Press Briefing by John Koskinen, Chair of the President's Council on Year 2000 Conversion

The Briefing Room

1:00 P.M. EDT

MR. LOCKHART: Good afternoon, everyone. Joining us is John Koskinen, who is Assistant to the President and Chair of the President's Council on the Year 2000 Conversion. And because this is an intricate problem, we thought we'd send the right message by starting on time.

MR. KOSKINEN: Good afternoon, happy to see everyone. As Joe mentioned, as some of you may recall, I was Deputy Director for Management at OMB for three years, through July of last year, and then left and was asked by the President and the Vice President to return to take over the coordination of the federal government's response to the year 2000 problem. As you know, the President and the Vice President made presentations this morning at the National Academy of Sciences outlining both the nature of the problem and the challenges to the public and the private sector and the challenges internationally, as well as to the federal government, and described both the status in general terms of where we are with the federal systems, as well as the challenges we think that exist in the private sector and the initiatives that we've undertaken and are in the process of executing to provide whatever assistance we can to the private sector in particular to help facilitate their addressing this problem.

Q: Is the White House up to snuff?

MR. KOSKINEN: The White House is busily engaged in dealing with this problem. Its computers are not at this time Y2K compliant, but they have a plan, as with most federal agencies, to complete their work by the March 31, 1999 deadline.

Q: The President and the Vice President cited the Social Security Administration -- what about the rest of the government, where are the problems in particular?

MR. KOSKINEN: As the President noted, he has asked the Cabinet agencies, the major agencies, to report to OMB on a quarterly basis the status of their progress, and those reports are released shortly thereafter, after they're analyzed. As a general matter, about a third of the agencies are in what's called the tier three or making satisfactory progress, nearing completion, and those include the Social Security Administration and those benefits, the Veterans Administration, EPA, FEMA, NASA and others.

The agencies that have the largest challenges, to a large extent, are the agencies with the most complicated and, in some cases, the oldest systems. Actually, the federal government operates some of the most complicated and largest systems in the world. So at this point the agencies dealing with those challenges that we're focusing a lot of time and attention to are the Department of Defense, the Department of Health and Human Services, particularly the Health Care Financing Administration, the Departments of Education and Transportation, the Department of Energy and USAID are the six agencies in the last OMB quarterly report listed in tier one, which was described as needing to make greater progress.

Q: They are some of the most critical, aren't they?

MR. KOSKINEN: Those clearly are some of the most critical systems, there's no doubt about that.

Q: What about IRS?

MR. KOSKINEN: IRS and the Federal Financial Management Service at Treasury both have large, complicated systems. But at this point, the judgment is that they have in place the appropriate management teams and strategies and are making appropriate progress. So Treasury generally is within the OMB category tier two, which is making progress, but still substantially challenged.

Obviously, the IRS has what may be the most difficult and complicated set of interrelated systems in the government. But Commissioner Rossotti is a very experienced manager in this area and I think has a significant challenge, but also I think is on schedule to be able to ensure that those systems operate.

Q: What is your goal?

Q: Do you expect to make the goal, that the whole federal government will be all ready?

MR. KOSKINEN: Yes, at this point we expect not only to make the goal, but we expect to have all mission critical systems or most mission critical systems completed by March 31, 1999, which will give us nine months to continue to work on them. As the private sector has found, this is a unique problem and a complicated, interrelated one. So once you think you're done is the time you begin to continue to test to catch the last mistakes. But at this stage, I have met with actually the heads of 43 different federal agencies separately with their staffs. And the Cabinet, in particular, officers have all assured me that they are, a, paying attention to this; and, b, that they will meet the government deadlines.

Q: What is it exactly? You talk about management systems in place. But what is it that you are doing for them and they have to do for themselves -- is it the purchase, design of a corrective system -- what do they have to do?

MR. KOSKINEN: From the standpoint from the federal agencies where we're spending a significant amount of our time, but not all of it -- we're spending some time worrying about the outreach issues, but with regard to the federal agencies and the chair one agencies in particular, after the last quarterly report, we announced that I would be attending the monthly senior management meetings in each of those agencies to work with them -- not that I have great new insights, but primarily to ensure that we provide whatever support is necessary to those agencies.

