This is the accessible text file for CG Presentation number GAO-07-
848CG entitled 'Transformation Challenges for the Twenty-first 
Century' which was released on May 4, 2007. 

The Honorable David M. Walker: 
Comptroller General of the United States: 

The National Association of State Chief Information Officers (NASCIO): 
2007 Mid-Year Conference: 

May 3, 2007: 


GAO’s Mission: 

GAO’s role is to support the Congress in carrying out its 
constitutional responsibilities and to help improve the performance and 
assure accountability of government for the benefit of the American 

We do this in four fundamental ways: 
* Oversight–preventing and detecting fraud, waste, abuse, and 

* Insight–making government more efficient and effective; 

* Foresight–examining the role of government; 

* Adjudication–bid protest resolution, legal opinions (e.g. 
appropriations law). 

The Need for Good Governance, Transparency, and Accountability: 

Good governance, transparency, and accountability are critical in: 

* The private sector, to promote efficiency and effectiveness in the 
capital and credit markets, and overall economic growth, both 
domestically and internationally. 

* The public sector, for the effective and credible functioning of a 
healthy democracy, and in fulfilling the government’s responsibility to 
citizens and taxpayers. 

* Both sectors, to support a health healthy that provides economic 
opportunities and benefits to citizens. 

Sorting out the needs—as well as the effective and appropriate 
governance and accountability mechanisms for different sectors and 
types of organizations—will be essential, both on a domestic and 
international scale. 


The Need for More Efficient and Effective Government Federal, State, 
and Local Collaboration: 

This is a line graph with two lines: Federal Grants as a percent of 
State and Local Receipts and Federal Grants as a percent of Federal 
Expenditures. The vertical axis of the graph depicts percent from 0 to 
30. The horizontal axis of the graph depicts calendar years 1970 
through 2005. 

Source: GAO analysis of data from the U.S. Dept. of Commerce, Bureau of 
Economic Analysis. 

[End of graph} 

The Case for Change:  

The federal government is on a “burning platform,” and the status quo 
way of doing business is unacceptable for a variety of reasons, 

* Past fiscal trends and significant long-range challenges; 

* Selected trends and challenges having no boundaries; 

* Additional resource demands due to Iraq, Afghanistan, incremental 
homeland security needs, and recent natural disasters in the United 

* Numerous government performance/accountability and high risk 

* Outdated federal organizational structures, policies, and practices; 

* Rising public expectations for demonstrable results and enhanced 

Composition of Federal Spending: 

[See PDF for image] - graphic text: 

There are three pie charts, containing the following compositions of 
spending by category: 

Year: 1966;
Defense: 43%;
Social Security: 15%; 
Medicare and Medicaid: 1%; 
Net Interest: 7%; 
All Other: 34%. 

Year: 1986;
Defense: 28%;
Social Security: 20%; 
Medicare and Medicaid: 10%; 
Net Interest: 14%; 
All Other: 29%. 

Year: 2006;
Defense: 20%;
Social Security: 21%; 
Medicare and Medicaid: 19%; 
Net Interest: 9%; 
All Other: 32%. 

Source: Office of Management and Budget and the Department of the 

Note: Numbers may not add to 100 percent due to rounding. 

[End of figure] 

Federal Spending for Mandatory Programs Crowds Out Spending for 
Discretionary Programs: 

This is a stacked line graph with three lines: Net interest, Mandatory, 
and Discretionary. The vertical axis of the graph depicts percent of 
total outlays from 0 to 100. The horizontal axis of the graph depicts 
calendar years 1962 through 2017, with years 2008 though 2017 being 
CBO's January 2007 projections. At all points on the graph, the three 
spending representations total 100 percent. 

Sources: Office of Management and Budget and the Congressional Budget 

[End of graph] 

Social Security, Medicare, and Medicaid Spending as a Percent of GDP: 

[See PDF for image] - graphic text. 

This is a line graph with three stacked lines (Social Security, 
Medicaid, and Medicare). The vertical axis represents Percent of GDP 
and the horizontal axis represents fiscal years 2000 through 2080. 

