Arlington, Virginia

Monday, October 2, 2000

Mr. Lawrence: Good evening, and welcome to The Business of Government Hour, conversations with government leaders. I'm Paul Lawrence, a partner at PricewaterhouseCoopers and the co-chair of The PricewaterhouseCoopers Endowment for The Business of Government. We created the endowment in 1998 to encourage discussion and research into new approaches to improving government effectiveness. To find out more about the Endowment's research and programs, visit us on the web at endowment.pwcglobal.com.

The Business of Government Hour focuses on outstanding government executives who are changing the way government does business. Our special guest tonight is Josh Gotbaum, executive associate director and comptroller of the U.S. Office of Management and Budget.

Welcome, Josh.

Mr. Gotbaum: Good to be here.



Mr. Lawrence: Thank you. Well, let's start by finding out more about the organization and your job. Can you tell us about OMB, and your role as comptroller?

Mr. Gotbaum: Well, as you might know, OMB is the President's eyes and ears for watching how the rest of the government functions. We put together the budget proposal each year from all the agency requests, reconciling, and compromising, and coordinating them.

We also provide the ongoing oversight as agencies implement programs throughout the year. So, it's a small organization. It has about 500 people. Almost all of them are career civil servants. They are spectacularly competent. They make the very few of us who are political appointees -- what my friend John Koskinen called the "temporary help" -- look much better than we are. There are about 20 of us who are political appointees.

Within the organization, I have two hats. I have the Executive Associate Director, which means I'm part of the senior management, and help Jack Lew, the director, the deputy director, and the deputy director for management, run the place.

I'm also the Comptroller, which means I run the Office of Federal Financial Management, whose special mission is to improve the quality of financial management in the federal government.

Mr. Lawrence: Throughout your career, you've worked in a number of different places: The White House, the Executive Branch, the Legislative Branch, and the private sector. Can you tell us about your career in the various positions you've held?

Mr. Gotbaum: I started out of graduate school. I went to law school and the Kennedy School. In the Carter administration -- actually, my first job was an internship in the Office of Management and Budget in the mid-70s, but my first full job was in the White House energy staff in the Carter administration. When they created the Department of Energy, I moved there. I had a couple of jobs there.

I then went to work for President Carter's inflation adviser, Alfred Kahn, on the wage-price program and regulatory issues, and then went to work for his domestic policy adviser, Stuart Eisenstadt, on economic policy matters.

I then was forcibly relocated professionally by 50 million voters, and worked briefly on Capitol Hill in the Senate for Gary Hart, doing economics and budget matters, and then went to Wall Street, where I was hired at Lazard Freres, first as an associate, and then vice president, and so on, to do merger and acquisition work, financial restructuring, financial advisory work, initially for corporations, but also, eventually, for labor unions and governments in the U.S. and Europe. I did that for 13 years.

When President Clinton was elected, I went to the Defense Department in a newly created job, Assistant Secretary for Economic Security. They said the Defense Department is restructuring, the defense industry is restructuring. We'd like a restructuring expert who wasn't steeped in defense lore to help us do it in a more businesslike fashion.

So, I worked there for Secretary Perry and Deputy Secretary John Deutch, working on base closure, on privatization; on how the department should respond to industry consolidation. It was a spectacular job, and I learned a great deal.

I then went to work for Bob Rubin and Larry Summers, as their Assistant Secretary of Treasury for Economic Policy, working on everything from budget to Social Security and Medicare policy.

Then, 3 years ago came to OMB, where, as I say, I work in the management, and then try especially to improve government management efforts especially in financial management, but in other areas as well.

Mr. Lawrence: You describe working at the Department of Defense, as well as at the Department of Treasury, and I'm curious. How would you contrast the different departmental cultures in government?

Mr. Gotbaum: Well, they are very substantial. I think the differences really come from whether or not an agency is operating a program, an operating agency, or an agency that's providing oversight.

The Defense Department delivers a service. It's an unusual service. It's one you hope doesn't have to get delivered too often, but puts people and material in odd places at difficult times.

Most federal agencies are in a different business. They're in the business of words. They write checks, they write speeches, they write regulations. They're on the policy side of the shop.

What you discover is that that difference changes the way the agency operates. For example, one of the things that is true in the Defense Department and almost no place else in government, is that it is really the case that even the political appointees in the Defense Department run their day on a schedule, and they deliver on that schedule.

In most of the civilian agencies, for perfectly good reasons, other things come in. Policymaking comes in. You have to respond to one firefight by deferring another.

