The Red Lake band of Chippewa Indians was sitting pretty financially--or so its members thought. As much as $500,000 a year in timber, mineral, and fishing royalties from their Minnesota reservation was supposed to be pouring into a trust fund managed by the federal government. But a 1982 audit uncovered decades of sloppy bookkeeping by the Bureau of Indian Affairs that left the tribe more than $800,000 short. Then, two years ago, the BIA quietly deducted $1.2 million from the account to adjust for accounting mistakes. Now the tribe is suing the BIA. "They were doing a lot of things with our money without our knowing about it," fumes Bobby Whitefeather, the tribe's secretary. "We never got an explanation."
The BIA may not have one. Like scores of other federal agencies, it often doesn't have a clue about where the money comes from or where it goes. Federal auditors, who are increasingly focusing on accounting practices government-wide, recently warned Congress that mismanagement of the $2 billion in BIA trust funds may force taxpayers to fork over untold millions to cover hundreds of tribal claims. "Everything that could go wrong with the trust fund did," declares James Richards, inspector general for the Interior Dept., the bureau's parent. "This is financial management at its worst."
So far, the BIA's troubles don't seem to involve the kind of fraud and political corruption that vaulted the Housing & Urban Development Dept. onto the front pages in 1989. Instead, the bureau's plight stems from what analysts say is a more pervasive cause of Washington's fiscal woes: Many federal agencies, having long neglected their financial systems, simply can't balance their books. The government's careless handling of its $2 trillion in annual cash flow is costing taxpayers dearly. "HUD was not an isolated incident," says Representative John Conyers (D-Mich.), chairman of the Government Operations Committee and co-author of a new law that will install chief financial officers at major agencies. "We often don't know how much we are spending or losing."
FISCAL FOLLIES. It wasn't always like this. In the 1950s, many federal agencies were on the cutting edge of accounting-management systems. But years of underinvestment, followed by Reagan-era budget-slashing that gutted back-office spending, have taken their toll: Many agencies lack up-to-date systems for measuring revenues and expenses, tracking inventories, managing cash flow, or even conducting cost-benefit analyses to evaluate programs. The records of the Air Force, where the General Accounting Office counted 130 different accounting systems, are in such disarray that when auditors tried to reconcile its books 18 months ago, they threw up their hands and quit.
These fiscal follies are costing billions (table), perhaps masking the true size of the already gargantuan deficit. Some outside financial experts blame the Pentagon's persistent cost overruns, as well as the ballooning liabilities of government loan agencies, on the lack of accurate accounting. And, according to the GAO, agencies now pay roughly one-quarter of their bills too early and another quarter too late--costing taxpayers roughly $350 million annually in interest and millions more in late fees.
A look at the BIA shows how deep the problems run. Congressional auditors recently discovered that many accounts in the agency's trust fund--which collects royalties from oil, land, and mineral rights for some 300,000 individuals and tribes--haven't been balanced for 60 or 70 years. The agency has two computer systems, but staffers still record many transactions manually in ledgers. Although the BIA, as trustee, has a legal obligation to maximize income, BIA officials admit that the agency hasn't invested the oil and gas royalties to earn interest in six years. It could be liable for breaching its duty.
PHONY ENTRIES. The BIA's books were so chaotic that payments routinely were credited to the wrong account. Whenever the fund's general ledger didn't balance, clerks plugged in fictitious entries until it did. The BIA "has become a bank that doesn't know how much money it has," says GAO investigator Jeffrey C. Steinhoff. "BIA has totally lost credibility with the trust-fund account holders."
In its defense, the BIA claims that its bookkeeping was hindered by the inability of its banker--the Treasury Dept.--to tell it which checks had been issued or cashed. Treasury admits to past problems but says it instituted changes in 1989 that now allow it to track checks. And the BIA says preliminary audits of larger accounts indicate that actual tribal losses may be relatively small. Eddie F. Brown, Assistant Interior Secretary for Indian Affairs, says one $17 million discrepancy was reduced to $1,200.
While the arrows fly in the BIA dispute, some reform is on the way. Lawmakers, led by Conyers, last year authorized the hiring of CFOs for the 23 largest federal agencies. To oversee this new army of green eyeshades, the White House on Aug. 2 nominated Virginia State Comptroller Edward J. Mazur as the government's first controller. Among the tasks ahead: developing and auditing financial statements for each agency--something Washington has long required of publicly traded companies but never of itself. "We're going to find problems sooner than we have in the past," promises the GAO's Steinhoff.
Perhaps. But not without some political flak first. Some senior Democrats, led by House Appropriations Committee Chairman Jamie L. Whitten (D-Miss.), have been campaigning to deny the $100 million in funding needed to staff the new CFO offices. They fear that the Bush Administration--particularly crafty Budget Director Richard G. Darman--will use the CFOs to discredit and kill programs the White House opposes.
And even when Congress and the White House do iron out their differences--as is likely--and the money is appropriated, it will be years before all 23 agencies can reconcile their books. Still, the payoff for taxpayers should be high. And the Chippewas may finally find out what happened to their money.
WIDESPREAD BOOKKEEPING WOES ARE COSTING TAXPAYERS PLENTY NO INVENTORY CONTROLS
The Pentagon's warehouses are bulging with useless spare parts for weapons and other hardware. Its secondary parts stockpile tripled during the 1980s to $29 billion
NO INTERNAL CONTROLS
The Health Care Financing Administration has paid more than $1 billion a year to hospitals for medicare expenses that private insurers should have paid
INABILITY TO MONITOR LOANS
The Federal Housing Administration racked up sky-high default rates on loans for single-family housing: Fiscal 1988 losses--$4.2 billion--are five times more than reported
The IRS's inability to find delinquent taxpayers leaves it unable to collect $57 billion in overdue taxes. Government-wide, over 25% of $316 billion in receivables are delinquent
The Veterans Administration's failure to pay suppliers on time, partly because of processing problems, cost it $790,000 in interest penalties over two years