Source: GAO analysis based on data from the Office of the Chief 
Actuary, Social Security Administration, Office of the Actuary, Centers 
for Medicare and Medicaid Services, and the Congressional Budget 

Notes: Social Security and Medicare projections based on the 
intermediate assumptions of the 2006 Trustees’ Reports. Medicaid 
projections based on CBO’s August 2006 short-term Medicaid estimates 
and CBO’s December 2005 long-term Medicaid projections under mid-range 

[End of graph] 

Table: Fiscal Year 2005 and 2006 Deficits and Net Operating Costs: 

On-Budget Deficit, Fiscal Year 2005 ($ Billion): (494);
On-Budget Deficit, Fiscal Year 2006 ($ Billion): (434); 

Unified Deficit[a], Fiscal Year 2005 ($ Billion): (318); 
Unified Deficit[a], Fiscal Year 2006 ($ Billion): (248); 

Net Operating Cost[b], Fiscal Year 2005 ($ Billion): (760); 
Net Operating Cost[b], Fiscal Year 2006 ($ Billion): (450); 

Sources: Office of Management and Budget and Department of the 

[a] Includes $173 billion in Social Security surpluses for fiscal year 
2005 and $185 billion for fiscal year 2006; $2 billion in Postal 
Service surpluses for fiscal year 2005 and $1 billion for fiscal year 

[b] Fiscal year 2005 and 2006 net operating cost figures reflect 
significant but opposite changes in certain actuarial costs. For 
example, changes in interest rates and other assumptions used to 
estimate future veterans’ compensation benefits increased net operating 
cost by $228 billion in 2005 and reduced net operating cost by $167 
billion in 2006. Therefore, the net operating costs for fiscal years 
2005 and 2006, exclusive of the effect of these actuarial cost 
fluctuations, were ($532) billion and ($617) billion, respectively. 

[End of table] 

Table: Major Fiscal Exposures ($ trillions): 

Explicit liabilities (Publicly held debt, Military & civilian pensions 
& retiree health, Other): 
2000: $6.9; 
2006: $10.4; 
Percent increase: 52. 

Commitments & contingencies (e.g., PBGC, undelivered orders):
2000: 0.5;
2006: 1.3
Percent increase: 140. 

Implicit exposures: 
2000: 13.0; (Future Social Security benefits: 3.8; Future Medicare Part 
A benefits: 2.7; Future Medicare Part B benefits: 6.5; Future Medicare 
Part D benefits: 0).
2006: 38.8; (Future Social Security benefits: 6.4; Future Medicare Part 
A benefits: 11.3; Future Medicare Part B benefits: 13.1; Future 
Medicare Part D benefits: 7.9).
Percent increase: 197. 

Total, 2000: $20.4; 
Total, 2006: $50.5; 
Percent increase: 147. 

Source: 2000 and 2006 Financial Report of the United States Government. 

Note: Totals and percent increases may not add due to 
rounding.Estimates for Social Security and Medicare are at present 
value as of January 1 of each year and all other data are as of 
September 30. 

[End of table] 

Table: How Big is Our Growing Fiscal Burden? 

This fiscal burden can be translated and compared as follows: 

Total major fiscal exposures: $50.5 trillion; 
Total household net worth[1]: $53.3 trillion; 
Burden/Net worth ratio: 95 percent. 

Per person: $170,000; 
Per full-time worker: $400,000; 
Per household: $440,000. 

Median household income[3]: $46,326; 
Disposable personal income per capita[4]: $31,519. 

Source: GAO analysis. 

Notes: (1) Federal Reserve Board, Flow of Funds Accounts, Table B.100, 
2006: Q2 (Sept. 19, 2006); (2) Burdens are calculated using estimated 
total U.S. population as of 9/30/06, from the U.S. Census Bureau; full-
time workers reported by the Bureau of Economic Analysis, in NIPA table 
6.5D (Aug. 2, 2006); and households reported by the U.S. Census Bureau, 
in Income, Poverty, and Health Insurance Coverage in the United States: 
2005 (Aug. 2006); (3) U.S. Census Bureau, Income, Poverty, and Health 
Insurance Coverage in the United States: 2005(Aug. 2006); and (4) 
Bureau of Economic Analysis, Personal Income and Outlays: October 2006, 
table 2, (Nov. 30, 2006). 

[End of table] 

Potential Fiscal Outcomes Under Baseline Extended (January 2001); 
Revenues and Composition of Spending as a Share of GDP. 

[See PDF for image] - graphic text. 

This is a line/stacked bar graph with one line (revenue) and four 
stacked bars containing four spending items (Net interest, Social 
Security, Medicare and Medicaid, and All other spending). The vertical 
axis represents Percent of GDP and the horizontal axis represents 
fiscal years 2005, 2015[a], 2030[a], and 2040[a]. 

Source: GAO’s January 2001 analysis. 

