,report
0,"The structure of the armed forces is based on the Total Force concept, which recognizes that all elements of the structure—active duty military personnel, reservists, defense contractors, host nation military and civilian personnel, and DOD federal civilian employees—contribute to national defense. In recent years, federal civilian personnel have deployed along with military personnel to participate in Operations Joint Endeavor, conducted in the countries of Bosnia-Herzegovina, Croatia, and Hungary; Joint G"
1,"uardian, in Kosovo; and Desert Storm, in Southwest Asia. Further, since the beginning of the Global War on Terrorism, the role of DOD’s federal civilian personnel has expanded to include participation in combat support functions in Operations Enduring Freedom and Iraqi Freedom. DOD relies on the federal civilian personnel it deploys to support a range of essential missions, including intelligence collection, criminal investigations, and weapon systems acquisition and maintenance. To ensure that its federal "
2,"civilian employees will deploy to combat zones and perform critical combat support functions in theater, DOD established the emergency-essential program in 1985. Under this program, DOD designates as “emergency-essential” those civilian employees whose positions are required to ensure the success of combat operations or the availability of combat-essential systems. DOD can deploy federal civilian employees either on a voluntary or involuntary basis to accomplish the DOD mission. DOD has established force he"
3,"alth protection and surveillance policies aimed at assessing and reducing or preventing health risks for its deployed federal civilian personnel; however, the department lacks procedures to ensure the components’ full implementation of its policies. In reviewing DOD federal civilian deployment records and other electronic documentation at selected component locations, we found that these components lacked documentation to show that they had fully complied with DOD’s force health protection and surveillance "
4,"policy requirements for some federal civilian personnel who deployed to Afghanistan and Iraq. As a larger issue, DOD’s policies did not require the centralized collection of data on the identity of its deployed civilians, their movements in theater, or their health status, further hindering its efforts to assess the overall effectiveness of its force health protection and surveillance capabilities. In August 2006, DOD issued a revised policy (to be effective in December 2006) that outlines procedures to add"
5,"ress its lack of centralized deployment and health-related data. However, the procedures are not comprehensive enough to ensure that DOD will be sufficiently informed of the extent to which its components fully comply with its requirements to monitor the health of deployed federal civilians. The DOD components included in our review lacked documentation to show that they always implemented force health protection and surveillance requirements for deployed federal civilians. These requirements include comple"
6,"ting (1) pre-deployment health assessments to ensure that only medically fit personnel deploy outside of the United States as part of a contingency or combat operation; (2) pre-deployment immunizations to address possible health threats in deployment locations; (3) pre-deployment medical screenings for tuberculosis and human immunodeficiency virus (HIV); and (4) post-deployment health assessments to document current health status, experiences, environmental exposures, and health concerns related to their wo"
7,"rk while deployed. DOD’s force health protection and surveillance policies require the components to assess the medical condition of federal civilians to ensure that only medically fit personnel deploy outside of the United States as part of a contingency or combat operation. The policies stipulate that all deploying civilian personnel are to complete pre-deployment health assessment forms within 30 days of their deployments, and health care providers are to review the assessments to confirm the civilians’ "
8,"health readiness status and identify any needs for additional clinical evaluations prior to their deployments. While the components that we included in our review had procedures in place that would enable them to implement DOD’s pre-deployment health assessment policies, it was not clear to what extent they had done so. Our review of deployment records and other documentation at the selected component locations found that these components lacked documentation to show that some federal civilian personnel who"
9," deployed to Afghanistan and Iraq had received the required pre-deployment health assessments. For those deployed federal civilians in our review, we found that, overall, a small number of deployment records (52 out of 3,771) were missing documentation to show that they had received their pre-deployment health assessments, as reflected in table 1. As shown in table 1, the federal civilian deployment records we included in our review showed wide variation by location regarding documentation of pre-deployment"
10," health assessments, ranging from less than 1 percent to more than 90 percent. On an aggregate component-level basis, at the Navy location in our review, we found that documentation was missing for 19 of the 52 records in our review. At the Air Force locations, documentation was missing for 29 of the 37 records in our review. In contrast, all three Army locations had hard copy or electronic records which indicated that almost all of their federal deployed civilians had received pre-deployment health assessm"
11,"ents. In addition to completing pre-deployment health assessment forms, DOD’s force health protection and surveillance policies stipulate that all DOD deploying federal civilians receive theater-specific immunizations to address possible health threats in deployment locations. Immunizations required for all civilian personnel who deploy to Afghanistan and Iraq include: hepatitis A (two-shot series); tetanus-diphtheria (within 10 years of deployment); smallpox (within 5 years of deployment); typhoid; and inf"
12,"luenza (within the last 12 months of deployment). As reflected in table 2, based on the deployment records maintained by the components at locations included in our review, the overall number of federal civilian deployment records lacking documentation of only one of the required immunizations for deployment to Afghanistan and Iraq was 285 out of 3,771. However, 3,313 of the records we reviewed were missing documentation of two or more immunizations. At the Army’s Fort Bliss, our review of its electronic de"
13,"ployment data determined that none of its deployed federal civilians had documentation to show that they had received immunizations. Officials at this location stated that they believed some immunizations had been given; however, they could not provide documentation as evidence of this. DOD policies require deploying federal civilians to receive certain screenings, such as for tuberculosis and HIV. Table 3 indicates that 55 of the 3,771 federal civilian deployment records included in our review were lacking"
14," documentation of the required tuberculosis screening; and approximately 35 were lacking documentation of HIV screenings prior to deployment. DOD’s force health protection and surveillance policies also require returning DOD federal civilian personnel to undergo post-deployment health assessments to document current health status, experiences, environmental exposures, and health concerns related to their work while deployed. The post-deployment process begins within 5 days of civilians’ redeployment from th"
15,"e theater to their home or demobilization processing stations. DOD’s policies require civilian personnel to complete a post- deployment assessment that includes questions on health and exposure concerns. A health care provider is to review each assessment and recommend additional clinical evaluation or treatment as needed. As reflected in table 4, our review of deployment records at the selected component locations found that these components lacked documentation to show that most deployed federal civilians"
16," (3,525 out of 3,771) who deployed to Afghanistan and Iraq had received the required post- deployment health assessments upon their return to the United States. Federal civilian deployment records lacking evidence of post-deployment health assessments ranged from 3 at the U.S. Army Corps of Engineers Transatlantic Programs Center and Wright-Patterson Air Force Base, respectively, to 2,977 at Fort Bliss. Beyond the aforementioned weaknesses found in the selected components’ implementation of force health pro"
17,"tection and surveillance requirements for deploying federal civilians, as a larger issue, DOD lacks comprehensive, centralized data that would enable it to readily identify its deployed civilians, track their movements in theater, or monitor their health status, further hindering efforts to assess the overall effectiveness of its force health protection and surveillance capabilities. The Defense Manpower Data Center (DMDC) is responsible for maintaining the department’s centralized system that currently col"
18,"lects location-specific deployment information for military servicemembers, such as grid coordinates, latitude/longitude coordinates, or geographic location codes. However, DOD has not taken steps to similarly maintain centralized data on its deployed federal civilians. In addition, DOD had not provided guidance that would require its components to track and report data on the locations and movements of DOD federal civilian personnel in theaters of operations. In the absence of such a requirement, each DOD "
19,"component collected and reported aggregated data that identified the total number of DOD federal civilian personnel in a theater of operations, but each lacked the ability to gather, analyze, and report information that could be used to specifically identify individuals at risk for occupational and environmental exposures during deployments. In previously reporting on the military services’ implementation of DOD’s force health protection and surveillance policies in 2003, we highlighted the importance of kn"
20,"owing the identity of servicemembers who deployed during a given operation and of tracking their movements within the theater of operations as major elements of a military medical surveillance system. We further noted the Institute of Medicine’s finding that documentation on the location of units and individuals during a given deployment is important for epidemiological studies and appropriate medical care during and after deployments. For example, this information allows epidemiologists to study the incide"
21,"nces of disease patterns across populations of deployed servicemembers who may have been exposed to diseases and hazards within the theater, and health care professionals to treat their medical problems appropriately. Without location-specific information for all of its deployed federal civilians and centralized data in its department-level system, DOD limits its ability to ensure that sufficient and appropriate consideration will also be given to addressing the health care concerns of these individuals. DO"
22,"D also had not provided guidance to the components that would require them to forward completed deployment health assessments for all federal civilians to the Army Medical Surveillance Activity (AMSA), where these assessments are suppose to be archived in the Defense Medical Surveillance System (DMSS), integrated with other historical and current data on personnel and deployments, and used to monitor the health of personnel who participate in deployments. The overall success of deployment force protection a"
23,"nd surveillance efforts, in large measure, depends on the completeness of health assessment data. The lack of such data may hamper DOD’s ability to intervene in a timely manner to address health care problems that may arise from DOD federal civilian deployments to overseas locations in support of contingency operations. With increases in the department’s use of federal civilian personnel to support military operations, DOD officials have recognized the need for more complete and centralized location-specifi"
