STATEMENT BY BRUCE B. DARLING BEFORE THE
HOUSE ENERGY & COMMERCE COMMITTEE
SUBCOMMITTEE ON OVERSIGHT & INVESTIGATIONS
February 26, 2003

Mr. Chairman, Mr. Deutsch and members of the Committee: My name is Bruce Darling, Senior Vice President of University Affairs for the University of California. On January 8, President Atkinson also appointed me interim Vice President for Laboratory Management.

I appreciate the opportunity to appear before the Committee today to address the management problems at Los Alamos National Laboratory. Let me assure you at the outset that I am not here to offer any excuses for the business, property management, and procurement problems at the Laboratory. On the contrary, the University of California takes full responsibility for these problems and is aggressively implementing the changes necessary to strengthen financial controls and restore the American public’s confidence in Los Alamos and the University’s management of it.

Our efforts have benefited greatly from the information made available by Glenn Walp and Steven Doran, other Laboratory employees, the Department of Energy Inspector General, the media and this Committee. All have been invaluable in the University’s effort to identify problems, to expose abuses, and to resolve them in an effective and decisive manner. I want to acknowledge in particular the leadership of Chairman Greenwood in this effort. If additional information becomes available today or at any other time, we will pursue it immediately. And we will continue to work with the Committee, the Department of Energy, and current and former employees at Los Alamos, including Mr. Walp and Mr. Doran, to accomplish our corrective actions.

Since the problems at Los Alamos have been reported in the media and discussed at this hearing, I will focus initially on the actions we have taken to date and then I will describe why we did so:

SWEEPING MANAGEMENT CHANGES

The University made sweeping management changes at Los Alamos starting in late December with the appointment of Vice Admiral George P. Nanos as Interim Director following the resignation of the Laboratory Director and the removal, and later termination, of the Principal Deputy Director. Admiral Nanos brings to Los Alamos a strong management background and valuable experience leading the U.S. Navy’s nuclear weapons program. He also commanded the Naval Sea Systems Command, the Navy’s largest acquisition command responsible for the design, construction, support and maintenance of all Navy ships and shipboard weapons systems, with four nuclear repair shipyards, seven Navy laboratories, 40,000 employees, and a $23 billion budget.

Soon thereafter, we removed the director of the Lab’s Audit Office. We removed and reassigned the Chief Financial Officer and his two deputies, and both the director and the deputy director of the Lab’s Security Division. We also rehired Mr. Walp and Mr. Doran, with full back pay to the date they had been dismissed by the former Laboratory management.

At the same time, senior University administrators took on direct, personal responsibility for managing Los Alamos functions.

UNIVERSITY MANAGEMENT OF LOS ALAMOS AUDIT OFFICE

The University Auditor is now directly managing the Audit Office. In that capacity, he has already taken a number of significant steps:

• He has strengthened the independence of the audit function by having the auditors of all three laboratories report directly to him.

• He rescinded the so-called “loyalty oath” prior to its mention in the DOE Inspector General’s Special Inquiry on Los Alamos operations.

• He has commenced peer reviews of the critical audit and assessments functions and redefined the internal audit reporting structures.

• He has developed a plan to bring current the substantial backlog of audit and investigation work utilizing existing staff, UC audit managers, and outside experts.

• He added an independent whistleblower hotline (1-800-403-4744) that improves confidentiality in order to encourage employees to report improper activities without fear of retaliation. This is intended to give employees confidence that their concerns will be investigated fully and in a timely manner. He is also implementing at Los Alamos recent University policies for reporting and investigating irregularities and protecting whistleblowers from retaliation.

UNIVERSITY MANAGEMENT OF LOS ALAMOS BUSINESS AND FINANCE

The Laboratory’s finance and business operations are also now being managed by the University’s Vice President for Financial Management, who has extensive corporate finance experience. In that capacity, she has taken the following actions:

• She organized a “red team” consisting of property, procurement and technology specialists from Lawrence Livermore National Laboratory to conduct a high level review of the organizational structure, business procedures and financial systems of the procurement and property functions.

• She is conducting an internal risk assessment of key financial and business processes, including a “cradle-to-grave” assessment of property acquisition.

• She adopted a more effective transitional organizational structure in the Business Division that includes enhancements to financial controls and business processes.

• She will integrate the financial control and business process improvements with the Enterprise Resource Project of the Laboratory.

• She named a senior procurement officer from the University as interim head of the Procurement Office and installed a new administrator to lead the purchase card program.