So, one difference is the culture of operations versus the culture of policy making. Another is the extent to which an agency is dominated by career professionals versus political professionals.

I've been fortunate, both in OMB, and Treasury, and Defense, to work in agencies where the career staff is terrific. They are extraordinary professionals. They hold their own against professionals any place.

As a result, there is a greater sense of history, appreciation of organization and process than, for example, when I worked in The White House itself in the Carter administration.

Mr. Lawrence: How about the differences between the public sector and the private sector? What's it like to move back and forth?

Mr. Gotbaum: Moving back and forth is like moving between Mars and Earth, successively. To an extraordinary extent, which is not always appreciated by people in government, in business, the bottom line is the bottom line.

You do those things that generate a profit. You're focused on getting the deal done, getting the service delivered, getting the product to market, et cetera. People worry much less about how you do it, what the process is, how inclusive you are, et cetera.

Government is quite different. In government, constituencies matter. Democracy was not intended to be efficient. It isn't. But that means that even folks who are delivering a service, or making a decision in government, have to pay attention to a lot of factors and constituencies that folks in the business community just don't.

For example, when I would buy some contract for a service, whether it's a consultant from PwC, or computer services, et cetera, on the Street, I might interview a couple of folks, I might take a recommendation from someone whom I trusted, et cetera. Then I'd negotiate. I'd agree on a price. I'd sign a contract. Sometimes, I wouldn't even sign a contract, okay.

In the federal government, you couldn't do that. Whether generally for well-intentioned reasons, but for a variety of reasons, the Congress has said that I can't buy anything in the federal government without publishing detailed specifications, except for very tiny contracts. I have to make sure that a broad array of folks read it. I have to give special emphasis to particular kinds of businesses. I am constrained in the way I can evaluate, pay for, and charge.

So, there really is a world of difference from one to the other. That's why it's not always a surprise when somebody comes from the business community with a terrific reputation, and they're seen in government as overly aggressive, not very politic, and why, when someone moves from government to business, they're seen as overly surface, overly concerned with marketing, and not direct enough.

Mr. Lawrence: What positions provide you with the best opportunities as a leader?

Mr. Gotbaum: Each of them has offered opportunities. What I found in the Defense Department was that because the world had changed so much for Defense, and the Defense budget had been reduced, in real terms, over a decade by 40 percent, there was a realization that they needed to do things differently. They needed to do business in a different fashion.

There was no consensus on how. But there was a recognition that things needed to change. So, for example, one of the things that Secretary Perry said is, 'we've got to improve the quality of housing. We no longer have a draft military. We've got folks who have to want to reenlist.' So, we went forward and said, 'how can we take advantage of the extraordinary expertise in the business community to use private techniques to get housing?' There was a real openness within DOD to adopt those techniques, to consider those techniques, to try those techniques, that I found enormously refreshing. I came away with extraordinary respect for the Defense Department and the military.

Mr. Lawrence: Great. It's time for a break. We'll be right back with more on The Business of Government Hour.

(Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, a partner at PricewaterhouseCoopers. Tonight's conversation is with Josh Gotbaum, executive associate director and comptroller, the U.S. Office of Management and Budget.

On this segment, let's talk about OMB. How do the budget and management side of OMB work together?

Mr. Gotbaum: All the time. As I said, OMB has a number of missions, one of which, the part for which it is best known is to put together the budget. The preponderance of our staff spends most of their time doing that.

But we also have, as a mission, to make sure that all the management and its -- of the President and the management mandates of law, are followed out. The way we do that is by a matrix organization.

We have what we call the resource management offices, the budget offices, which is the largest part of OMB. These are folks who are tasked with having an agency relationship. They are required to know -- they talk every day with the Department of Health and Human Services, or the Department of Housing and Urban Development, et cetera. They'll know the programs in it.

Then, we have a set of management offices. Procurement, financial management, which I run, and information and regulatory affairs, whose job is to be a combination of internal and external consultants.

They had expertise in information systems. They had expertise in financial systems. What they do, is they work with the relationship folks at the RM office, to review agency actions, to encourage agency actions, et cetera.

So that, for example, when, as we did this afternoon, we met with the Department of Treasury to talk about all the financial systems that they are modernizing, I had the budget side of OMB there, who have been working to get adequate funding for financial systems and other systems for the IRS and others, along with the folks in OFFM and other parts of OMB, whose expertise is management and management process.

It's the leveraging of the two, combined with the leverage that's provided by the budget process, that really gives OMB its ongoing influence.