[a] All other spending is net of offsetting interest receipts. 

[End of graph] 

Discretionary Spending Grows with GDP After 2007 and All Expiring Tax 
Provisions Extended through 2017 (Thereafter Revenue Returns to 
Historical Average of 18.3% of GDP plus Deferred Revenue): 

[See PDF for image] - graphic text. 

This is a line/stacked bar graph with one line (revenue) and four 
stacked bars containing four spending items (Net interest, Social 
Security, Medicare and Medicaid, and All other spending). The vertical 
axis represents Percent of GDP and the horizontal axis represents 
fiscal years 2006, 2015, 2030, and 2040. 

Source: GAO’s August 2007 analysis. 

[End of graph] 

Health Care Is the Nation’s Top Tax Expenditure in Fiscal Year 2006: 

[See PDF for image] - graphic text. 

This is a bar graph with the vertical axis representing estimated 
dollars in billions, and the horizontal axis depicting bars indicating 
the amount of expenditures in five categories. 

Estimated dollars in billions, Exclusion of employer contributions for 
medical insurance premiums and medical care: 125[a]; 
Estimated dollars in billions, Deductability of mortgage interest on 
owner-occupied homes: 68.3;
Estimated dollars in billions, Net exclusion of pension contributions 
and earnings: defined benefit plans: 49[b];
Estimated dollars in billions, Capital gains except agriculture, 
timber, iron ore, and coal): 48.6; 
Estimated dollars in billions, Deductability of nonbusiness states and 
local taxes other than on owner-occupied homes: 43.1. 

Source: GAO analysis of OMB, Analytical Perspectives, Budget of the 
United States Government, Fiscal Year 2008. 

Note: “Tax expenditures” refers to the special tax provisions that are 
contained in the federal income taxes on individuals and corporations. 
Treasury does not include forgone revenue from other federal taxes such 
as Social Security and Medicare payroll taxes. 

[a] If the payroll tax exclusion were also counted here, the total tax 
expenditure for employer contributions for health insurance premiums 
would be about 50 percent higher or $187.5 billion. 

[b] This tax expenditure does not include $40.8 billion in revenue 
losses due to defined contribution plans. 

[End of graph] 

Current Fiscal Policy Is Unsustainable: 

* The “Status Quo”is Not an Option: 
- We face large and growing structural deficits largely due to known 
demographic trends and rising health care costs. 
- GAO’s simulations show that balancing the budget in 2040 could 
require actions as large as: 
* Cutting total federal spending by 60 percent or; 
* Raising federal taxes to 2 times today's level. 
* Faster Economic Growth Can Help, but It Cannot Solve the Problem: 
- Closing the current long-term fiscal gap based on reasonable 
assumptions would require real average annual economic growth in the 
double digit range every year for the next 75 years. 
- During the 1990s, the economy grew at an average 3.2 percent per 
- As a result, we cannot simply grow our way out of this problem. Tough 
choices will be required. 

The Way Forward: A Three-Pronged Approach: 

1. Improve Financial Reporting, Public Education, and Performance 
2. Strengthen Budget and Legislative Processes and Controls. 
3. Fundamentally Reexamine & Transform for the 21st Century (i.e., 
entitlement programs, other spending, and tax policy). 

Solutions Require Active Involvement from both the Executive and 
Legislative Branches. 

The Objective of Transformation: 

To create a more positive future by maximizing value and mitigating 
risk within current and expected resource levels. 

Key National Indicators: 

* What: A portfolio of economic, social, and environmental outcome-
based measures that could be used to help assess the nation’s and other 
governmental jurisdictions’ position and progress; 

* Who: Many countries and several states, regions, and localities have 
already undertaken related initiatives (e.g., Australia, New Zealand, 
Canada, United Kingdom, Oregon, Silicon Valley (California) and 

* Why: Development of such a portfolio of indicators could have a 
number of possible benefits, including:
- Serving as a framework for related strategic planning efforts;
- Enhancing performance and accountability reporting;
- Informing public policy decisions, including much needed baseline 
reviews of existing government policies, programs, functions, and 
- Facilitating public education and debate as well as an informed 

* Way Forward: Consortium of key players housed by the National 
Academies domestically and related efforts by the OECD and others 

Key National Indicators: 

Where the United States Ranks: 

The United States may be the only superpower, but compared to most 
other OECD countries on selected key economic, social, and 
environmental indicators, on average, the U.S. ranks 16 out of 28. 