EXTERNAL REVIEW OF PURCHASE CARDS AND PROCUREMENT

Meanwhile, the University has directed an External Review Team — made up of two distinguished former federal Inspectors General and more than a dozen forensic accountants from PricewaterhouseCoopers — to expand its recently completed review of the Lab’s purchase card system to include all other procurement practices at the Laboratory, including Just-in-Time contracting, blanket purchase agreements, and local vendor agreements. As soon as the expanded work is done, we will report the results to the Committee and to the public and we will immediately address any deficiencies identified by the External Review Team.

EXTERNAL REVIEW OF KEY BUSINESS PROCESSES

The University has also retained Ernst & Young to conduct a comprehensive review and validation of the Laboratory's key financial processes; to review systems integration and controls; to assess the business organization and recommend the optimal organizational structure; to evaluate core competencies of the business organization personnel; and to recommend required employee skill sets. A team of over 30 Ernst & Young consultants has been at Los Alamos for several weeks now and is expected to report back to us next month.

PROPERTY INVENTORY

Property management is another high priority. To that end, we are moving forward with a comprehensive property inventory — the first since 1998. As you can imagine, at a facility like Los Alamos, which covers 43 square miles and includes some 2,000 buildings and $943 million in controlled property inventory, a wall-to-wall inventory is a massive but important and necessary undertaking. We have also conducted a survey of all Laboratory delivery sites, known as “drop points,” in order to assess vulnerabilities in security. Our external consultants will recommend additional property management controls that we will be instituting.

INTERIM OVERSIGHT BOARD

More strategically, President Atkinson has established an interim Oversight Board of University Regents and scientific experts to guide Interim Director Nanos and to ensure that necessary reforms are vigorously pursued at Los Alamos. Its membership includes three members of the Board of Regents, Richard Blum, Peter Preuss and Gerald Parsky; UC San Diego Chancellor Robert Dynes, a physicist; and Sidney D. Drell, a Stanford University professor emeritus and a noted arms control advisor.

Both Blum and Parsky are highly regarded financial experts with long experience in financial management. Parsky’s firm acquires and builds middle-market companies in the industrial sector of the economy. Under his leadership, Blum’s firm has helped to build numerous publicly- and privately-owned companies both in the United States and abroad.

Drell served in 2001-2002 as chair of the senior review board for the Intelligence Technology Innovation Center and also served from 1992-2001 as a member of the President’s Foreign Intelligence Advisory Board.

Dynes is a physicist specializing in semiconductor research. He came to UC San Diego in 1991 after a 22-year career with AT&T Bell Laboratories. He has two decades of experience consulting and advising on national laboratory oversight issues, including as vice chair of the President’s Council on National Laboratories.

Preuss is President of the Preuss Foundation, which is involved in brain tumor research. In 1970, he founded Integrated Software Systems Corporation, the first software company specializing in computer graphics. He is chairman of the Regents’ Committee on Oversight of Department of Energy Laboratories.

UNIVERSITY GOVERNANCE AND OVERSIGHT

At the same time, we are working on a larger revamping of the University’s governance structure for the three national laboratories it operates for the federal government.

External Oversight. We are examining various national laboratory management models for elements that we can draw upon to improve our own oversight: DOE’s Sandia National Laboratories, Argonne National Laboratory, Oak Ridge National Laboratory, and Brookhaven National Laboratory; DOD’s Draper Laboratory; and NASA’s Jet Propulsion Laboratory. Our goal is stronger oversight by people with expertise in science and weapons, technology businesses, and corporate governance who will hold the Labs and the University accountable.

For the new governance board, we are currently developing a list of candidates with experience relevant to national security laboratories. We are developing a charter and initial definition of roles and responsibilities for this oversight structure and its relationship to the UC Board of Regents, to the University President and Vice President for Laboratory Management, and to the Laboratory Directors. We will include a list of expectations for Laboratory Directors in creating and maintaining a culture of accountability at the Laboratories.

Internal Oversight. To ensure that the University remains fully engaged in oversight, not just at Los Alamos but also at the other two Laboratories, we are designing an improved internal University structure. It will integrate a broader array of University management expertise — business and finance, audit, legal counsel, and human resources — into the oversight of the Laboratories, create a strong support function and staff for the external oversight body, integrate external expertise into the University’s oversight, and create our own clear set of expectations and culture of accountability.

That’s where we are today. Now let me explain the events that led us to this point.