Mr. Lawrence: You just mentioned that as comptroller, you direct the Office of Federal Financial Management. Can you tell us about this office and its functions?

Mr. Gotbaum: Ten years ago, Congress set up the Chief Financial Officers Act. It was a very good idea. They said, 'the federal government ought to adopt some of the practices of private business. They ought to have CFOs.' In addition, within the Office of Management and Budget, it established the Deputy Director for Management, a senior management official within OMB, and the Comptroller -- my job -- and the Office of Federal Financial Management.

OFFM's job is to be a combination of cheerleader, steerer, guide, and critic for improving financial management in the federal government. Because we have come a very long way, but we have a really long way to go.

So, we do a combination of establishing standards for accounting for the federal government; establishing standards for systems, financial systems in the federal government; coordinating the activities of interagency councils, like the Chief Financial Officers Council, and the Council of the Inspectors General. So, what we do, again, through a combination of setting standards, providing guidance, asking tough questions, and just convening and coordinating, in OFFM, is to encourage improvements in financial management. There have been many, many, and there are many more yet to go.

Mr. Lawrence: What kind of interactions does OMB have with the agency?

Mr. Gotbaum: All kinds. OMB, as I said, is a relatively small organization. It's about 500 people. Most of them are extremely high-quality career civil servants. A few of us are the temporary Christmas help -- politicals.

What you find is that OMB's involvement with agencies goes at all levels. Jack Lew, the director, talks all the time with Cabinet secretaries. The deputies and I talk with deputy secretaries.

The career staff, at all levels, works with all levels of the agencies, to track budget execution, to track program execution; to make sure that agencies are in fact following through on the Government Performance and Results Act, or the Clinger-Cohen Act, or whatever.

So, what you find is that there is a myriad of relationships for a myriad of purposes. Everything from coordinating an agency request for legislation that might affect another agency's view; so we have a group of folks, fabulously skilled, whose job it is to recognize that when an agency proposes legislation, what other agencies might be affected by it, and get their views before the administration sends it to Congress.

We have a similar group of folks, the budget review division, whose job it is to take all the budget requests, submitted and reviewed by the rest of OMB, and put them in a single template, so that the President can actually make decisions about the various choices he has to make.

So, there are discussions about programs and initiatives. There are discussions about expenditures and timing, there are discussions about systems and compliance, all the time.

Mr. Lawrence: What lessons have you learned about interagency collaboration?

Mr. Gotbaum: First, that communication matters intensely, communication at all levels matters intensely. What we found is that when there is a problem, it is most frequently because one level of an agency was talking to OMB, or to another agency, but there wasn't a similar free flow of conversation at another level. So that two Cabinet secretaries were talking and thinking they'd reached a really terrific agreement, but either they hadn't communicated to their staff, or their staffs had not communicated to each other. As a result, what seemed like a great agreement, turned out in fact to be ships passing in the night. So, the first rule is that there needs to be communications at all levels.

The second one is that this is a federal government that combines -- and I should say this also applies to communications with the Congress� the second rule is that this is a government which has a layer of political policy oversight on a career staff. If there is not extensive, rich communication, if there is not real comfort between them, things just break down. So, what we found is that it's very important that the career staff continually talk to the political staff, and talk to the political staff in the Congress and elsewhere. That communication across those lines, unless it's frequent, unless people know each other well and can judge when something is really impossible, as opposed to really difficult, then we don't do as well as we should.

Mr. Lawrence: Well, great. It's time for a break. We'll be right back with more of The Business of Government Hour. (Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, a partner in PricewaterhouseCoopers. Tonight's conversation is with Josh Gotbaum, executive associate director and comptroller of the U.S. Office of Management and Budget.

Does OMB's job change now that we have a balanced budget?

Mr. Gotbaum: In some senses, yes. But to a surprising degree, no. We have always thought that when the budget was out of balance, OMB's job would be more important and more difficult -- making the hard decisions, trade-offs, and choices, and helping the President make those choices in order to get to balance.

But it turns out that just because the budget is in balance, doesn't mean there still aren't hard choices to make. The amount of time it took, from when people said, "Oh, it's not really in balance," to "Oh, we've got a surplus. Let's describe how to spend it," was a nanosecond.

So now, we still have the same questions. How much should we reserve for Social Security and Medicare when we all retire? How much should we reserve for tax cuts? How much should we reserve for spending on national defense, for saving the environment, et cetera?

So, to a surprising degree, the choices that we still have to make are very similar choices.