OECD Categories for Key Indicators (2006 OECD Factbook): 

* Population/Migration;
* Energy;
* Environment;
* Labor Market;
* Education;
* Public Finance;
* Science & Tech.;
* Quality of Life;
* Macroeconomic Trends;
* Economic Globalization
* Prices. 

Where the United States Ranks on Selected Health Outcome Indicators: 

Outcome: Life expectancy at birth (U.S. = 77.8 years in 2004);
Rank: 23 out of 30 in 2004. 

Outcome: Infant Mortality (U.S. = 6.8 deaths in 2004); 
Rank: 26 out of 30 in 2004. 

Outcome: Potential Years of Life Lost (U.S. = 5,066 in 2002); 
Rank: 23 out of 26 in 2002. 

Source: OECD Health Data 2006 and 2007. 

Notes: Data are the most recent available for all countries. Life 
expectancy at birth for the total population is estimated by the OECD 
Secretariat for all countries, as the unweighted average of the life 
expectancy of men and women. Infant mortality is measured as the number 
of deaths per 1,000 live births. Potential years of life lost (PYLL) is 
the sum of the years of life lost prior to age 70, given current age-
specific death rates (e.g., a death at 5 years of age is counted as 65 
years of PYLL). 

[End of table] 

Growth in Health Care Spending: Health Care Spending as a Percentage of 

[See PDF for image] - graphic text. 

This is a bar graph of the percent of health care spending as a 
percentage of GDP with the vertical axis representing percent from 0 to 
25 and the horizontal axis representing years 1975, 1985, 1995, 2005, 
and 2015. 

Year: 1975;
Health care spending: 8.1. 

Year: 1985;
Health care spending: 10.4. 

Year: 1995;
Health care spending: 13.7. 

Year: 2005;
Health care spending: 16.0. 

Year: 2015;
Health care spending: 19.2. 

Source: The Centers for Medicare & Medicaid Services, Office of the 

Note: The figure for 2015 is projected. 

[End of graph] 

Issues to Consider in Examining Our Health Care System: 

* The public needs to be educated about the differences between wants, 
needs, affordability, and sustainability at both the individual and 
aggregate level. 

* Ideally, health care reform proposals will: 
- Align Incentives for providers and consumers to make prudent 
decisions about the use of medical services; 
- Foster Transparency with respect to the value and costs of care, and; 
- Ensure Accountability from insurers and providers to meet standards 
for appropriate use and quality; 

* Ultimately, we need to address four key dimensions: access, cost, 
quality,and personal responsibility. 

GAO Criteria for Evaluating Social Security Reform Proposals: 

Reform proposals should be evaluated as packages that strike a balance 
among individual reform elements and important interactive effects. 

Comprehensive proposals can be evaluated against three basic criteria: 

* Financing sustainable solvency; 
* Balancing adequacy and equity in the benefits structure; 
* Implementing and administering reforms. 

Table: GAO's High-Risk List 2007: 

Addressing Challenges in Broad-based Transformations: 

* Strategic Human Capital Management[a]: Year Designated: 2001;
* Managing Federal Real Property[a]: Year Designated: 2001;
* Protecting the Federal Government’s Information Systems and the 
* Nations’ Critical Infrastructures: Year Designated: 1997;
* Implementing and Transforming the Department of Homeland Security: 
Year Designated: 2003;
* Establishing Appropriate and Effective Information-Sharing Mechanisms 
to Improve Homeland Security: Year Designated: 2005;
* DOD Approach to Business Transformation[a]: Year Designated: 2005;
- DOD Business Systems Modernization: Year Designated: 1995;
- DOD Personnel Security Clearance Program; Year Designated: 2005;
- DOD Support Infrastructure Management; Year Designated: 1997;
- DOD Financial Management; Year Designated: 1995;
- DOD Supply Chain Management; Year Designated: 1990;
- DOD Weapon Systems Acquisition; Year Designated: 1990;
* FAA Air Traffic Control Modernization; Year Designated: 1995;
* Financing the Nation’s Transportation System[a] (New); Year 
Designated: 2007; 
* Ensuring the Effective Protection of Technologies Critical to U.S. 
National Security Interests[a] (New): Year Designated: 2007; 
* Transforming Federal Oversight of Food Safety[a] (New): Year 
Designated: 2007; 

Managing Federal Contracting More Effectively: 

* DOD Contract Management: Year Designated: 1992;
* DOE Contract Management: Year Designated: 1990;
* NASA Contract Management: Year Designated: 1990;
* Management of Interagency Contracting: Year Designated: 2005; 