24,"c deployment information and deployment-related health information on its deployed federal civilians. In this regard, in August 2006, the Office of the Under Secretary of Defense for Personnel and Readiness issued revised policy and program guidance that generally addressed the shortcomings in DOD’s force health protection and surveillance capabilities. The revised policy and guidance, scheduled to become effective in December 2006, require the components within 3 years, to electronically report (at least w"
25,"eekly) to DMDC, location-specific data for all deployed personnel, including federal civilians. In addition, the policy and guidance require the components to submit all completed health assessment forms to the AMSA for inclusion in DMSS. Nonetheless, DOD’s new policy is not comprehensive enough to ensure that the department will be sufficiently informed of the extent to which its components are complying with existing health protection requirements for its deployed federal civilians. Although the policy re"
26,"quires DOD components to report certain location-specific and health data for all of their deployed personnel, including federal civilians, it does not establish an oversight and quality assurance mechanism for assessing and ensuring the full implementation of the force health protection and surveillance requirements by all DOD components that our prior work has identified as essential in providing care to military personnel. In a September 2003 report on the Army’s and the Air Force’s compliance with force"
27," health protection policy for servicemembers, we noted that neither of the military services had fully complied with DOD’s force health protection and surveillance policies for many active duty servicemembers, including the policies requiring that servicemembers be assessed before and after deploying overseas and receive certain immunizations. We further noted that DOD, at that time, did not have an effective quality assurance program to provide oversight of, and ensure compliance with, the department’s for"
28,"ce health protection and surveillance requirements, and that the lack of such a system was a major cause of the high rate of noncompliance that we identified at the units we visited. In response to a legislative mandate and our recommendation, DOD established an oversight mechanism to evaluate the success of its force health protection and surveillance policies in ensuring that servicemembers received pre- and post-deployment medical examinations and that record-keeping requirements were met. This oversight"
29," mechanism included (1) periodic site visits jointly conducted with staff from the Office of the Assistant Secretary for Health Affairs and staff from the military services to assess compliance with the deployment health requirements, (2) periodic reports from the services on their quality assurance programs, and (3) periodic reports from AMSA on health assessment data maintained in the centralized database. Until the department provides a similar oversight and quality assurance mechanism for its deployed f"
30,"ederal civilians, it will not be effectively positioned to ensure compliance with its policies, or ensure the health care and protection of these individuals as they continue to support contingency operations. DOD has established medical treatment policies that cover its federal civilians while they are deployed to support contingency operations in Afghanistan and Iraq, and available workers’ compensation claims we reviewed confirmed that those deployed federal civilians received care consistent with the po"
31,"licies. These policies state that DOD federal civilians who require treatment for injuries or diseases sustained during overseas hostilities may be provided care under the DOD military health system. Thus, DOD’s deployed federal civilians may receive care through the military’s treatment facilities. As shown in figure 1, DOD’s military health system provides four levels of medical care to personnel who are injured or become ill while deployed. Specifically, medical treatment during a military contingency be"
32,"gins with level one care, which consists of basic first aid and emergency care at a unit in the theater of operation. The treatment then moves to a second level of care, where, at an Aid station, injured or ill personnel are examined and evaluated to determine their priority for continued movement outside of the theater of operation and to the next (third) level of care. At the third level, injured or ill personnel are treated in a medical installation staffed and equipped for resuscitation, surgery, and po"
33,"stoperative care. Finally, at the fourth level of care, which occurs far from the theater of operation, injured or ill personnel are treated in a hospital staffed and equipped for definitive care. Injured or ill DOD federal civilians deployed in support of contingency operations in Afghanistan and Iraq who require level four medical care are transported to DOD’s Regional Medical Center in Landstuhl, Germany. Injured or ill DOD federal civilians who cannot be returned to duty in theater are evacuated to the "
34,"United States for continuation of medical care. In these cases (or where previously deployed federal civilians later identify injuries or diseases and subsequently request medical treatment), DOD’s policy provides for its federal civilians who require treatment for deployment-related injuries or occupational illnesses to receive medical care through either the military’s medical treatment facilities or civilian facilities. The policy stipulates that federal civilians who are injured or become ill as a resul"
35,"t of their deployment must file a Federal Employees’ Compensation Act (FECA) claim with DOD, which then files a claim with the Department of Labor’s Office of Workers’ Compensation Programs (OWCP). The Department of Labor’s OWCP is responsible for making a decision to award or deny medical benefits. OWCP must establish—based on evidence provided by the DOD civilian—that the employee is eligible for workers’ compensation benefits due to the injury or disease for which the benefits are claimed. To obtain bene"
36,"fits under FECA, DOD federal civilians must show that (1) they were employed by the U.S. government, (2) they were injured (exposed) in the workplace, (3) they have filed a claim in a timely manner, (4) they have a disabling medical condition, and (5) there is a causal link between their medical condition and the injury or exposure. Three avenues of appeal are provided for DOD federal civilians in the event that the initial claim is denied: (1) reconsideration by an OWCP claims examiner, (2) a hearing or re"
37,"view of the written record by OWCP’s Branch of Hearings and Review, and (3) a review by the Employees’ Compensation Appeals Board. DOD’s medical treatment process and the OWCP’s claims process are shown in figure 2. Overall, the claims we reviewed showed that the DOD federal civilians who sustained injuries or diseases while deployed had received care that was consistent with DOD’s medical treatment policies. Specifically, in reviewing a sample of seven workers’ compensation claims (out of a universe of 83)"
38," filed under the Federal Employees’ Compensation Act by DOD federal civilians who deployed to Iraq, we found that in three cases where care was initiated in theater the affected federal civilians had received treatment in accordance with DOD’s policies. For example, in one case, a deployed federal civilian was treated for traumatic injuries at a hospital outside of the theater of operation and could not return to duty in theater because of the severity of the injuries sustained. The civilian was evacuated t"
39,"o the United States and received medical care through several of the military’s medical treatment facilities as well as through a civilian facility. Further, in all seven claims that we reviewed, DOD federal civilians who requested medical care after returning to the United States, had, in accordance with DOD’s policy, received initial medical examinations and/or treatment for their deployment-related injuries or illnesses and diseases through either military or civilian treatment facilities. While OWCP has"
40," primary responsibility for processing and approving all FECA claims for medical benefits, as noted earlier, the scope of our review did not include assessing actions taken by the Department of Labor’s OWCP in further processing workers’ compensation claims for injured or ill civilians and authorizing continuation of medical care once their claims were submitted for review. DOD provides a number of special pays and benefits to its federal civilian personnel who deploy in support of contingency operations, w"
41,"hich are generally different in type and in amount from those provided to deployed military personnel. Both groups receive special pays, but the types and amounts differ. In our modeled scenarios, the overall amounts of compensation, which include special pays, were higher for DOD federal civilian personnel than for military personnel. DOD federal civilian personnel also receive different types and amounts of disability benefits, depending on specific program provisions and individual circumstances. Further"
42,", survivors of deceased DOD federal civilian and military personnel generally receive comparable types of cash survivor benefits—lump sum, recurring, or both—but benefit amounts differ for the two groups. Survivors of DOD federal civilian personnel, however, almost always receive lower noncash benefits than military personnel. DOD federal civilian and military personnel are both eligible to receive special pays to compensate them for the conditions of deployment. As shown in table 5, some of the types of sp"
43,"ecial pays are similar for both DOD federal civilian and military personnel, although the amounts paid to each group differ. Other special pays were unique to each group. DOD federal civilian and military personnel deployed to posts with unusually difficult or unhealthful conditions or severe physical hardships are authorized a similar type of post (hardship) differential. In addition, danger pay is granted to both groups serving at a post where civil insurrection, civil war, or war-like conditions exist. I"
44,"n this context, DOD federal civilian personnel who are deployed to Afghanistan and Iraq are eligible to receive post (hardship) differential and danger pay, each equivalent to 35 percent of their base salaries. In contrast, military personnel receive monthly pays of $100 for hardship duty and $225 for imminent danger. However, some special pays are unique to each group. For example, to partially reimburse those who are involuntarily separated from their dependents, military personnel are eligible to receive"
45," a family separation allowance that is not available to deployed DOD federal civilian personnel. Additionally, unlike DOD federal civilian personnel, military personnel also receive a combat zone tax exclusion while deployed to Afghanistan and Iraq that excludes certain income from federal taxes. DOD federal civilian personnel, by contrast, are eligible for a variety of premium pays, such as overtime and night differential, that are not available to military personnel. Although DOD federal civilian and mili"
46,"tary personnel generally receive various special pays to compensate them for conditions of deployment, in certain scenarios that we modeled, the overall amounts of compensation payments were higher for DOD federal civilian personnel than for military personnel, as illustrated in tables 6 and 7. In the event of sustaining an injury while deployed, DOD federal civilian and military personnel are eligible to receive two broad categories of disability benefits—disability compensation and disability retirement. "
47,"However, the benefits applicable to each group vary by type and amount, depending on specific program provisions and individual circumstances. Within these broad categories, there are three main types of disability: (1) temporary disability, (2) permanent partial disability, and (3) permanent total disability. Both DOD federal civilian and military personnel who are injured in the line of duty are eligible to receive continuation of their pay during the initial period of treatment and may be eligible to rec"
