETT. Thank you.

[The following questions were not asked at the hearing, but were submitted to the Office for response subsequent to the hearing:]

ADDITIONAL COMMITTEE QUESTIONS

Question. Please update the Committee on the status of your Year 2000 conversion plans.

Answer. GAO has identified the Year 2000 problem as one of its most serious operational challenges and ranks its Year 2000 Compliance Project as the highest information technology priority. To date, GAO has developed a detailed Year 2000 plan that includes schedules for converting or replacing all mission critical systems that are Year 2000 non-compliant. We have completed an agencywide inventory of 66 systems and identified 28 of those systems as mission critical. All mission critical systems have been assessed for Year 2000 compliance: 9 are compliant, 5 are being repaired, and 14 are to be replaced.

The main component of GAO's effort to repair or replace non-compliant systems is its long-planned technology modernization project. GAO plans to repair or replace all of the non-compliant systems well before the Year 2000.

Other Year 2000 actions that GAO has taken include the identification of all data exchanges and development of data exchange agreements and plans for making external systems compliant. We have also documented a Year 2000 test strategy, which includes approaches for testing network-based applications and corporate in

formation systems, such as payroll and personnel systems run at the National Finance Center. In addition, we have begun developing contingency plans to ensure continuing core business operations in the event of Year 2000-induced failures.

Question. What did GAO spend in fiscal year 1997 for information technology, and what do you plan to spend in fiscal years 1998 and 1999?

Answer. Our information technology budget funds a variety of services underlying agency operations including mainframe computing services, data and voice communications, video conferencing services, network customer support, and maintenance and support for hardware and software. In fiscal year 1997, GAO spent $21.9 million on information technology (IT). The current estimate for IT spending is $26.4 million for fiscal year 1998 and $27.8 million for fiscal year 1999.

GAO requested a $1.4 million increase in its technology budget for fiscal year 1999, as part of continuing its technology modernization project to replace outdated hardware and software and to ensure GAO is Year 2000 compliant. The hardware and software replacements are for GAO's existing information and communications infrastructure and are needed to support the new workstation and network platforms to which the agency is migrating. A very small amount will be used to fund development efforts for GAO's mission tracking (audit work) systems.

Question. GAO cut 25 percent from its budget and reduced staff by 33 percent between fiscal years 1996 and 1997. The stabilization level established at the beginning of the downsizing was 3,450 FTE's. GAO effectively downsized and has operated with increased productivity levels since fiscal year 1997. Given this experience, is 3,450 FTE's the optimal level for GAO to serve Congress' needs?

Answer. At this point in time, GAO believes that 3,450 FTE's will enable it to meet Congress' current needs. In fiscal year 1997, GAO completed its downsizing efforts that began in fiscal year 1992 with a GAO-wide hiring freeze. By the beginning of fiscal year 1997, GAO's staffing had declined almost 35 percent from a 1992 level of 5,325 to its planned stabilization level of 3,500 staff (3,450 FTE's). Since then, higher than normal attrition has further reduced GAO staffing and caused staff shortages in critical program areas, such as financial auditing, information management, telecommunications' infrastructure, and Medicare and Commerce-related issues.

In fiscal year 1998, GAO began implementing a recruiting plan to replace attrition, correct the skills imbalance resulting from our downsizing, and gradually rebuild to the 3,450 employment goal. GAO is concerned about its ability to quickly respond to Congressional needs in critical areas if unable to implement this recruiting plan.

Question. What is your estimated total cost to address the Year 2000 problem? What has been spent to date, and what is requested in your fiscal year 1999 budget? What is your cost estimate beyond fiscal year 1999?

Answer. Many of GAO's Year 2000 issues are being corrected through its longplanned technology modernization project. This project is replacing obsolete hardware and software and providing additional capacity that would have been done regardless of Year 2000 issues. Without the resources needed to implement the modernization project, GAO will not be Year 2000 compliant.

In addition to the modernization project that indirectly addresses most Year 2000 issues, GAO estimates that about $500,000 will be spent directly for Year 2000 efforts related to upgrades/fixes for its Financial Management System and a number of small database system, and the replacement of voice mail processing systems. Of the $500,000, $33,000 was spent in fiscal year 1997, while the remainder will be spent in fiscal year 1998. There are no funds included in the fiscal year 1999 budget, nor are there costs estimated beyond fiscal year 1999 that are directly attributable to correcting Year 2000 issues.

Question. What are the highest risk areas confronting GAO in completing its Year 2000 program on time?

Answer. GAO believes the highest risk to timely completion of its Year 2000 Project is with major systems that are outside of GAO's direct control and that GAO relies on to carry out its functions. These major systems include the pay computation and EFT systems; telecommunications carriers that provide nationwide communications for GAO's data, voice and video systems; and infrastructure utilities that support our facilities—electrical, power, and water.

QUESTIONS SUBMITTED BY SENATOR BYRON DORGAN

Question. As you are aware, a provision was included in the Fiscal Year 1998 Treasury and General Government Appropriations Act, which allows a six-month "open-season" for Federal employees who wish to switch their retirement system