And what they need to do -- a critical need for those agencies is to set priorities. That is, not within the mission critical systems, but priorities between work on the year 2000 and all-over computer work. So, for instance, in the IRS reform legislation that just passed, the Congress agreed in response to Commissioner Rossotti's request to delay the implementation date of several the significant provisions that would have required substantial programming and would have jeopardized the IRS's ability to meet the year 2000.

The Health Care Financing Administration announced a couple weeks ago that they were going to have to delay the implementation of some of the balanced budget act amendments that would require programming such that it would interfere with their ability to get to the year 2000.

So the reason I have announced several times that I think the FAA will, indeed, make this deadline is because they have reorganized the way they have thought about this problem, they are now making decisions to make sure that the year 2000 problem is the highest priority in their internal agency processes -- which means that some important and needed modernization are upgrades that would be nice to have will be delayed in their implementation.

So you've got three examples there. And what I'm focusing on with the other agencies is to make sure that as we move through this process, that they ensure that nothing else they're doing -- even though they may be important policy initiatives -- interferes with their ability to deal with this problem.

Q: And are they buying new programs or buying expertise to change the systems they've got, or buying new systems?

MR. KOSKINEN: That's a good question. It's actually all of the above. The decisions the agencies made when they started on this project when I was here before, in 1995, was the first stages -- do an assessment and actually create an inventory of all of their systems; analyze which ones could simply be retired without being replaced at all, which ones needed to be replaced and which ones needed to be renovated.

So on those that they're retiring, they have done that already. And they, therefore, have a two-pronged effort. One is to go through appropriate replacement strategies where that seems to be the most cost-effective and efficient way to proceed. And for other, particularly large customized systems, to go through the renovation process for those. Whether they replace or renovate, they then have to test the solutions before they finally implement the year 2000 solution.

Q: What's your current best estimate of the government-wide cost of bringing the systems into compliance?

MR. KOSKINEN: The current estimate to OMB and, again, published in their last report, is $5 billion, which would run from Fiscal '96 to the first quarter of Fiscal 2000. About $1 billion of that is in the President's budget request for '99. There's about $200 million in addition that will be spent from prior year funds. So the spending estimated for Fiscal Year 1999 for the government at large is about $1.2 billion.

Q: Has Congress gone along, given you everything you want, or have they --

MR. KOSKINEN: As a general matter, there's been great bipartisan support for dealing with this problem. Unfortunately, there's been some hiccup along the road in the House in terms of how to deal with the President's basic request and as well an emergency fund. The President's budget requested the billion dollars in new authority for '99, spread across the agencies specifically identified to deal with this. The President's budget also had a $3.2 billion contingency fund for emergencies designating year 2000 as one of those emergencies.

In the Senate, Senators Bennett and Stevens proposed that there be a designated year 2000 emergency fund of about $2.25 billion. On the House side, what's happened is there's now been a move in some subcommittees to move the budget request for the year into the emergency fund. And there's a debate going on about whether the emergency fund has to have offsets as opposed to the normal way of dealing with emergencies, which is that they do not have offsets that are above the budget caps.

As I do a monthly briefing for Hill staffers, as I told them two weeks ago, from my perspective I'm not concerned about where they provide the money and how they provide it, but I am very concerned that it be provided with adequate amounts and in an appropriate time frame. If this gets caught inadvertently in the end game that comes down to the end of the fiscal year, that will present a major challenge and risk to the agency work on the year 2000.

I think the leadership generally in the Congress has been very supportive and understands that. And my strong hope is that the year 2000 funding will not get tied up in the normal end of session budget debates.

Q: By risk do you mean it could delay implementation of the program --

MR. KOSKINEN: Yes, there's no doubt. If the agencies to not have a clear ability to plan the amount of money they're going to have for the year 2000 and have that money on October 1st, for some of them it will be a risk of implementation and a risk of meeting the government deadlines.

Q: Will you describe what problems could take place prior to the January 1, 2000 date, and also address how many of the agencies that are in good compliance are simply ones that had to address this problem many years ago because their systems are so forward-looking?

MR. KOSKINEN: You only get two questions at a time, the third question I don't have to answer, right? The first question -- what was the first question?