48,"eive recurring payments for lost wages. However, the payments to DOD federal civilian personnel are based on their salaries and whether the employee has any dependents, regardless of the number, which can vary significantly, whereas disability compensation payments made by the Department of Veterans Affairs (VA) to injured military personnel are based on the severity of the injury and their number of dependents. DOD federal civilian personnel are eligible to receive continuation of pay (salary) for up to 45"
49," days, followed by a recurring payment for wage loss which is based on a percentage of salary and whether they have any dependents, up to a cap. In contrast, military personnel receive continuation of pay of their salary for generally no longer than a year, followed by a recurring VA disability compensation payment for wage loss that is based on the degree of disability and their number of dependents, and temporary DOD disability retirement for up to 5 years. Appendix II provides additional information on t"
50,"emporary disability compensation payments for federal civilian and military personnel. To illustrate the way in which the degree of impairment and an individual’s salary can affect temporary disability compensation, in our April 2006 review, we compared the disability benefits available to military personnel with those available to comparable civilian public safety officers at the federal, state, and local levels. We found that VA compensation payments for military personnel were based on a disability ratin"
51,"g, regardless of salary level; in contrast, compensation payments for civilian public safety officers were based on salary level, regardless of disability level. Thus, for an individual with severe injuries and relatively low wages, VA compensation payments for military personnel were generally higher than those of the civilian public safety officers included in the reviews. However, if an individual had less severe injuries and high wages, VA compensation payments for military personnel were generally lowe"
52,"r than those of the civilian public safety officers included in the review. When a partial disability is determined to be permanent, DOD federal civilian and military personnel can continue to receive recurring compensation payments. For DOD federal civilian personnel, these payments are provided for the remainder of life as long as the impairment persists, and can vary significantly depending upon the salary of the individual and the existence of dependents. Military personnel are also eligible to receive "
53,"recurring VA disability compensation payments for the remainder of their lives, and these payments are based on the severity of the servicemember’s injury and the number of dependents. In addition, both groups are eligible to receive additional compensation payments beyond the recurring payments just discussed, based on the type of impairment. DOD federal civilians with permanent partial disabilities receive a schedule of payments based on the specific type of impairment (sometimes referred to as a schedule"
54," award). Some impairments may result in benefits for a few weeks, while others may result in benefits for several years. Similarly, military personnel receive special monthly VA compensation payments depending on the specific type and degree of impairment. Appendix II provides more detailed information on permanent partial disability compensation payments for DOD federal civilian and military personnel. Our April 2006 review compared the compensation benefits available to military personnel with those avail"
55,"able to federal civilian public safety officers, among others, using several scenarios. Our analysis showed that when able to return to duty, military personnel often received a greater amount of compensation benefits over a lifetime than did civilians, even when the monthly benefit payment was substantially lower and receipt of benefits was delayed for several years. Permanent partial disabilities that prevent civilian and military personnel from returning to duty in their current jobs may entitle them to "
56,"receive disability retirement benefits based on a percentage of salary in addition to compensation benefits; however, the eligibility criteria and benefit amounts differ. Under the Civil Service Retirement System (CSRS), DOD federal civilian personnel must be unfit for duty and have 5 years of service to qualify for disability retirement benefits. Under the Federal Employees’ Retirement System (FERS), civilian personnel must be unfit for duty and have 18 months of service. DOD federal civilian personnel mus"
57,"t elect either compensation benefits or disability retirement. Military personnel who are unfit for duty are eligible for DOD disability retirement benefits if they have a disability rating of 30 percent or more regardless of length of service, or if they have 20 years or more of service regardless of disability rating. The amount of the DOD disability retirement payment is offset dollar for dollar, however, by the amount of the monthly VA disability compensation payment unless they have at least 20 years o"
58,"f service and a disability rating of 50 percent or more, or combat-related disabilities. Our April 2006 review of disability benefits showed that when military personnel and federal civilian public safety officers were unable to return to duty due to a permanent partial disability, such as a leg amputation, the combined compensation and retirement benefits provided to the military personnel over a lifetime were sometimes more, and sometimes less, than the combined benefits provided to civilian public safety"
59," officers. When an injury is severe enough to be deemed permanent and total, DOD federal civilian and military personnel may receive similar types of benefits such as disability compensation and retirement payments; however, the amounts paid to each group vary. For civilian personnel, the monthly payment amounts for total disability are generally similar to those for permanent partial disability described earlier, but unlike with permanent partial disabilities, the payments do not take into account any wage"
60," earning capacity. Both groups are eligible to receive additional compensation payments beyond the recurring payments that are similar to those for permanent partial disability. DOD federal civilians with permanent disabilities receive a schedule award based on the specific type of impairment. In addition, DOD federal civilian personnel may be eligible for an additional attendant allowance—up to $1,500 per month during 2006—if such care is needed. Military personnel receive special monthly VA compensation p"
61,"ayments for particularly severe injuries, such as amputations, blindness, or other loss of use of organs and extremities. The payments are designed to account for attendant care or other special needs deriving from the disability. In addition to disability compensation, both DOD federal civilian and military personnel have access to disability retirement benefits for permanent total disabilities. The provisions for election and offset of disability compensation and disability retirement benefits in cases of"
62, permanent total disability are similar to provisions in cases of permanent partial disability discussed earlier. Another benefit available to DOD federal civilian and military personnel with permanent total disabilities is Social Security Disability Insurance (SSDI). SSDI benefits are available to individuals who incur a physical or mental impairment that prevents them from performing substantial gainful activity and that is expected to last at least 1 year or to result in death. The benefit is based on th
63,"e employee’s earnings history and lifetime contributions to Social Security; therefore, the benefit amounts vary widely among individuals. DOD federal civilian personnel covered by FERS and military personnel pay into Social Security and thus may be eligible to receive SSDI benefits. The maximum benefit to both groups in 2006 was $2,053 per month. However, DOD federal civilian personnel must choose between either compensation payments and SSDI benefits or have their disability retirement payments reduced wh"
64,"en receiving SSDI benefits. Survivors of deceased DOD federal civilian and military personnel generally receive similar types of cash survivor benefits—either as a lump sum, a recurring payment, or both—through comparable sources. However, the benefit amounts generally differ for each group. Survivors of DOD federal civilian and military personnel also receive noncash benefits that differ in type and amounts. As shown in table 8, survivors of deceased DOD federal civilian and military personnel both receive"
65," lump sum benefits in the form of Social Security, a death gratuity, burial expenses, and life insurance. Social Security provides $255 upon the death of a DOD federal civilian employee or military member. In addition, survivors of deceased DOD federal civilian personnel receive a death gratuity of up to $10,000, while survivors of deceased military personnel receive $100,000. The payment for funeral expenses provided to survivors of deceased DOD federal civilian personnel can be as high as $800, plus $200 "
66,"for costs associated with terminating employee status, while it can be $7,700 for deceased military personnel. Life insurance is another common source of benefits for the survivors of many deceased civilian and military personnel. Survivors of deceased federal civilian personnel receive a payment equal to the civilian’s rate of basic pay, rounded to the nearest thousand, plus $2,000. Military personnel automatically are insured as part of the Servicemembers’ Group Life Insurance for up to $400,000, unless t"
67,"hey elect less or no coverage. DOD federal civilian employees also receive a survivor benefit in their retirement plans. Survivors of deceased DOD federal civilian and military personnel are also eligible for recurring benefits, some of which are specific to each group, as shown in table 9. Survivors of both deceased DOD federal civilian and military personnel may be eligible to receive recurring Social Security payments based on the deceased individual’s earnings in a covered period. However, other types o"
68,"f recurring payments are specific to either civilian or military personnel. For example, survivors of DOD federal civilian personnel may receive recurring payments from a retirement plan or workers’ compensation if the death occurred while in the line of duty. Survivors of deceased military personnel also receive payments through the Survivor Benefit Plan, Dependency and Indemnity Compensation, or both. In addition to lump sum and recurring benefits, survivors of deceased DOD federal civilians and military "
69,"personnel receive noncash benefits. As shown in table 10, survivors of deceased military personnel receive more noncash benefits than do those of deceased DOD federal civilian personnel, with few benefits being comparable in type. For example, eligible survivors of military personnel who die while on active duty obtain benefits such as rent-free government housing or tax- free housing allowances for up to 365 days, relocation assistance, and lifetime access to commissaries and exchanges that are not availab"
70,"le to civilian personnel who die in the line-of-duty. However, survivors of both deceased DOD federal civilian and military personnel do continue to receive health insurance that is wholly or partially subsidized. As DOD’s federal civilian employees assume an expanding role in helping the department support its contingency operations overseas, the need for attention to the policies and benefits that affect the health and welfare of these individuals becomes increasingly significant. DOD currently has import"
71,"ant policies in place that relate to the deployment of its federal civilians. However, it lacks an adequate oversight and quality assurance mechanism to ensure compliance and quality of service. Thus, not all of its policies—such as those that define the department’s requirements for force health protection and surveillance—are being fully implemented by the DOD components. Until DOD improves its oversight in this area, it will jeopardize its ability to be effectively informed of the extent to which its fed"
