But having said that, the functional classification system has been very effective in bringing a sense of coherence to budget decisions in this area.

I would now like to discuss some long-term trends. In your opening remarks, you mentioned something I was planning to note as well, which is that the general public's perception of foreign aid programs is way out of proportion to their actual size. This perception has troubled policymakers in this area for the better part of 20 years and its effect has been a less than strong public clamoring for foreign aid spending.

There is a strong desire to have a major United States presence in the world. But when the perception is that 10 or 20 percent of our budget goes to foreign aid programs, Americans think that is too much. I think we all have an obligation not just to educate ourselves, but to have a conversation with the American people. We need to make clear that the current level of spending is really a very small commitment. At 1 percent, of the entire Federal budget it is down to the bare minimum.

I do not pretend to be an expert as to why the public believes that foreign aid consumes a larger percentage of the budget than it actually does, but I suspect that the lack of clamoring for foreign aid spending is not unrelated to this misperception.

I would like to put up a chart which illustrates some things about the long-term trends since 1976 in the function 150 programs. I will not go into each of the chart lines right now. I would be happy to answer questions about them, but I would instead like to make some general points about the chart; my full testimony does go into the trends, in each category. As a picture, I think this chart tells us things about foreign aid spending that are really very important.

First of all, there are some jagged peaks. Each peak can be explained by an external event that created a situation where there was a need for the United States Government to respond. For example, the Camp David Accords was something that we helped to bring about. Nonetheless, it was a situation in the world that required a new commitment. A drought that we had no control over. If you remove those peaks and look at the period from 1976 to 1995, there is a pretty flat trend in spending, in constant dollars. For the most part, international discretionary spending, in 1976 dollars has been clustered in the low $20 billion range.

In the period from 1995 through 1998, there was a policy decline, and I think it needs to be broken into two parts. I think the first part was a response to the changing situations in the world, and the second part was a decision to retrench in terms of our commitment of resources. For the first part, the key external event was the end of the cold war, which caused us to have changing requirements. For the latter, the event was obviously a change in politics which realigned thinking in many areas, including function 150 spending.

We were very troubled by the second part and I think your opening remarks suggested that you were too. That is why we started the 1998 budget and entered the budget negotiations with such a strong commitment to reverse the very dangerous trend that was threatening our ability to maintain the role of the United States in its bilateral relations, in its international relationships, in its multilateral relationships in financial institutions and other international multilateral institutions.

I am very pleased to be able to sit here today and say that, as a result of the bipartisan budget agreement and the legislation moving through Congress, we have, to a great extent, accomplished what I think are our common objectives. If one looks at the appropriation bills, there are some issues on which we still disagree, but, in general, there has been a recognition of the fact that the line had gone down and needed to turn back up.

Such recognition has been reflected in the spending levels for programs like AID, and in commitments to the United Nations and to multilateral development banks.

We are disappointed that, in a number of instances, programs for which accommodations were made in the bipartisan budget agreement have not been fully funded. Two in particular are the funding of the New Arrangement to Borrow and the advance appropriation of outyear obligations in the international organizations, both the United Nations and the MDBs. We believe the funding of these obligations is critical and should not be done in a time of crisis.

We now find ourselves at a moment where there is an international financial crisis, but it is not one that we would use these resources to address. The history of the past several years, particularly the situation in Mexico, is proof that it is necessary to have things like the New Arrangement to Borrow funded and in place so that we have a tool that we can use in a timely manner when we decide that there is a need to respond. Given the speed with which information now flows through the world economy, it changes very much our ability to formulate a response through the legislative process after a crisis has surfaced.

In sum, our view is that, in general, the appropriation levels for the Foreign Aid 150 Programs in fiscal 1998 are very much in accord with the bipartisan budget agreement and the spending levels that we believe are necessary. With regard to the obligations such as the New Arrangeent to Borrow and the international organization outyear arrears, we would very much hope that they be addressed before the end of this session. If not, we hope that the budget resolution provisions that permit cap adjustments remain in effect so that, to the extent they are not fully addressed this year, they can be addressed next year.

I would now like to turn to the question of GPRA, or the Results Act, issues that I know the committee is very concerned about. There is a telephone-book thick set of submissions that have been made by the different international organizations. I will not try to summarize each agency's goals or implementation plans, but I would like to make a few overall comments about their value, and in particular their future value.

The plans were timely. They were complete. Having looked through them myself, they helped me to understand the agencies that we are dealing with better than I did before. They gave me a better sense of what is behind the policies and programs that we see. There are really three levels of detail here, and I think it is important to distinguish between, and note the value of, each level. There is a 150-wide review that was an attempt to coordinate, at a very global level, our international affairs concerns. By necessity, it is not terribly helpful as a tool for making specific policy decisions because it is at such a high level of aggregation. At the

e time, it is a way of looking at all of the things that we are g to see if they hold together as a set of goals. I think it has ed us think through those issues.

e also have the agency-level presentations and reviews, and are still at a high level of aggregation. Given the nature of rnational programs, which especially in bilateral relations ded on individual country-specific issues, these will again help to le, but not direct, us towards the full value we could get from ults Act reviews.

think as we go into the next year or two, we may have an opunity to reap the biggest benefit. We already see pilot projects ere we are looking at country-specific objectives and plans that enable us to rethink, at the ground level, the operational sigcance of the issues that are raised in the Results Act reviews. enator SMITH. As I remember, the Results Act review is to idenplaces where there is overlap. Has there been any glaring diseries of where agencies are overlapping?