Mr. Lawrence: Congress required that government start producing audited consolidated financial statements in 1994. I think progress has been made in that 13 of the top 24 federal agencies received clean opinions on their statements this year. Can you tell us about the current state of federal financial management and the improvements, and the changes that need to be made?

Mr. Gotbaum: Actually, 15 --

Mr. Lawrence: Fifteen. Okay.

Mr. Gotbaum: -- have now received clean opinions. This is a case -- somebody once said to me, "How do you describe this?" I said, "This is a little as if, imagine you were a speech writer for Moses just after he's brought the Israelites across the Red Sea, parting the waters, okay, and they're on the edge of the desert. What do you say to them?"

There's good news and bad news. The good news is, you have performed a number of miracles. You've parted the waters, et cetera. The bad news is that you're about to spend 40 years in the desert. By the way, some of you are not going to make it.

That's how I think about federal financial management. In the last 10 years, we started from a circumstance in which people could not keep track of finances. They knew what their budget appropriation was, and they knew they couldn't spend more than it.

But there were no gap financials. As a matter of fact, there were no accounting standards for the federal government. So, in the last 10 years, we have created a standard-setting body, FAASB and a set of accounting standards that have been recognized as generally accepted accounting principles.

We have created and appointed CFOs, and accounting staffs. We've started turning out annual financial reports. Last year, 19 of the 24 CFO agencies got their reports in on time. Fifteen of them were clean.

Originally, the first year we did this, which was four years ago, 13 of them had disclaimers. In other words, they were so bad that you could get no audit opinion on them at all. Last year, the number was down to five.

So, we're making very, very real progress in terms of getting a set of standards, getting a set of reports, beginning to turn them out in a way that they can be audited.

But there is so much more to go, because unlike business, in the federal government, the bottom line is not net profit. In order to know how an institution is working in government, you need to compare financial data to operating data. You need to know how many kids you have helped with Head Start money. You need to know how many toxic waste dumps you've cleaned up with federal dollars.

So, as a result, the task that's before us, is to marry performance information with financial information, and turn that out in a way that is reliable, automated, repeatable, so that managers can track their businesses, and that people who provide oversight -- the Office of Management and Budget, the Congress, the people -- can see how government agencies are doing.

That's the task that's ahead of us.

Mr. Lawrence: Well, how is OMB involved in the implementation of the Government Performance and Results Act?

Mr. Gotbaum: All over. The Government Performance and Results Act was a really critical piece of legislation. It was one that was supported by the administration and by both parties and both houses of Congress.

It was really pretty simple in its basic concept. It said: Agencies, you need to set up a set of performance measures. You need to set up a set of strategic plans that you want to follow, and you need to set up a set of measures that you can track them on, and you need to report on those.

What OMB has done, is to say, first, that you must comply with the law and turn out those reports. But far more importantly, take that information, and bring it into your budgeting process. Bring it into your management process. Because knowing performance information without financial information is almost as useless as knowing financial information without performance information.

So, what we've done at OMB, is we've said to agencies, three years ago, in your budget submissions, please include performance information.

Last year, we got a little more detailed and said, 'give us a sense of alternatives for some agencies.'

This year, we said, 'you're turning out an annual performance plan. That ought to be part of your budget submission. You shouldn't turn out a separate performance plan and a separate budget proposal. They should be one.'

So, what we are doing by this process -- and this is something that OMB does through its budget and management authorities together -- is to insure that agencies are constantly assessing what are the best measures, and then tracking how they perform against them.

What we hope to do, over the long run, is to develop enough understanding and enough practice, if you will, so that we can compare the performance of agencies that are doing similar kinds of things, and so that they can benchmark against their own performance, and against the performance of others.

Mr. Lawrence: What's your impression of the impact of the Chief Financial Officers Act after 10 years?

Mr. Gotbaum: Enormous -- as I said, it's enormous progress and even more progress yet to be achieved. What we can say, thank God, is that we have CFOs, we have financial standards, we have financial auditing, and we have reporting.

What we can't yet say, is that we have systems in place to use that information reliably as part of program management. In other words, Kmart, Wal-Mart, Ford Motor, any business you name: they run their business by a continual stream of information, a combination of financial and performance information, so that you know what are sales in a particular division, and what they are by a week, by a month, et cetera.

In the federal government, we don't have that level of information and that level of control. So, we do after-the-fact estimates for what we've spent. We do after-the-fact estimates for how many people we've helped.

The real task is to do that on an automated, reliable basis. That's really what we have yet to achieve.