72,"eral civilians are screened and deemed medically fit to deploy in support of contingency operations; deployed civilian personnel receive needed immunizations to counter theater disease threats; and what medical follow-up attention federal civilians require for health problems or concerns that may arise following their deployment. To strengthen DOD’s force health protection and surveillance for its federal civilian personnel who deploy in support of contingency operations, we recommend that the Secretary of "
73,"Defense direct the Office of the Under Secretary of Defense for Personnel and Readiness to establish an oversight and quality assurance mechanism to ensure that all components fully comply with its requirements. In written comments on a draft of this report, DOD partially concurred with our recommendation. The department acknowledged the necessity for all deployed civilians to receive required medical assessments and immunizations, and that documentation must be available in every instance. The department o"
74,"utlined several steps it intends to take to determine appropriate implementation of our recommendation. Specifically, the department stated that it has written and coordinated a new DOD instruction, scheduled to become effective before the end of 2006, that establishes a comprehensive DOD force health protection quality assurance program that will apply to DOD civilian personnel accompanying deploying military forces. While DOD’s response is encouraging, we remain concerned that the department’s description"
75," of the actions it plans to take to assess the components’ compliance with its requirements lacks sufficient detail. DOD was unable to provide us with a copy of the new instruction; thus, we could not evaluate the comprehensiveness of its new force health protection quality assurance program or determine whether the program identifies specific actions the department plans to take for assessing and ensuring the full implementation of the force health protection and surveillance requirements by all DOD compon"
76,"ents. DOD also stated that proposed revisions to its directives and instructions that address the planning, preparation, and utilization of DOD civilians include, among other things, annual assessments for compliance with pre-and post-deployment medical assessment requirements. However, the department did not describe what actions, if any, it plans to take to ensure that it will be sufficiently informed of the extent to which its components are complying with existing health protection requirements for its "
77,"deployed federal civilians. In the absence of more specific details on its planned actions, we continue to emphasize the department’s need for a comprehensive oversight and quality assurance mechanism without which it will not be effectively positioned to ensure compliance with its policies, or ensure the health care and protection of its deployed federal civilians as they continue to support contingency operations. In addition to its comments on our recommendation, the department took issue with some of ou"
78,"r specific findings. DOD questioned our findings that in many cases DOD components were unable to produce documentation confirming that deployed federal civilians had received necessary pre- or post-deployment medical assessments, or immunizations. The department stated that DOD activities, particularly regarding the Army Corps of Engineers, Transatlantic Programs Center (TPC), had determined that documentation did exist for many records included in our review, thus raising reservations about our findings. "
79,"In particular, the department stated that the number (and percent) of records missing two or more immunizations that we reported for TPC was inaccurate. It stated that based on TPC’s review of the specific documentation that we used to support our findings, we had actually identified 69 records (54.3 percent) as missing two or more immunizations, rather than 85 (66.9 percent) noted in our draft report. We disagree. TPC overlooked 16 records included in our review that lacked documentation of any immunizatio"
80,"ns. Moreover, as we noted in our report, to provide assurances that the results of our review of hard copy deployment records at the selected component locations were accurate, we requested that each component’s designated medical personnel reexamine those deployment records that we determined were missing required health documentation. We then adjusted our results in those instances where documentation was subsequently provided. To provide additional assurances regarding our determinations, we requested th"
81,"at each component’s designated medical personnel review and sign the data collection instrument that we used to collect deployment health information from each individual civilian’s deployment record attesting to our conclusions regarding the existence of health assessment or immunization documentation. DOD also stated that we inappropriately mixed discussion of Veterans Affairs and DOD benefits without distinguishing between the two. However, our report appropriately discusses two broad categories of “gove"
82,"rnment-provided” benefits: (1) those provided by DOD and (2) those provided by VA. Nonetheless, to further clarify this section of our report, we added “VA” and “DOD” to our discussions of disability compensation and retirement benefits for military personnel. DOD also stated that our discussion of military disability benefits presented incorrect information in many cases, indicating that our statements that compensation payments for military personnel were based on a disability rating, regardless of salary"
83," level is only true with regard to VA disability benefits. DOD also stated that DOD disability payments do, in fact, take into account salary level, and that if a former member is entitled to both, there is an offsetting mechanism. We agree. As we state in our report, under veterans’ compensation programs, benefits typically include cash payments to replace a percentage of the individual’s loss in wages while injured and unable to work. We also state that disability retirement benefits for military personne"
84,"l are based on a percent of salary in addition to compensation benefits, and that the amount of retirement payment is offset dollar for dollar by the amount of monthly compensation payment unless military personnel have at least 20 years of service and a disability rating of 50 percent or more, or have combat-related disabilities. Further, DOD submitted detailed comments related to our analysis of special pays and benefits provided to deployed DOD federal civilian and military personnel. In particular, the "
85,"department stated that our selection and presentation of the associated data on the special pays and benefits provided to DOD federal civilian and military personnel could easily mislead the reader into drawing erroneous conclusions. The department also stated that our comparisons did not take into account the relative value of certain key benefits for which explicit dollar amounts cannot be measured, such as retirement systems, health care systems, and military commissary exchange privileges. To the contra"
86,"ry, our report did discuss this limitation, and as is the case with any modeled scenarios based on certain assumptions, some of the factors with the potential to affect the overall outcomes of our comparisons could not be included because of, as DOD pointed out, the relative value of certain key benefits for which explicit dollar amounts cannot be measured. It is partly for this reason that we acknowledged in the report that we do not take a position on the adequacy or appropriateness of the special pays an"
87,"d benefits provided to DOD federal civilian and military personnel. DOD also requested that we clearly acknowledge the fundamental differences between the military and civilians systems. We believe that we have done so. As we noted in our report, we did not make direct analytical comparisons between compensation and benefits offered by DOD to deployed federal civilian and military personnel because such comparisons must account for the demands of the military service, such as involuntary relocation, frequen"
88,"t and lengthy separations from family, and liability for combat. DOD provided other technical comments, which we have incorporated as appropriate. The department’s comments are reprinted in their entirety in appendix III. We are sending copies of this report to the Chairman and Ranking Minority Member, Senate Committee on Armed Services; the Chairman and Ranking Minority Member, House Committee on Armed Services; the Chairman and Ranking Minority Member, Subcommittee on Defense, Senate Committee on Appropri"
89,"ations; and the Chairman and Ranking Minority Member, Subcommittee on Defense, House Committee on Appropriations; and other interested congressional parties. We are also sending copies to the Secretary of Defense and the Under Secretary of Defense for Personnel and Readiness. We will make copies available to other interested parties upon request. Copies of this report will also be made available at no charge on GAO’s Web site at http://www.gao.gov. Should you or your staff have any questions about this repo"
90,"rt, please contact me at (202) 512-6304 or by e-mail at melvinv@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. To assess the extent to which DOD has established force health protection and surveillance policies for DOD federal civilians who deploy outside of the United States in support of contingency operations, and how the components (military services and the Def"
91,"ense Contract Management Agency) have implemented those policies, we reviewed pertinent force health protection and surveillance policies and discussed these policies with the following offices or commands: U.S. Central Command; Joint Chiefs of Staff, Manpower and Personnel; Under Secretary of Defense for Personnel and Readiness (including the Assistant Secretary of Defense for Health Affairs, Deployment Health Support Directorate; Civilian Personnel Policy; and Civilian Personnel Management Services); the "
92,"Surgeons General for the Army, Navy, and Air Force; and the Defense Contract Management Agency (DCMA). Our review focused on DOD federal civilians who (1) deployed to Afghanistan or Iraq for 30 continuous days or more between June 1, 2003, and September 30, 2005, and (2) returned to the United States by February 28, 2006. Because DOD had difficulty identifying the total number of federal civilians who deployed to Afghanistan or Iraq, we assessed the implementation of DOD’s deployment health requirements at "
93,"eight component locations that were selected using a number of approaches. Given that DOD components have flexibility in where they conduct deployment processing, we selected locations for our review accordingly. Specifically, the Army uses a centralized approach, deploying its federal civilians at three primary locations; therefore, we selected all three locations for review. By contrast, the Navy and Air Force use a decentralized approach, deploying their federal civilians from their home stations. For th"
94,"ese components, we selected five locations based on data that indicated that these locations had deployed the largest numbers of federal civilian personnel. DCMA was included in our review because it had deployed the largest number of federal civilian personnel compared to other defense agencies. DCMA has an informal agreement with the Army to process its federal civilians through two of the Army’s three deployment locations. Therefore, DCMA federal civilian deployment data in this report are included in th"
95,"e Army results to the extent that DCMA federal civilian deployments were documented at the two relevant Army locations. At all eight component locations, we reviewed either all available hard copy or electronic deployment records, or in one instance, a sample of the deployment records for deployed federal civilian personnel who met our criteria above. Table 11 shows the locations included in our review and the number of deployment records reviewed at each location. In total, we reviewed 3,431 hard copy and "
96,"automated records for federal civilian personnel who deployed to Afghanistan and Iraq. Specifically, we reviewed hard copies of deployment records for 454 (out of a reported 822) federal civilian personnel at seven component locations and automated deployment records for 2,977 (out of the reported 2,977) federal civilian personnel at the other location where all deployment records were being maintained electronically. The results of deployment record reviews, however, could not be projected beyond the sampl"