Q: What problems could arise --

MR. KOSKINEN: Forward-looking problem -- it's a good question, as I was thinking about it. There is an assumption that the year 2000 problem will only show up on that Saturday, January 1, 2000. And the question is a good one because any system that looks forward into the year 2000 will reveal the problem whenever it has to do that, so if you're, for instance, now trying to make a hotel reservation or an airline reservation in the year 2000, in many cases you can't do that because the computers are still being renovated. Similarly, corporations that have fiscal years that start before the end of the year -- federal government for instance, has a fiscal year that starts on October 1, so October 1 of 1999 will be the start of the year 2000 fiscal year. So in many of those cases you'll begin in advance of January 1, 2000 to begin to see if there are problems as you go forward.

And that corollary then is the answer to your second question of did some agencies sort of get a head start and that's why they're in good shape, including Social Security as one of those agencies. Social Security started working on this problem in 1989 because they do a lot of actuarial and forward-looking calculations and at about that time discovered their systems couldn't deal with the transition from 1999 to the year 2000. So they began to work on it.

They got far enough ahead and have done such a good job that when we set up the first working committee in the government in 1995, we had the Social Security administration people run that working committee for us because they already had significant experience. Others -- FHA and others in as early as '93 had the same issue when they were looking at forward calculations for seven-year debt, and they discovered that they needed to, in fact, adjust their systems. So those that ran into the problem, recognized it and dealt with it did indeed get a significant head start.

Q: There are some high priority programs where upgrades would be deferred so that they could concentrate on the Y2K. Are there any programs that are being deferred and that will require either presidential or congressional action to let them defer them?

MR. KOSKINEN: Yes. As I noted, the IRS had to get congressional approval in the IRS reform bill to delay the implementation dates; otherwise, they would have been implemented at a time that would have made it impossible for the IRS to proceed.

HCFA is dealing with its 70 private sector contractors who administer Medicare and Medicaid -- or actually Medicare -- is such that, obviously, that's -- the delay of the Balanced Budget Act amendments require both administration and congressional understanding as you go forward.

There will be others. I've just had discussions in my monthly meeting with the Department of Education that what people have to understand is even the normal adjustments in payment cycles or payment systems or amounts require in many cases substantial programming either by the federal government or by those administering our programs. So one of our focuses is on working with state and local governments because a lot of federal programs are actually administered by the states. So unemployment insurance, Medicaid, job training are actually programs run with federal money by states for us, so we need to have an assurance that their systems are being renovated and upgraded.

Q: And have you found any reluctance to go along with this on the part of Congress or the White House for that matter?

MR. KOSKINEN: No. At this point, as I say, as a general matter, I've been delighted with the bipartisan response. Senator Lott and a number of senators have basically said, let us know what we need to do, what support you need, and we'll give it to you. And I continue to expect that this is a unique, clearly once in a lifetime problem and I would be extremely disappointed if we didn't have ongoing and continuing cooperation from the Congress.

Q: What does the government compare in terms of dealing with the problem with the private sector -- and also, I guess in laymen's terms, can you explain to ordinary folks what the government agencies need to do to get up to speed?

MR. KOSKINEN: Yes. We compare -- well, we're clearly ahead of 90 percent of the world in terms of countries or governments, which is why I believe our risk exposure is international rather than certainly domestic or from the federal system. From the standpoint of comparison with the private sector, as the President noted this morning, we are well ahead of a whole series of companies who have not yet started to pay attention to the need to assess for this problem. So there are a lot of small, the medium-sized organizations in almost every industry group who are significantly behind the curve, and we are trying to reach out to them to get them to pay attention.

With regard to the large financial organizations -- banks, insurance companies, and securities firms -- many of them started at about the same time as the government earlier, and it depends on the institution as to -- and which part of the federal government you're comparing it to -- as to where they are. Social Security is clearly ahead of a lot of federal agencies and private sector agencies. On the other hand, there's been a lot of very good work done by large complicated systems owned by private sector companies who are ahead of some of the federal agencies that are still being challenged.

In terms of the laymen's view of what you have to do, one of the things we've stressed is that this is not a technological problem. The fix is relatively straightforward and understandable. If you're calculating a year with two dates, you have to in fact change the program so it has four dates -- it takes a little bit of work to do that.

The problem is it's a management challenge because when you start talking about millions of lines of code that have to be reviewed to find out where those dates are operating and then correct it, what you have to do is be able to manage that project. And it's a problem, and it's not just the federal government; any organization that has large, complicated, interrelated systems has to fix a line of code, has to check that that program runs, has to check that that software application runs, has to then check the interfaces with all of the other systems in that organization, and then has to check the interfaces with all the organizations with whom they relate.