Mr. Lawrence: The Chief Financial Officers Council has been working on a statement on the 21st century CFO. What changes is the council proposing and what will their impact be?

Mr. Gotbaum: This is a real encouraging development. I should talk for one second about the Chief Financial Officers Council, because one of the things we've discovered over the last five or 10 years in the federal government, is that for the first time, in many instance, people are willing to look beyond their own turf and their own stove pipes, to recognize that they have common problems.

One of the most depressing things about working in the government is the extent to which people think that their problems are unique. I have to keep track of my program, and my problem looks completely different from the next grant manager's program.

The Chief Financial Officers Council, and its counterparts for Chief Operating Officers, the President's Management Council for Inspectors General, for Chief Information Officer, et cetera, represents a recognition by agencies that they have common problems.

So, what we've done is in instances where there are common problems -- for example, computer security, where agency after agency after agency recognizes they have a problem, rather than each of them trying to solve it on their own, they pull together, they actually work together, and they say, "What standard should we follow? What rule should we follow?"

On the chief financial officers, for example, we energized an organization that tested commercial financial software, software that was being offered to the federal government. We said, "We're going to set up a single organization, we're going to set up a set of standards for that software, and we're going to have an organization to test to see whether they meet it."

That way, the Department of Housing and Urban Development doesn't need to go through its own trials, it can rely on it.

So, this is a really important development. What the CFOs have done over the past year, since this is the 10th anniversary of the CFO Act, is they've said, "Where can we go further to adopt the private sector CFO model to do our jobs better?"

What they concluded is that they still had a ways yet to go on a couple of dimensions. For example, for historical reasons, the federal government still keeps a lot of financial information separately from its budget information. Obviously, that doesn't make a lot of sense. Most chief financial officers actually are responsible for both, but they operate them out of different shops. So, one of the things that the CFOs did is they said, "You need to integrate information. You need to take budget information and performance information, capital planning, reengineering, to follow the private sector model in which the CFO was a place that could provide advice and judgment about program management generally." So, that's one thing they said.

Another thing that they said, is there are real issues here of compensation and pay. The federal government is, in some respects, lagging. We need to look at that. We think that if you're going to keep on attracting the talent that you need, you're going to need to recognize that you have to pay for it.

Then they've made some other suggestions. These are, right now, suggestions we're discussing within the administration, and which will then, in some way, be put out and given as a gift to the next Congress and the next administration.

Mr. Lawrence: Got to go to a break. We'll be right back in just a few minutes. (Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, a partner at PricewaterhouseCoopers. Tonight's conversation is with Josh Gotbaum, executive associate director and comptroller, Office of Management and Budget.

Well, in this last segment, let's look ahead to the future. Then, part of the future is technology. Technology has become an increasing part in the importance of success of all government agencies. What's OMB doing to insure the increased use of technologies is taken advantage of?

Mr. Gotbaum: A lot of things. First of all, we have said that in order to take best advantage of technology, you ought to follow the kinds of capital planning processes that are used outside the government, inside the government.

This is something that was done by former OMB director Frank Raines, in what's now known throughout the government as Raines Rules. He said, "Think commercial. Think modular." Et cetera. Like that.

Congress helped with the Clinger-Cohen Act, whose formal name is some long thing that comes out to ITUMRA, and said, 'yes, you should use technology, but you ought to plan it out in advance. You ought to rely, where possible, on commercial applications. You ought to do your business planning first, and your architecture second, and your procurement, third.' You know, things that are basic.

What we in OMB do, again, is this combination of providing guidance to agencies, saying that as you do capital planning, you need to let us know that you have followed Raines' Rules. You need to have a capital plan. You need to have thought through these questions of architecture.

Then we say to the agencies, if you do this, and you propose funding for the system, that we'll support it. Because that's, really, where the marriage of management and budget comes to fruition.

For example, as I say, we met today with the Treasury Department on their financial management issues. One of the long standing difficulties has been the Customs Service, which is in desperate need of modernizing its systems, and which has been unable to do so, both to figure out a design that worked, and to get Congressional buy-in.

What we've done is we've worked with them in developing a plan that makes sense and involves consultation with all of their constituencies, and then gone to the Congress and said, 'it really matters. You've got to fund it.'

Mr. Lawrence: Is using new technology just buying hardware and software?

Mr. Gotbaum: Would that it were that simple. Of course, there are plenty of people who view technology as an excuse to do the same old thing faster, using silicon instead of paper.

But we don't think so. We don't think that's how it should be. So, one of the things we do as part of this process, is to say, 'have you rethought your processes?'