97,"es to all DOD federal civilians who had deployed during this time frame. To facilitate our review of federal civilian deployment records at the selected component locations, we developed a data collection instrument to review and collect deployment health information from each individual civilian’s deployment record. For federal civilians in our review at each location, we reviewed deployment records for documentation that the following force health protection and surveillance policy requirements were met: "
98,"Pre-and post-deployment health assessments; Tuberculosis screening test (within 1 year of deployment); Human Immunodeficiency Virus (HIV) screening test; Pre-deployment immunizations: hepatitis A (first and second course); influenza (within 1 year of deployment); tetanus-diphtheria (within 10 years of deployment); typhoid; and smallpox (within 5 years of deployment) After our review of hard copy deployment records, we requested each component’s medical personnel to reexamine those hard copy deployment recor"
99,"ds that were missing required health documentation, and we adjusted our results where documentation was subsequently provided. We also requested and queried other documentation from information systems used by the components to capture deployment and related health information, making adjustments to our results where documentation was found in the systems. These data sources included the Army’s Medical Protection System (MEDPROS), the Army’s medical database (MedBase), the Air Force’s Preventive Health Asse"
100,"ssment and Individual Medical Readiness (PIMR) system and its Comprehensive Immunization Tracking Application (CITA), DOD’s Defense Enrollment Eligibility Reporting System (DEERS), which is used by the Navy, and the Army Medical Surveillance Activity’s Defense Medical Surveillance System (DMSS). At the Army’s Fort Benning, we created a sampling frame (i.e., total population) of records for 606 federal civilian deployments between June 1, 2003, and September 30, 2005. Our study population was limited to DOD "
101,"federal civilians who deployed to Afghanistan or Iraq. We then drew a stratified random sample of 288 deployment records and stratified the sample to isolate potential duplicate deployment records for the same federal civilian. We found two duplicate records and removed them from both the population and sample, as shown in table 12. We also removed another 14 deployment records from our sample because those DOD federal civilians had been deployed to locations other than Afghanistan or Iraq, and were not eli"
102,"gible for the duty population. In addition, we removed another 13 deployment records that were originally selected as potential replacement records; however, we found that those replacements were not needed. Ultimately, we identified 238 in-scope responses, for a weighted response rate of 87 percent. Each sampled record was subsequently weighted in the analysis to represent all DOD federal civilians deployed to Afghanistan or Iraq. The disposition of the federal civilian deployment records we reviewed at Fo"
103,"rt Benning are summarized in the following table: Our probability sample is only one of a large number of samples that we might have drawn. Because each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval. This is the interval that would contain the actual population value for 95 percent of the Fort Benning, Ga., samples we could have drawn. All percentage estimates from our sample have margins of e"
104,"rror (that is, widths of confidence intervals) of plus or minus 5 percentage points or less, at the 95 percent confidence level, unless otherwise noted. We took steps to assess the reliability of DOD federal civilian deployment and health data for the purposes of this review, including consideration of issues such as the completeness of the data from the respective information systems’ program managers and administrators. We also examined whether the data were subjected to quality control measures such as p"
105,"eriodic testing of the data against deployment records to ensure the accuracy and reliability of the data. In addition, we reviewed existing documentation related to the data sources and interviewed knowledgeable agency officials about the data. We did not find these deployment and health data to be sufficiently reliable for (1) identifying the universe of DOD federal civilian deployments or (2) use as the sole source for reviewing the health and immunization information for all DOD federal civilian deploym"
106,"ents, but we found the information systems to be sufficiently reliable when used as one of several sources in our review of deployment records. In those instances where we did not find a deployment health assessment or immunization in either the deployment records or in the electronic data systems, we concluded that the health assessment or immunization was not documented. To determine the extent to which DOD has established and the components have implemented medical treatment policies for DOD federal civi"
107,"lians who deployed in support of contingency operations, we examined pertinent medical treatment policies for DOD federal civilian employees who required treatment for injuries and diseases sustained while supporting contingency operations. In addition, we obtained workers’ compensation claims filed by DOD federal civilian personnel with the Department of Labor’s Office of Workers’ Compensation Programs(OWCP) showing those civilians who sustained injuries and diseases during deployment. We selected and revi"
108,"ewed a non-probability sample of claims to assess the components’ processes and procedures for implementing DOD’s medical treatment policies across a range of civilian casualties including injuries, physical and mental illnesses, and diseases. The scope of our review did not extend to the Department of Labor’s claims review process. To identify special pays and benefits provided to DOD federal civilians who deployed in support of contingency operations and to assess the extent that special pays and benefits"
109," differ from those provided to deployed active duty military personnel, we examined major statutory provisions for special pays, disability and death benefits for federal civilians and military personnel, including relevant chapters of Title 5 of the U.S. Code governing federal civilian personnel management; relevant chapters of Title 10 of the U.S. Code governing armed forces personnel management; Section 112 of Title 26 of the U.S. Code governing combat zone tax exemption; relevant chapters of Title 37 of"
110," the U.S. Code governing pay and allowances for the uniformed services; relevant chapters of Title 38 of the U.S. Code governing veterans’ benefits; relevant provisions of applicable public laws governing military and civilian pay and benefits; applicable directives and instructions related to active duty military and DOD federal civilian benefits and entitlements; DOD financial management regulations; Department of State regulations; and prior GAO reports. In addition, we discussed the statutes and guidanc"
111,"e with cognizant officials of the Office of the Under Secretary of Defense for Personnel and Readiness, military services’ headquarters, and the Defense Contract Management Agency involved with the administration of active duty and federal civilian personnel entitlements. We did not perform a comprehensive review of all compensation—comprised of a myriad of pays and benefits—offered to active duty military and federal civilian personnel in general. Our analysis focused on selected elements of compensation s"
112,"uch as special pays (e.g., hostile fire/imminent danger pay). Also, we did not make direct analytical comparisons between compensation and benefits offered by DOD to deployed federal civilian and military personnel because such comparisons must account for the demands of the military service, such as involuntary relocation, frequent and lengthy separations from family, and liability for combat. After reviewing documents and interviewing officials, we then compiled and analyzed the information on the types a"
113,"nd amounts of special pays and benefits available to active duty military and DOD federal civilian personnel who deployed to Afghanistan or Iraq. We interviewed DOD officials to discuss the basis for any differences in compensation. In addition, to illustrate how special pays affect overall compensation provided to DOD federal civilian and military personnel, we modeled scenarios for both groups using similar circumstances, such as length of deployment, pay grades, special pays (e.g., post differential pay,"
114," danger pay, overtime pay, family separation allowance, basic allowance for housing, basic allowance for subsistence), and duty location. Through discussions with senior DOD officials, we made an assumption that deployed DOD federal civilians worked 30 hours of overtime per week. For deployed DOD federal civilians, we subtracted a contribution of $15,000 to the Thrift Savings Plan (TSP) to obtain the adjusted gross income. We assumed that DOD federal civilians, temporarily at a higher tax bracket, would tak"
115,"e maximum advantage of the opportunity to defer taxes. We assumed that the military personnel would contribute a smaller percentage of pay, 5 percent of gross income, to TSP. We made this assumption because much of the military pay was not subject to federal taxes, which removes the incentive to contribute to TSP, and because unlike for federal workers, military TSP does not have a matching component. For military personnel, we also deducted the amount of pay not subject to taxes due to the combat zone excl"
116,"usion, family separation allowance, basic allowance for subsistence, and basic allowance for housing. Using these assumptions, we generated an adjusted gross income and used that as input into a commercial tax program, Turbo Tax, to obtain federal taxes owed. We assumed that both DOD federal civilian and military personnel were married, filing jointly, with a spouse that earned no income. We assumed that the family had two children and qualified for two child tax credits, and the Earned Income Tax Credit, i"
117,"f at that income level. This resulted in four exemptions and a standard deduction of $10,000 in 2005. For purposes of validation, we repeated this exercise using an alternate tax program, Tax Cut, and obtained identical results. We conducted our review from March 2006 to August 2006 in accordance with generally accepted government auditing standards. Both DOD federal civilian and military personnel are eligible to receive disability benefits when they sustain a line-of-duty injury. However, these benefits v"
118,"ary in amount. Table 13 shows the temporary disability benefits available to eligible DOD federal civilian and military personnel. As table 13 shows, DOD federal civilians who are injured in the line of duty are eligible to receive continuation of their salary up to 45 days, followed by a recurring payment for wage loss that is based on a percentage of their salary and the existence of dependents, up to a cap. In contrast, military personnel receive continuation of their salaries for generally no longer tha"
119,"n a year, followed by a recurring payment for wage loss, which is based on the degree of disability and their number of dependents, and temporary retirement pay based on salary for up to 5 years. When a partial disability is determined to be permanent, both DOD federal civilians and military personnel are eligible to continue receiving recurring compensation payments, but again, the amounts of these benefits vary, as shown in table 14. As table 14 shows, DOD federal civilian personnel with permanent partial"
120," disabilities receive payments based on salary and dependents while military personnel receive payments based on the severity of the injury and their number of dependents, as long as the condition persists. In addition to the contact named above, Sandra Burrell, Assistant Director; William Bates; Dr. Benjamin Bolitzer; Alissa Czyz; George Duncan; Steve Fox; Dawn Godfrey; Nancy Hess; Lynn Johnson; Barbara Joyce; Dr. Ronald La Due Lake; William Mathers; Paul Newton; Dr. Charles Perdue; Jason Porter; Julia Mat"
121,ta; Susan Tieh; John Townes; and Dr. Monica Wolford made key contributions to this report.