Assessing the Efficiency and Effectiveness of Tax Law Administration: 

* Enforcement of Tax Laws[a]: Year Designated: 1990;
* IRS Business Systems Modernization: Year Designated: 1995; 

Modernizing and Safeguarding Insurance and Benefit Programs: 

* Modernizing Federal Disability Programs[a]: Year Designated: 2003;
* Pension Benefit Guaranty Corporation Single-Employer Pension 
Insurance Program: Year Designated: 2003;
* Medicare Program[a]: Year Designated: 1990;
* Medicaid Program[a]: Year Designated: 2003;
* National Flood Insurance Program[a]: Year Designated: 2006. 

[a] Legislation is likely to be necessary, as a supplement to actions 
by the executive branch, in order to effectively address this high-risk 

Source: GAO. 

[End of table] 

2007 High-Risk Changes: 

Two areas removed from list: 
* U.S. Postal Service Transformation Efforts and Long-Term Outlook; 
* HUD Single-Family Mortgage Insurance and Rental Housing Assistance 

Three new areas added: 
* Transforming Federal Oversight of Food Safety; 
* Ensuring the Effective Protection of Technologies Critical to U.S. 
National Security Interests; 
* Financing the Nation’s Transportation System. 

Twenty-first Century Challenges Report: 

* Provides background, framework, and questions to assist in 
reexamining the base. 

* Covers entitlements & other mandatory spending, discretionary 
spending, and tax policies and programs. 
* Based on GAO’s work for the Congress. 

{Source: GAO.] 

Twelve Reexamination Area: 

Mission Areas:
* Defense; 
* Education & Employment;
* Financial Regulation & Housing;
* Health Care;
* Homeland Security;
* International Affairs;
* Natural Resources, Energy & Environment;
* Retirement & Disability;
* Science & Technology;
* Transportation. 

Crosscutting Areas: 

* Improving Governance; 
* Reexamining the Tax System. 

Illustrative Twenty-first Century Questions: Scientific and 
Technological Innovation Challenges: 

* How can the federal government develop a more coordinated and 
targeted approach to setting the U.S. research agenda that also ensures 
the best return on investment? 

* Are different kinds of federal incentives needed to encourage greater 
private sector collaboration and nurture interdisciplinary research and 
development approaches that can enhance U.S. competitiveness and 

* How can the United States better develop a world-class technical and 
scientific domestic workforce that is not as dependent on large inflows 
of international students and researchers? 

* Do current workforce retraining programs provide adequate incentives 
to help the United States develop lifelong learning strategies and 
proactive training programs that will meet the needs of a rapidly 
changing technological environment? 

* How can the federal government effectively utilize advanced 
technologies to further enhance homeland security while also protecting 
the privacy of U.S. citizens? 

* What cyber-security technologies can be applied to protect critical 
infrastructures from attack given current threat assessments and what 
implementation challenges, such as effective information sharing among 
key public and private stakeholders, will have to be addressed? 

Three Suggested Areas of Congressional Oversight: Illustrative Examples 
Related to IT: 

* Targets for near-term oversight: 
- Enhancing computer security and deterring identity theft; 

* Policies and programs that are in need of fundamental reform and re-
- Ensuring a strategic and integrated approach to prepare for, respond 
to, recover, and rebuild from catastrophic events; 

* Governance issues that should be addressed to help ensure an 
economical, efficient, effective, ethical, and equitable federal 
government capable of responding to the various challenges and 
capitalizing on related opportunities in the 21st century; 
- Reviewing the need for various budget controls and legislative 
process revisions in light of current deficits and our long-range 
fiscal imbalance. 

Key Topics Needing Congressional Oversight Related to Information 

* Establishing accountability measures for implementing effective 
information security programs at federal agencies, including effective 
policies and practices for detecting, responding, and reporting 
information on security incidents; 

* Determining the extent to which relevant federal and state 
organizations consider risk-based factors when making management and 
resource decisions related to catastrophic events; 

* Reviewing agencies’ delivery of information technology to improve 
mission performance by determining whether major provisions of the 
Clinger-Cohen Act are being effectively addressed (e.g., capital 
planning and investment control processes, enterprise architecture, 
information technology leadership and human capital). 

Key Leadership Attributes Needed for These Challenging and Changing 

* Courage; 
* Integrity; 
* Creativity: 
* Stewardship: 
* Partnership. 

[End of presentation] 

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