We do this in a number of FORA. For example, the President last week announced the creation of Firstgov, a search engine for all of the government web pages. But there was more than just a search engine there. Among the things that we are trying to do is to give people a single point of access to all the grant programs in the federal government, to give people a single point of access to procurement programs. What will flow from that, naturally -- not easily, but naturally -- is that they will begin to do comparisons about the processes that they have, the procedures they have, et cetera. When you're all tied to one website -- when grant programs are tied to one website, it's harder to explain why it is they need 15 different forms. So, there will be a natural pressure that we hope to take advantage of, to streamline the processes of government afterwards.

Mr. Lawrence: Is this e-government? Is this what we're talking about? Are we talking e- government?

Mr. Gotbaum: This is a part of e-government. But I think of e-government as taking advantage of the electronic revolution and all the processes of government. Whether they are a trucking company applying to the Department of Transportation for a trucking license on-line, paying for it with a credit card and getting the verification electronically and the receipt in the mail, which they can do today, thanks to the Department of Transportation's adoption of a new software. Or the Social Security Administration saying you can check your records electronically, whether it's by telephone -- a form of electronic communication -- or on-line. Or the Internal Revenue Service, which now has literally tens of millions of people who are doing business with them electronically.

So, this is more than just eliminating paper. It's providing connection and access; it's providing education and communication in ways that we weren't able to do before.

One of the things that we're working on right now is that each year, federal agencies turn out on paper inventories of positions that might be potentially commercial. We publish it in the Federal Register. Well, this year, we're going to do more. This year, we're going to put it on a website. We're going to put links to the agency website so that someone can, without having to wade through 9 inches of the Federal Register, figure out what's going on in each agency that he or she cares about.

So, we think there are a myriad of opportunities there.

Mr. Lawrence: We hear a lot today about the forthcoming retirement wave, and the difficulty of attracting people to government when the unemployment rate's so low. How does OMB deal with these recruiting challenges?

Mr. Gotbaum: OMB is, fortunately, the recipient of the best and the brightest coming out of colleges and graduate schools. It is no different than PwC, or Lazard Freres, or whatever, in the sense that we get fantastic individuals, and we work them very hard.

We recognize the fact that many of them will move on after three years or five years, et cetera, and a few will stay and become members of management. That's a model that we can use, and we benefit from it. It's obviously not a model that applies to all of government. So, we really do think there is an issue for government longer term, and that there are some bills that need to be paid.

Now, over the course of the past decade, we have been working and providing increased flexibility in personnel. But one of the things we've discovered is that you can lead to a personnel officer to water, but you can't make him drink. So, just to give you one little for instance, recently there were some fires. There had been very extensive wildfires in the West. It turned out that one of the problems was that there was a provision in the law that said that although you could pay overtime to someone who left their job to supervise firefighters, you couldn't pay them more than a certain level. So, in some cases, we had people who were taking a pay cut to go out and help supervise firefighters. It was outrageous. What we discovered is that it didn't have to be that way; that agencies had the authority to pay bonuses that could make up the difference. But it hadn't occurred to them to use it. When we said, 'why don't you use your bonus authority, there was some resistance. This was new.'

So, one issue, we find is that we've got to encourage people to use the flexibility we have. But after that, and this is one of -- I think will be the real challenges of the coming decade -- I think we need to recognize the fact that as the economy grows and we are the beneficiaries of a wonderful economy -- as people make more outside the government, unless we find ways to compensate people within the government, we're going to stop getting the best and the brightest.

So, one of the issues that Bob Rubin, when he was Secretary of the Treasury always said, is 'you've got to pay attention, in addition to initiatives, to the core functions of government.'

From my perspective, one of the issues long term that we need to do now that we have a surplus and we can think about investing for the future and paying down the national debt is we need to recognize the fact that part of that core is the human capital and the talent of the people we have, and that their compensation, and their working conditions, need to be competitive with PricewaterhouseCoopers.

Mr. Lawrence: Or the dot coms. Well, listen, we're out of time, so I've enjoyed our conversation very much. Thank you for making so much time available to us.

Mr. Gotbaum: Oh, it's a pleasure. Thanks very much.

Mr. Lawrence: This has been The Business of Government Hour, conversations with government leaders. I'm Paul Lawrence, a partner at PricewaterhouseCoopers and the co-chair of The PricewaterhouseCoopers Endowment for The Business of Government. For more about the endowment's programs and research into new approaches to improving government effectiveness, visit us on the web at endowment.pwcglobal.com.

See you next week.