122,"Most income derived from private sector business activity in the United States is subject to federal corporate income tax, the individual income tax, or both. The tax treatment that applies to a business depends on its legal form of organization. Firms that are organized under the tax code as “C” corporations (which include most large, publicly held corporations) have their profits taxed once at the entity level under the corporate income tax (on a form 1120) and then a second time under the individual inco"
123,"me tax when profits are transferred to individual shareholders in the form of dividends or realized capital gains. Firms that are organized as “pass-through” entities, such as partnerships, limited liability companies, and “S” corporations are generally not taxed at the entity level; however, their net incomes are passed through each year and taxed in the hands of their partners or shareholders under the individual income tax (as part of those taxpayers’ form 1040 filing). Similarly, income from businesses "
124,"that are owned by single individuals enters into the taxable incomes of those owners under the individual income tax and is not subject to a separate entity-level tax. The base of the federal corporate income tax includes net income from business operations (receipts, minus the costs of purchased goods, labor, interest, and other expenses). It also includes net income that corporations earn in the form of interest, dividends, rent, royalties, and realized capital gains. The statutory rate of tax on net corp"
125,"orate income ranges from 15 to 35 percent, depending on the amount of income earned. The United States taxes the worldwide income of domestic corporations, regardless of where the income is earned, with a foreign tax credit for certain taxes paid to other countries. However, the timing of the tax liability depends on several factors, including whether the income is from a U.S. or foreign source and, if it is from a foreign source, whether it is earned through direct operations or through a subsidiary. The b"
126,"ase of the individual income tax covers business-source income paid to individuals, such as dividends, realized net capital gains on corporate equity, and income from self-employment. The statutory rates of tax on net taxable income range from 10 percent to 35 percent. Lower rates (generally 5 percent and 15 percent, depending on taxable income) apply to long-term capital gains and dividend income. Sole proprietors also pay both the employer and employee shares of social insurance taxes on their net busines"
127,"s income. Generally, a U.S. citizen or resident pays tax on his or her worldwide income, including income derived from foreign-source dividends and capital gains subject to a credit for foreign taxes paid on such income. Three long-standing criteria—economic efficiency, equity, and a combination of simplicity, transparency and administrability—are typically used to evaluate tax policy. These criteria are often in conflict with each other, and as a result, there are usually trade-offs to consider and people "
128,"are likely to disagree about the relative importance of the criteria. Specific aspects of business taxes can be evaluated in terms of how they support or detract from the efficiency, equity, simplicity, transparency, and administrability of the overall tax system. To the extent that a tax system is not simple and efficient, it imposes costs on taxpayers beyond the payments they make to the U.S. Treasury. As shown in figure 1, the total cost of any tax from a taxpayer’s point of view is the sum of the tax li"
129,"ability, the cost of complying with the tax system, and the economic efficiency costs that the tax imposes. In deciding on the size of government, we balance the total cost of taxes with the benefits provided by government programs. A complete evaluation of the tax treatment of businesses, which is a critical element of our overall federal tax system, cannot be made without considering how business taxation interacts with and complements the other elements of the overall system, such as the tax treatment of"
130," individuals and excise taxes on selected goods and services. This integrated approach is also appropriate for evaluating reform alternatives, regardless of whether those alternatives take the form of a simplified income tax system, a consumption tax system, or some combination of the two. Businesses contribute significant revenues to the federal government, both directly and indirectly. As figure 2 shows, corporate businesses paid $278 billion in corporate income tax directly to the federal government in 2"
131,"005. Individuals earn income from business investment in the form of dividends and realized capital gains from C corporations; income allocations from partnerships and S corporations; entrepreneurial income from their own sole proprietorships; and rents and royalties. In recent years this business- source income, which is all taxed under the individual income tax, has amounted to between roughly 14 percent and 19 percent of the income of individuals who have paid individual income tax. In addition to the ta"
132,"xes that are paid on business-source income, most of the remainder of federal taxes is collected and passed on to the government by businesses. Business tax revenues of the magnitude discussed make them very relevant to considerations about how to address the nation’s long-term fiscal imbalance. Over the long term, the United States faces a large and growing structural budget deficit primarily caused by demographic trends and rising health care costs as shown in figure 3, and exacerbated over time by growin"
133,"g interest on the ever-larger federal debt. Continuing on this imprudent and unsustainable fiscal path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. We cannot grow our way out of this long-term fiscal challenge because the imbalance between spending and revenue is so large. We will need to make tough choices using a multipronged approach: (1) revise budget processes and financial reporting requirements; (2) restructure entitlement pr"
134,"ograms; (3) reexamine the base of discretionary spending and other spending; and (4) review and revise tax policy, including tax expenditures, and tax enforcement programs. Business tax policy, business tax expenditures, and business tax enforcement need to be part of the overall tax review because of the amount of revenue at stake. Business tax expenditures reduce the revenue that would otherwise be raised from businesses. As already noted, to reduce their tax liabilities, businesses can take advantage of "
135,"preferential provisions in the tax code, such as exclusions, exemptions, deductions, credits, preferential rates, and deferral of tax liability. Tax preferences—which are legally known as tax expenditures—are often aimed at policy goals similar to those of federal spending programs. For example, there are different tax expenditures intended to encourage economic development in disadvantaged areas and stimulate research and development, while there are also federal spending programs that have similar purpose"
136,"s. Also, by narrowing the tax base, business tax expenditures have the effect of raising either business tax rates or the rates on other taxpayers in order to generate a given amount of revenue. The design of the current system of business taxation causes economic inefficiency and is complex. The complexity provides fertile ground for noncompliance and raises equity concerns. Our current system for taxing business income causes economic inefficiency because it imposes significantly different effective rates"
137," of tax on different types of investments. Tax treatment that is not neutral across different types of capital investment causes significant economic inefficiency by guiding investments to lightly taxed activities rather than those with high pretax productivity. However, the goal of tax policy is not to eliminate efficiency costs. The goal is to design a tax system that produces a desired amount of revenue and balances economic efficiency with other objectives, such as equity, simplicity, transparency, and "
138,"administrability. Every practical tax system imposes efficiency costs. There are some features of current business taxation that have attracted criticism by economists and other tax experts because of efficiency costs. My point in raising them here is not that these features need to be changed—that is a policy judgment for Congress to make as it balances various goals. Rather, my point is that these economic consequences of tax policy need to be considered as we think about reform. The following are among t"
139,"he most noted cases of nonneutral taxation in the federal business tax system: Income earned on equity-financed investments made by C corporations is taxed twice—under both the corporate and individual income taxes, whereas no other business income is taxed more than once. Moreover, even noncorporate business investment is taxed more heavily than owner-occupied housing—a form of capital investment that receives very preferential treatment. As a result, resources have been shifted away from higher-return bus"
140,"iness investment into owner-occupied housing, and, within the business sector, resources have been shifted from higher-return corporations to noncorporate businesses. Such shifting of investment makes workers less productive than they would be under a more neutral tax system. This results in employees receiving lower wages because increases in employee wages are generally tied to increases in productivity. As noted above, such efficiency costs may be worth paying in order to meet other policy goals. For exa"
141,"mple, many policymakers advocate increased homeownership as a social policy goal. Depreciation allowances under the tax code vary considerably in generosity across different assets causing effective tax rates to vary and, thereby, favoring investment in certain assets over others. For example, researchers have found that the returns on most types of investments in equipment are taxed more favorably than are most investments in nonresidential buildings. These biases shift resources away from some investments"
142," in buildings that would have been more productive than some of the equipment investments that are being made instead. Tax rules for corporations favor the use of debt over shareholder equity as a source of finance for investment. The return on debt- financed investment consists of interest payments to the corporation’s creditors, which are deductible by the corporations. Consequently, that return is taxed only once—in the hands of the creditors. In contrast, the return on equity-financed investment consist"
143,"s of dividends and capital gains, which are not deductible by the corporation. These forms of income that are taxed under the individual tax are paid out of income that has already been subject to the corporate income tax. The bias against equity finance induces corporations to have less of an “equity cushion” against business downturns. Capital gains on corporate equity are taxed more favorably than dividends because that tax can be deferred until the gains are realized (typically when shareholders sell th"
144,"eir stock). This bias against dividend payments likely means that more profits are retained within corporations than otherwise would be the case and, therefore, the flow of capital to its most productive uses is being constrained. The complex set of rules governing U.S. taxation of the worldwide income of domestic corporations (those incorporated in the United States) leads to wide variations in the effective rate of tax paid on that income, based on the nature and location of each corporation’s foreign ope"
145,"rations and the effort put into tax planning. In effect, the active foreign income of some U.S. corporations is taxed more heavily than if the United States followed the practice of many other countries and exempted such income from tax. However, other U.S. corporations are able to take advantage of flexibilities in the U.S. tax rules in order to achieve treatment that is equivalent to or, in some cases, more favorable than the so-called “territorial” tax systems that exempt foreign-source active business i"
146,"ncome. As a consequence, some U.S. corporations face a tax disadvantage, while others have an advantage, relative to foreign corporations when competing in foreign countries. Those U.S. corporations that have a disadvantage are likely to locate a smaller share of their investment overseas than would be the case in a tax-free world; the opposite is true for those U.S. corporations with the tax advantage. Moreover, the tax system encourages U.S. corporations to alter their cash-management and financing decisi"