Without addressing every allegation you may have read about in the press or heard about in the hearing today, we clearly determined that the general thrust of many of the allegations concerning control weaknesses are valid. It is clear, for example, that the purchase card program at Los Alamos, which differed from the program used at the University’s ten campuses and two other UC-managed laboratories, lacked strong controls. The controls that did exist were not adequately enforced. It is also clear that Los Alamos did not impose the kinds of sanctions and accountability that would have encouraged employees to keep track of property for which they were responsible. And it is clear that the dismissals of Mr. Walp and Mr. Doran were unwarranted.

As I explained earlier, we have been aggressively correcting these problems. We also accept the challenge posed to us by Chairman Greenwood during his visit to Los Alamos last month to make our purchase card program a model for the nation.

PURCHASE CARD EXTERNAL REVIEW TEAM

Last August, when we first heard allegations of procurement card abuse at Los Alamos, the University immediately directed the Lab to establish the External Review Team to examine the Lab’s purchase card program. This team reviewed 45 months of transactions totaling $120 million and 170,000 separate transactions. Following issuance of the External Review Team’s final report in December 2002, the University Auditor, Patrick Reed, was dispatched to verify the Lab’s efforts to reconcile and review all questionable transactions raised by the External Review Team.

The University Auditor, in turn, submitted his interim report in February. It concludes that there were approximately $320,000 in costs that were questioned as to allowability. These costs, including some that cannot be documented because of records lost in the 2000 Cerro Grande fire, will be fully reimbursed to the Department of Energy immediately upon a determination by the DOE contracting officer that this represents a full and fair accounting of the questioned transactions. In addition, the Lab adopted the University’s purchase card program in June 2002 and has reduced the number of purchase cards in use by the Lab’s 8,500 employees from 1,100 to 561. Furthermore, all current cardholders and “approving officials” have been trained on purchase card policies and procedures. Numerous changes have been made in the policies and procedures governing the purchase card program in order to tighten internal controls and reduce the risk of fraud. We have decreased cardholder-spending limits and imposed requirements that each transaction be approved by a supervisor. We have also banned the use of purchase cards to buy inventory-controlled items. Finally, we have implemented sanctions such as revocation and suspension of cards for inappropriate card usage or non-completion of training requirements.

UNIVERSITY SPECIAL REVIEW TEAM

While the External Review Team was conducting its initial review, President Atkinson directed me on November 21, 2002 to lead a Special Review Team of senior University administrators to assess first-hand the scope of the problems at the Laboratory. During our visit to Los Alamos four days later, we identified weaknesses in the Laboratory's purchasing, property management, audits and assessments, financial management, security, and public communications programs and issued a report with nine findings and recommendations. To cite a few examples, we learned that:

• $4.9 million in purchase card transactions either had not been electronically reconciled in a timely manner or were otherwise under question;

• There was no systematic process to ensure that controlled property items purchased via alternative procurement methods (e.g., purchase cards, Just-in-Time contracts), were entered into the property inventory;

• There was an urgent need to evaluate the Laboratory's business systems, financial controls and accountability;

• There were ineffective processes to ensure that senior Laboratory officials were notified of inappropriate business activity at the Laboratory. In addition, there was an inadequate process to ensure that inappropriate activity, such as waste, fraud, abuse or theft, was reported to Laboratory management, the DOE Inspector General, and UC officials.

• There were unacceptable audit practices, both in terms of the timeliness of addressing audit findings and a serious backlog of unresolved repetitive audit findings.

TERMINATION AND SUBSEQUENT REHIRING OF MR. WALP AND MR. DORAN

In addition, our report to the President strongly recommended that the circumstances surrounding the dismissals of Mr. Walp and Mr. Doran — which, unbeknownst to us, occurred the morning of November 25 when the first Special Review Team met in Los Alamos — be referred for investigation to the Inspector General and that the University also investigate the dismissals, but in a way that would not interfere with the Inspector General’s investigation. Both investigations subsequently concluded that the dismissals were unwarranted.

On December 16, President Atkinson directed me to lead a second University Special Review Team to explore the circumstances related to the dismissals of Mr. Walp and Mr. Doran. We had already written both gentlemen on December 11 to request their assistance in addressing the procurement and property problems. On December 18, we interviewed ten Los Alamos officials and departed with serious questions about the events leading to, and the judgments exercised in, terminating their employment. We interviewed four additional witnesses the following day and, as a result, on December 20 we took two actions:

• First, we placed a call to their attorney to arrange a meeting to hear their allegations and to understand their views of the Laboratory and its management;

• Second, we hired a former U.S. Attorney to contact the U.S. Attorney and the FBI in New Mexico to seek a better understanding of the Laboratory’s on-going relationships with the FBI and the U.S. Attorney, and to discuss steps necessary to solidify a good working relationship for the future.