Mr. LEW. A glaring discovery suggests we would have been unare of them. I think, in many cases, we are aware of overlaps terms of responsibilities. I think the Results Act gives us a way think about how we can deal with those overlaps. Some overlaps estatutory. We have, for example, the division of responsibilities ween, at the largest level, the State Department's role with rerd to non-financial issues and the Treasury Department's role th regard to financial issues. Obviously, there is a need to have e policy. They cannot go off in separate directions.

We did not need to do a Results Act review to know that. But e Results Act review does help you think through, on an operional level, whether the goals that you are setting in the State epartment and the goals that you are setting in the Treasury Dertment are consistent, whether the measures of success are going be such that if you succeed in one it does not mean you fail in e other-in fact, whether it makes you more likely to succeed in e other. But they will not always be exactly the same. There obously has to be overlap, but there has to be some difference as ell.

I want to conclude by suggesting that the Results Act focuses on omething that was our obligation prior to its enactment, and connues to be our obligation, and that is to look, in a world of scarce esources, at the question of whether we are allocating our reources towards our highest priorities. And also, whether we are pending the dollars well in each of the areas in which we allocate hem.

On the "spending it well" side, we are very much in accord with he notion that we have an obligation to review whether we are getting the best bang for our buck. In something as decentralized as the foreign policy programs, when you are talking about a mission that is remote, and that is not connected to a headquarters except by telephone and computers, it is more of a challenge than when you are all in one building.

We have made it an objective in this Administration to try and reach out not just at the State Department or at the Treasury Department or at the Ex-Im Bank in Washington, but to have reforms that go out to the far-spread programs and outposts where we actu

ally implement our foreign policy. It would be an exaggeration to say that we have had complete success. It would be fair to say that we are making progress, and the Results Act has helped us to focus on that and to continue to make progress in this area.

I want to thank you for the opportunity to go through this overview. I would be happy to answer any questions that you, or as they arrive, other members of the committee might have. Thank

you.

Senator SMITH. Thank you very much.

[The prepared statement of Mr. Lew follows:]

PREPARED STATEMENT OF JACOB J. LEW, DEPUTY DIRECTOR, OFFICE OF
MANAGEMENT AND BUDGET

Mr. Chairman, Senator Sarbanes, and members of the task force, I am pleased to be here to discuss with you: the structure and organization of budget function 150; how function 150 spending for international affairs activities is adjusting to changing needs in international affairs; and the status of the Government Performance and Results Act (GPRA) strategic and performance plans for international affairs activities. I will also highlight some significant achievements in function 150 programs in the recent bipartisan budget agreement.

INTERNATIONAL AFFAIRS AND THE BUDGET

The Federal budget and the executive branch budget process are well organized to support international activities. Recent Administrations have followed the practice of making comprehensive budget requests for international affairs activities. This is accomplished by making budgetary proposals for all international affairs activities, under the umbrella of budget function 150. Rather than reviewing the various international affairs activities individually by agency, the executive branch budget process looks at all major international affairs programs together to determine the optimal funding combinations to achieve U.S. foreign policy objectives. Budget function 150 includes activities of four cabinet departments State, Defense, Treasury and Agriculture; several relatively large agencies-the Agency for International Development, the U.S. Information Agency and the Export Import Bank; and about a dozen smaller agencies.

This international affairs budget review process has been followed by a number of Administrations dating back to at least 1970 and has been judged to serve them well. The relevant departments and agencies fully accept the approach and participate actively in the decision making process. They are all aware, sometimes painfully in periods of tight resources, that their programs must fit within the overall policy construct and budget constraints. The fact that congressional budget resolutions are trained in terms of budget functions has also added cohesiveness to the executive branch process and sharpened decision making.

An important characteristic of function 150 has been the continuity of its program content. No functional classification system can be perfect, and arguments can be made for changing components of the budget function. For example, in the 1970's there were pressures to shift international affairs programs relating to energy to the newly created energy function of the budget.

There are many activities outside function 150 that are international in nature ranging from the provision of U.S. military forces in Bosnia, to U.S. Customs Service employees abroad, to the international space station. Some might argue that function 150 should be enlarged to include them. Most, if not all of these programs, however, serve some other objective as their primary purpose; and, at least in terms of initial budget trade-offs, they are probably better considered in the context of other budget functions.

Successive Administrations, including this one, have been cautious about changes in function 150, and I believe this view has generally been shared by the Budget Committees. Of course, we are always open to discussions with you regarding adjustments to the budget functions.

LONG TERM TRENDS

Turning to trends in international affairs spending, I would begin by suggesting that the long term trend for function 150 belies a widely held misperception of the relative magnitude of international affairs programs. Public opinion polls have con