147,ons (such as by delaying the repatriation of profits) in order to reduce their taxes. The taxation of business income is part of the broader taxation of income from capital. The taxation of capital income in general (even when that taxation is uniformly applied) causes another form of inefficiency beyond the inefficiencies caused by the aforementioned cases of differential taxation across types of investments. This additional inefficiency occurs because taxes on capital reduce the after-tax return on saving
148,"s and, thereby, distort the choice that individuals make between current consumption and saving for future consumption. However, although research shows that the demand for some types of savings, such as the demand for tax exempt bonds, is responsive to tax changes, there is greater uncertainty about the effects of tax changes on other choices, such as aggregate savings. Sometimes the concerns about the negative effects of taxation on the U.S. economy are couched in terms of “competitiveness,” where the vag"
149,"uely defined term competitiveness is often defined as the ability of U.S. businesses to export their products to foreign markets and to compete against foreign imports into the U.S. market. The goal of those who push for this type of competitiveness is to improve the U.S. balance of trade. However, economists generally agree that trying to increase the U.S. balance of trade through targeted tax breaks for exports does not work. Such a policy, aimed at lowering the prices of exports, would be offset by an in"
150,"crease in the value of the dollar which would make U.S. exports more expensive and imports into the Unites States less expensive, ultimately leaving both the balance of trade and the standard of living of Americans unchanged. An alternative definition of competitiveness that is also sometimes used in tax policy debates refers to the ability of U.S.-owned firms operating abroad to compete in foreign markets. The current U.S. policy of taxing the worldwide income of U.S. businesses places some of their foreig"
151,"n operations at a disadvantage. The tradeoffs between a worldwide system and a territorial tax system are discussed below. Tax compliance requirements for businesses are extensive and complex. Rules governing the computation of taxable income, expense deductions, and tax credits of U.S. corporations that do business in multiple foreign countries are particularly complex. But even small businesses face multiple levels of tax requirements of varying difficulty. In addition to computing and documenting their i"
152,"ncome, expenses, and qualifications for various tax credits, businesses with employees are responsible for collecting and remitting (at varying intervals) several federal taxes on the incomes of those employees. Moreover, if the businesses choose to offer their employees retirement plans and other fringe benefits, they can substantially increase the number of filings they must make. Businesses also have information-reporting responsibilities—employers send wage statements to their employees and to IRS; bank"
153,"s and other financial intermediaries send investment income statements to clients and to IRS. Finally, a relatively small percentage of all businesses (which nevertheless number in the hundreds of thousands) are required to participate in the collection of various federal excise taxes levied on fuels, heavy trucks and trailers, communications, guns, tobacco, and alcohol, among other products. It is difficult for researchers to accurately estimate compliance costs for the tax system as a whole or for particu"
154,lar types of taxpayers because taxpayers generally do not keep records of the time and money spent complying with tax requirements. Studies we found that focus on the compliance costs of businesses estimate them to be between about $40 billion and $85 billion per year. None of these estimates include the costs to businesses of collecting and remitting income and payroll taxes for their employees. The accuracy of these business compliance cost estimates is uncertain due to the low rates of response to their 
155,"data-collection surveys. In addition, the range in estimates across the studies is due, among other things, to differences in monetary values used (ranging between $25 per hour and $37.26 per hour), differences in the business populations covered, and differences in the tax years covered. Although the precise amount of business tax avoidance is unknown, IRS’s latest estimates of tax compliance show a tax gap of at least $141 billion for tax year 2001 between the business taxes that individual and corporate "
156,"taxpayers paid and what they should have paid under the law. Corporations contributed about $32 billion to the tax gap by underreporting about $30 billion in taxes on tax returns and failing to pay about $2 billion in taxes that were reported on returns. Individual taxpayers that underreported their business income accounted for the remaining $109 billion of the business income tax gap. A complex tax code, complicated business transactions, and often multinational corporate structures make determining busin"
157,"ess tax liabilities and the extent of corporate tax avoidance a challenge. Tax avoidance has become such a concern that some tax experts say corporate tax departments have become “profit centers” as corporations seek to take advantage of the tax laws in order to maximize shareholder value. Some corporate tax avoidance is clearly legal, some falls in gray areas of the tax code, and some is clearly noncompliance or illegal, as shown by IRS’s tax gap estimate. Often business tax avoidance is legal. For example"
158,", multinational corporations can locate active trade or business operations in jurisdictions that have lower effective tax rates than does the United States and, unless and until they repatriate the income, defer taxation in the United States on that income, thus reducing their effective tax rate. In addition, investors can avoid paying the corporate income tax by putting their money into unincorporated businesses or into real estate. Complicating corporate tax compliance is the fact that in many cases the "
159,"law is unclear or subject to differing interpretations. In fact, some have postulated that major corporations’ tax returns are actually just the opening bid in an extended negotiation with IRS to determine a corporation’s tax liability. An illustration—once again from the complex area of international tax rules—is transfer pricing. Transfer pricing involves setting the appropriate price for such things as goods, services, or intangible property (such as patents, trademarks, copyrights, technology, or “know-"
160,"how”) that is transferred between the U.S.-based operations of a multinational company and a foreign affiliate. If the price paid by the affiliate to the U.S. operation is understated, the profits of the U.S. operation are reduced and U.S. taxable income is inappropriately reduced or eliminated. The standard for judging the correct price is the price that would have been paid between independent enterprises acting at “arm’s length.” However, it can be extremely difficult to establish what an arm’s length pr"
161,"ice would be. Given the global economy and the number of multinational firms with some U.S.-based operations, opportunities for transfer pricing disputes are likely to grow. Tax shelters are one example of how tax avoidance, including corporate tax avoidance, can shade into the illegal. Some tax shelters are legal though perhaps aggressive interpretations of the law, but others cross the line. Abusive shelters often are complex transactions that manipulate many parts of the tax code or regulations and are t"
162,"ypically buried among legitimate transactions reported on tax returns. Because these transactions are often composed of many pieces located in several parts of a complex tax return, they are essentially hidden from plain sight, which contributes to the difficulty of determining the scope of the abusive shelter problem. Often lacking economic substance or a business purpose other than generating tax benefits, abusive shelters have been promoted by some tax professionals, often in confidence, for significant "
163,"fees, sometimes with the participation of tax-indifferent parties, such as foreign or tax-exempt entities. These shelters may involve unnecessary steps and flow-through entities, such as partnerships, which make detection of these transactions more difficult. Regarding compliance with our tax laws, the success of our tax system hinges greatly on individual and business taxpayers’ perception of its fairness and understandability. Compliance is influenced not only by the effectiveness of IRS’s enforcement eff"
164,"orts but also by Americans’ attitudes about the tax system and their government. A recent survey indicated that about 10 percent of respondents say it is acceptable to cheat on their taxes. Furthermore, the complexity of, and frequent revisions to, the tax system make it more difficult and costly for taxpayers who want to comply to do so and for IRS to explain and enforce tax laws. The lack of transparency also fuels disrespect for the tax system and the government. Thus, a crucial challenge in evaluating o"
165,ur business tax system will be to determine how we can best strengthen enforcement of existing laws to give businesses owners confidence that their competitors are paying their fair share and to give wage earners confidence that businesses in general bear their share of taxes. One option that has been suggested as a means of improving public confidence in the tax system’s fairness is to make the reconciliation between book and tax income that businesses present on schedule M-3 of their tax returns available
166," for public review. Reform of our business tax system will necessarily mean making broad design choices about the overall tax system and how business taxes are coordinated with other taxes. The tax reform debate of the last several years has focused attention on several important choices, including the extent to which our system should be closer to the extreme of a pure income tax or the other extreme of a pure consumption tax, the extent to which sales by U.S. businesses outside of this country should be t"
167,"axed, the extent to which taxes should be collected from businesses or individuals, and the extent to which taxpayers are compensated for losses or costs they incur during the transition to any new tax system. Generally there is no single “right” decision about these choices and the options are not limited to selecting a system that is at one extreme or the other along the continuum of potential systems. The choices will involve making tradeoffs between the various goals for our tax system. The fundamental "
168,"difference between income and consumption taxes lies in their treatment of savings and investment. Income can be used for either consumption or saving and investment. The tax base of a pure income tax includes all income, regardless of what it is ultimately used for; in contrast, the tax base of a consumption tax excludes income devoted to saving and investment (until it is ultimately used for consumption). The current tax system is a hybrid between a pure income tax and a pure consumption tax because it ef"
169,"fectively exempts some types of savings and investment but taxes other types. As noted earlier, evidence is inconclusive regarding whether a shift closer to a consumption tax base would significantly affect the level of savings by U.S. taxpayers. There is, however, a consensus among economists that uneven tax treatment across different types of investment should be avoided unless the efficiency costs resulting from preferential tax treatment are outweighed by the social benefits generated by the tax prefere"
170,"nce. That objective could be achieved under either a consumption tax that exempts all new savings and investment from taxation (which means that all business profits are exempt) or a revised income tax that taxed all investments at the same effective rate. In comparison to the current system, a consumption tax’s exemption of business-source income would likely encourage U.S. businesses to increase their investment in the United States relative to their foreign investment. Both income and consumption taxes c"