So as noted, the Securities Industries Association which has done, I think, a terrific job in this area, started yesterday what they call "beta-testing" or "testing of the test" in preparation for what they're calling "street-wide testing," which will take place early next spring, in which they will test the ability of all participating financial organizations on the street to be able to exchange information across organization lines, because, obviously, everyone is interconnected in their ability to make transactions, to make trades, to close them, to move the funds through the system.

So you'll hear some people talking about end-to-end testing. What they're talking about, for instance, in Social Security is not whether Social Security can just issue the check, but can a beneficiary walk into the office, register someplace in the United States as a beneficiary, have that application processed, a check written, paid out through the system to that beneficiary, deposited in the bank, and cleared. That's the whole process, end to end testing.

Q: You mentioned your general delight with the bipartisan consensus on this to date. Yet, both the President and the Vice President expressed their concern that this issue might be used as a political football. What is the cause of their concern and what do you see as the political angle of this situation?

MR. KOSKINEN: Well, I think there is some concern, as I say, before the recess that the funding for the year 2000 got very complicated kind of all of a sudden on the House side. And the issue of how you would pay for the year 2000 and whether there would be offsets against what was in the budget, how you would treat the contingency funding got to be less clear than it had been. And I think there is a concern that if we don't clarify that we could, in fact, end up, as I say, with a lot of arguments about the budget near the end of the fiscal year, which may -- always seems to happen -- somehow drag the year 2000 funding along with it. And that would be the concern that we all have.

Q: You sound fairly optimistic about the federal government moving ahead with this. When you look at the commercial and the private sector and the global application of all this, do you think that come the year 2000 that serious problems are inevitable?

MR. KOSKINEN: I don't think they're inevitable. In fact, one of the challenges of this problem is no one knows what the end of next year is going to look like because no one has enough real data. There are a lot of people issuing opinions and guesses, but no one has enough hard data to make an estimate at this stage. Some of the guesses are more educated than others, but they're still basically projections on the basis of what limited knowledge is available.

But with all of that, my guess -- and many people have said that somehow I've been brought in to calm everybody down, or I'm optimistic -- but you keep telling us all of these worrying stories and I say I'm going to quit smiling when I tell the stories. We have great risks, I think, internationally. As the President noted, it's not only a global village, it's a global economy; and it's an economy globally, as well as nationally, that depends increasingly on the ability to exchange information and financial services electronically. So that, much like the old adage that a chain is as strong as its weakest link, we are concerned that there are weak links out in the international arena.

One of the reasons the securities industry is doing street-wide testing, as they're calling it, is to test all of the linkages domestically. But obviously, we have significant economic and other exchanges around the world. And as I said when I started, if the Singapore Stock Exchange -- just to pick an exchange -- doesn't open on that Monday, January 3rd, that's a problem for us, even though it's not our exchange, we don't have any control or authority over it. So we are concerned about international telecommunications, international financial transactions, international transportation. And one of our goals, while we have no control or responsibility directly over any of those systems, has been to reach out as best we can through international organizations to try to get countries around the world to treat this problem seriously and to pay attention to it and to start to solve it.

Q: Can you touch on how state agencies are doing in systems that they use in conjunction with federal programs, like, for example, of the IRS you said looks on track to be ready by the time the problem would manifest. How are the state tax agencies doing --

MR. KOSKINEN: The states are -- when I was at OMB I was accused of viewing the whole world as a bell-shaped curve. But the states kind of fit along a bell-shaped curve. Some are doing very well, started on it early, are reporting directly to the governor about it. Others at the other end of the spectrum were somewhat concerned about whether they are paying the right amount of attention to it. And the bulk of them were in the middle, doing a lot of work.

We have exchanged -- at their request, actually -- earlier this spring with all of the states all of the data exchanges between the federal government and the states. So each exchange of data point has been now inventoried and isolated in terms of who runs it on the federal level, who runs it on the state level, and we're now in the process of testing those data exchanges. And it will provide us the first hard information not only of how we're doing, but how they're doing, because if the data exchange works it means it's very likely that the systems behind those data exchanges work.

So we're monitoring that now on a monthly basis and it will be able to isolate for us which federal programs are not able to participate in the data exchanges, and also which states and which state operations are not.