FULFILLING THE LABORATORY’S MISSION TO THE NATION

I want to assure you that, while we have been identifying and remedying these problems at Los Alamos, we have also been focused on fulfilling the Lab’s and the University’s mission to the nation, especially at this critical time in world events. We are focused on ensuring that:

• Los Alamos’ scientific and weapons programs continue to meet their objectives;

• Security operations of the Laboratory meet the nation’s expectations;

• The Lawrence Livermore and Lawrence Berkeley Laboratories, which the University also manages, meet the same high standards the University is setting for Los Alamos;

• The University continues to strengthen its governance and oversight of the three national laboratories it manages for the Department of Energy.

• And, lastly, that there are open and timely communications with the Department of Energy, the National Nuclear Security Administration, this Committee and Congress, as well as the media, to promptly apprise all interested parties of our findings and actions.

As you know, since the days of Professor and Nobel Laureate Ernest O. Lawrence and his colleague Robert Oppenheimer, the University of California has had the privilege of managing Los Alamos to contribute to our nation’s security. Over the last 60 years, the University and the Lab have become an integral system, both through the research collaborations conducted with our ten campuses, as well as the lasting ties to the Los Alamos workforce. Through this unique partnership with the federal government, the University is proud to have contributed to a remarkable range of science and technology related to national defense.

The laboratories at Los Alamos and Livermore have developed all of the nuclear weapons in the U.S. arsenal. When nuclear weapons testing ended, the nation looked to Los Alamos and Livermore to find ways to use the most advanced scientific and computational assets to simulate nuclear testing and to ensure the continued viability of our nuclear weapons stockpile. And today, as the Committee knows, Los Alamos is front-and-center in the effort to bolster homeland security, especially in the areas of counter-terrorism, non-proliferation, and prevention and preparedness for nuclear, biological, and chemical attacks. The International Atomic Energy Agency nuclear safeguard inspectors from all over the world are trained at Los Alamos, and scientists at the Lawrence Livermore Lab provide broad country analyses of potential proliferant countries, such as recent information about North Korea’s nuclear developments.

I raise all this to underscore the University of California’s continuing commitment to the nation even as we resolve the business and administrative deficiencies at Los Alamos. The business practices need to be raised to the same level of quality as the science and weapons programs. We owe this to the American people, who are paying for the work of the Lab, and whose security is dependent on the Lab. Let me reemphasize that managing the national security laboratories for the last 60 years has been an honor and an awesome responsibility, and we will address any challenges that might detract from our ability to fulfill our obligations to the American people.

Finally, I would be remiss not to mention the dedication and commitment with which Interim Director Pete Nanos has tackled his responsibilities at such a difficult time. He and Los Alamos National Laboratory’s employees are energized and working diligently to bring about a change in the culture of Los Alamos to one that welcomes open communication and encourages employees — without threat of retaliation — to step forward with their concerns. Every indication is that he is succeeding, but the challenge will be to solidify his efforts and sustain them over the long-term.

In conclusion, let me apologize to you on behalf of President Atkinson and the University’s Board of Regents. The problems I have outlined reflect poorly on Los Alamos and on the University, and detract from our many accomplishments on behalf of the nation. Moreover, they are a disservice to the thousands of honest and hardworking scientists, technicians and support personnel who are working to protect American troops and the American homeland. They deserve better from the Laboratory’s management and the University of California.

Let me assure you that the University of California, including the new management team at Los Alamos, shares with the Committee, the Department of Energy, and the National Nuclear Security Administration the urgency to fix the problems that have emerged. This has been a difficult time, both for the University and for the Laboratory, but we have benefited enormously from the intense scrutiny and from the active involvement of the Secretary of Energy, the NNSA Administrator, and this Committee in helping to identify the problems we are discussing today and to develop appropriate remedies. Far from weakening us, this experience has strengthened us; it has further bolstered our resolve to restore the confidence of the Nation in the service we are determined to perform in time of peace and in time of war.

Thank you again for this opportunity to address the Committee. I would be pleased to answer your questions.