The National Governors Association has arranged for a summit meeting here in Washington later this month with the senior technical and political people in each state working on this problem to come to Washington to meet as a group. We will meet with them and talk with them about the problem. As a general matter, I think it's safe to say that we have high hopes the that states across the board will be able to deal with this problem effectively and each federal agency is dealing with their counterparts.

Of greater concern to us than the states, though, are a lot of the small to medium-sized counties and cities, much as we're concerned with small to medium-sized businesses -- that the problem with both foreign countries with small to medium-sized businesses and small to medium-sized counties and cities is that they all assume if they're not running a major mainframe operation this is not their problem. And what they're overlooking is what I call the growth industry of the problem, which are imbedded chips or integrated circuits -- which there are billions loose in the world, which run everything, as the President said, from major operations to home appliances.

It turns out that we actually now run everything from oil refineries to waste treatment plants to power plants to water control plants with people sitting at computers responding to the information provided by sensors embedded in the process.

So when a lot of medium-sized cities and counties say we're not in the information processing business, one of the things we're trying to get them to understand is they have an issue about whether their major equipment will start and whether it has an embedded chip that will cause it not to function; concern that they need to check all of their emergency response equipment to make sure that their mobile communications systems function. We're concerned that they all look at their local utility operation. We have a lot of municipal and other utilities that are operated. We're concerned that they look at their local medical care systems. There are a lot of county-owned and county-operated hospitals and other health care facilities, all of which have the potential to have difficulties.

In some ways it would be a lot easier problem if we could guarantee that everything would stop because then everybody would go out and fix everything. The problem in the embedded chip area is the estimates -- and they are just estimates, although they're better than the guesses about what's going to happen -- but the estimates are that one to two percent of the chips have a problem, which means that 98 percent or 95 percent will function fine. The problem is you have to figure out which are which.

And you have to remember that in one year alone recently, we shipped approximately 5 billion chips into the market, which at two percent means there's 100 million chips out there that potentially are a problem. So our pitch to small and medium-sized businesses and small and medium-sized counties and cities is you have to make an assessment of this problem. We don't want people wasting money, buying systems, or replacing them that they don't need.

But on the other hand, it was a startling number when Wells Fargo came up with a survey that half of the businesses that know about this are planning to do nothing. And it does strike us that that's a risk not only to them, but if they are enough small and medium-sized organizations not doing anything, that's a risk to the larger public as well.

Q: Why are they not doing anything?

MR. KOSKINEN: Because they don't think it applies to them. They look and they figure, my payroll is done by someone else; my accounting service is done by someone else. And at a minimal, we're saying, you have to go find out if those people are going to work, but the counties and others who have run -- the state of Washington advised me they're are large construction equipment, it turned out, when they rolled the clock forward, wouldn't start because it, in fact, depended upon regular maintenance servicing, and it thought when it rolled it forward, it had been 98 years rather than 2 years since it had been maintained.

So we've said that you have to look at fire engines; you've got to look at major construction and highway equipment; you have to look at bulldozers; you need to talk to manufacturers; you need to make sure that you're in the 98 percent of the chips rather than the two percent of the chips. And there's no way to do that other than checking it out one by one. Part of the reason for the President talking this morning was to try to get the message across that people cannot afford not to do that assessment.

Q: Have you all examined what liability the federal government might have with any ensuing year 2000 problem?

MR. KOSKINEN: We have not done a thorough examination of that. As a general matter, the Federal Court Claims Act specifically delineates what the federal government exposure is. As a general matter, you can't sue the government except for qualification under that act.

At this stage, we do not expect that the government has a major liability exposure, but as we've told a lot of companies out there, the way to limit your liabilities is to have your systems work. And one of the things we think is that the basic federal systems will either work or, if necessary, we'll have back-up plans that allow them to work. One of the things the President stressed this morning -- we're stressing to everyone -- even if you think your systems are done, you can never know that for sure, so you need to have back-ups or contingency plans for the failure of your systems, but, equally important, you have to have back-up or contingency plans for the failure of other systems on which you depend -- whether they are power, telecommunications, transportation. You need to be able to deal with what, in effect, you would do if there were a hurricane, if there were an earthquake, if there were a typhoon.

People have business recovery plans, and what we're saying is you've got to make sure that those plans are current and that you're able to continue to provide basic services in a face of a problem that may be unanticipated.

Thank you.

END 1:24 P.M. EDT