171,"an be structured in a variety of ways, as discussed in the following subsections, and the choice of a specific design for either type of tax can have as significant implications for efficiency, administrability, and equity as the choice between a consumption or income base. The exemption of saving and investment can be accomplished in different ways, so consumption taxes can be structured differently and yet still have the same overall tax base. Both income and consumption taxes can be levied on individuals"
172," or businesses, or on a combination of the two. Whether collected from individuals or businesses, ultimately, individuals will bear the economic burden of any tax (as wage earners, shareholders, or consumers). The choice of whether to collect a tax at the business level or the individual level depends on whether it is thought to be desirable to levy different taxes on different individuals. A business-level tax, whether levied on income or consumption, can be collected “at source”—that is, where it is gener"
173,"ated—so there can be many fewer tax filers and returns to administer. Business-level taxes cannot, however, directly tax different individuals at different rates. Individual-level taxes can allow for distinctions between different individuals; for example, standard deductions or graduated rates can be used to tax individuals with low income (or consumption) at a lower rate than individuals with greater income (or consumption). However, individual-level taxes require more tax returns, impose higher complianc"
174,"e costs, and would generally require a larger tax administration system. A national retail sales tax, a consumption value-added tax, and an income value-added tax are examples of taxes that would be collected only at the business level. A personal consumption tax and an integrated individual income tax are examples of taxes that would be collected only at the individual level. The “flat tax” proposed by economists Robert Hall and Alvin Rabushka that has received attention in recent years is an example of a "
175,"tax collected at both the business and individual level. Our current system for taxing corporate-source income involves taxation at both the corporate and individual level in a manner that results in the double taxation of the same income. Under a pure worldwide tax system the United States would tax the income of U.S. corporations, as it is earned, regardless of where it is earned, and at the same time provide a foreign tax credit that ensures that the combined rate of tax that a corporation pays to all go"
176,vernments on each dollar of income is exactly equal to the U.S. corporate tax rate. Some basic differences between the current U.S. tax system and a pure worldwide system are that (1) in many cases the U.S. system permits corporations to defer U.S. tax on their foreign-source income until it is repatriated and (2) the U.S. foreign tax credit is limited to the amount of U.S. tax that would be due on a corporation’s foreign-source income. In cases where the rate of foreign tax on a corporation’s income exceed
177,"s the U.S. tax rate, the corporation is left paying the higher rate of tax. Under a pure territorial tax system the United States would simply exempt all foreign-source income. (No major country has a pure territorial system; they all tax mobile forms of foreign-source income, such as royalties and income from securities.) The current U.S. tax system has some features that result in some cases in treatment similar to what would exist under a territorial system. First, corporations can defer U.S. tax indefin"
178,"itely on certain foreign-source income, as long as they keep it reinvested abroad. Second, in certain cases U.S. corporations are able to use the excess credits that they earned for taxes they paid to high-tax countries to completely offset any U.S. tax that they would normally have to pay on income they earned in low-tax countries. As a result, that income from low-tax countries remains untaxed by the United States—just as it would be under a territorial system. In fact, there are some cases where U.S. cor"
179,"porations enjoy tax treatment that is more favorable than under a territorial system. This occurs when they pay no U.S. tax on foreign-source income yet are still able to deduct expenses allocable to that income. For example, a U.S. parent corporation can borrow money and invest it in a foreign subsidiary. The parent corporation generally can deduct its interest payments from its U.S. taxes even if it defers U.S. tax on the subsidiary’s income by leaving it overseas. Proponents of a worldwide tax system and"
180, proponents of a territorial system both argue that their preferred systems would provide important forms of tax neutrality. Under a pure worldwide system all of the income that a U.S. corporation earns abroad would be taxed at the same effective rate that a corporation earning the same amount of income domestically would pay. Such a tax system is neutral in the sense that it does not influence the decision of U.S. corporations to invest abroad or at home. If the U.S. had a pure territorial tax system all o
181,f the income that U.S. corporations earn in a particular country would be taxed at the same rate as corporations that are residents of that country. The pure territorial system is neutral in the specific sense that U.S. corporations investing in a foreign country would not be at a disadvantage relative to corporations residing in that country or relative to other foreign corporations investing there. In a world where each country sets its own tax rules it is impossible to achieve both types of neutrality at
182," the same time, so tradeoffs are unavoidable. A change from the current tax system to a pure territorial one is likely to have mixed effects on tax compliance and administration. On the one hand, a pure worldwide tax system, or even the current system, may preserve the U.S. tax base better than a territorial system would because U.S. taxpayers would have greater incentive under a territorial system to shift income and investment into low-tax jurisdictions via transfer pricing. On the other hand, a pure terr"
183,"itorial system may be less complex for IRS to administer and for taxpayers to comply with than the current tax system because there would be no need for the antideferral rules or the foreign tax credit, which are among the most complex features of the current system. Broad-based consumption taxes can differ depending on whether they are imposed under a destination principle, which holds that goods and services should be taxed in the countries where they are consumed, or an origin principle, which holds that"
184," goods and services should be taxed in the countries where they are produced. In the long run, after markets have adjusted, neither type of tax would have a significant effect on the U.S. trade balance. This is true for a destination-based tax because products consumed in the United States would be taxed at the same rate, regardless of where they were produced. Therefore, such a tax would not influence a consumer’s choice between buying a car produced in the United States or one imported from Japan. And at "
185,"the same time, U.S. exports of cars would not be affected by the tax because they would be exempted. An origin-based consumption tax would not affect the trade balance because the tax effects that taxes have on prices would ultimately be countered by the same price adjustment mechanism that we discussed earlier with respect to targeted tax subsidies for exports. A national retail sales tax limited to final consumption goods would be a destination-principle tax; it would tax imports when sold at retail in th"
186,"is country and would not tax exports. Value-added taxes can be designed as either destination or origin-principle taxes. A personal consumption tax, collected at the individual level, would apply to U.S. residents or citizens and could be formulated to tax their consumption regardless of whether it is done domestically or overseas. Under such a system, income earned abroad would be taxable but funds saved or invested abroad would be deductible. In that case, foreign- produced goods imported into the United "
187,"States or consumed by U.S. citizens abroad would be taxed. U.S. exports would only be taxed to the extent that they are consumed by U.S. citizens abroad. A wide range of options exist for moving from the current business tax system to an alternative one, and the way that any transition is formulated could have significant effects for economic efficiency, equity, taxpayer compliance burden, and tax administration. For example, one transition issue involves whether tax credits and other tax benefits already e"
188,"arned under the current tax would be made available under a new system. Businesses that are deducting depreciation under the current system would not have the opportunity to continue depreciating their capital goods under a VAT unless special rules were included to permit it. Similar problems could arise with businesses’ carrying forward net operating losses and recovering unclaimed tax credits. Depending on how these and other issues are addressed, taxpayer compliance burden and tax administration responsi"
189,"bilities could be greater during the transition period than they currently are or than they would be once the transition ends. Transition rules could also substantially reduce the new system’s tax base, thereby requiring higher tax rates during the transition if revenue neutrality were to be achieved. Our publication, Understanding the Tax Reform Debate: Background, Criteria, and Questions, may be useful in guiding policymakers as they consider tax reform proposals. It was designed to aid policymakers in th"
190,"inking about how to develop tax policy for the 21st century. The criteria for a good tax system, which our report discusses, provide the basis for a set of principles that should guide Congress as it considers the choices and tradeoffs involved in tax system reform. And, as I also noted earlier, proposals for reforming business taxation cannot be evaluated without considering how that business taxation will interact with and complement the other elements of our overall future tax system. The proposed system"
191," should raise sufficient revenue over time to fund our expected expenditures. As I mentioned earlier, we will fall woefully short of achieving this end if current spending or revenue trends are not altered. Although we clearly must restructure major entitlement programs and the basis of other federal spending, it is unlikely that our long-term fiscal challenge will be resolved solely by cutting spending. The proposal should look to future needs. Like many spending programs, the current tax system was develo"
192,"ped in a profoundly different time. We live now in a much more global economy, with highly mobile capital, and with investment options available to ordinary citizens that were not even imagined decades ago. We have growing concentrations of income and wealth. More firms operate multinationally and willingly move operations and capital around the world as they see best for their firms. As an adjunct to looking forward when making reforms, better information on existing commitments and promises must be couple"
193,"d with estimates of the long-term discounted net present value costs from spending and tax commitments comprising longer-term exposures for the federal budget beyond the existing 10-year budget projection window. The tax base should be as broad as possible. Broad-based tax systems with minimal exceptions have many advantages. Fewer exceptions generally means less complexity, less compliance cost, less economic efficiency loss, and by increasing transparency may improve equity or perceptions of equity. This "
194,suggests that eliminating or consolidating numerous tax expenditures must be considered. In many cases tax preferences are simply a form of “back-door spending.” We need to be sure that the benefits achieved from having these special provisions are worth the associated revenue losses just as we must ensure that outlay programs— which may be attempting to achieve the same purposes as tax expenditures—achieve outcomes commensurate with their costs. And it is important to supplement these cost-benefit evaluati
195,"ons with analyses of distributional effects—i.e., who bears the costs of the preferences and who receives the benefits. To the extent tax expenditures are retained, consideration should be given to whether they could be better targeted to meet an identified need. If we must raise revenues, doing so from a broad base and a lower rate will help minimize economic efficiency costs. Broad-based tax systems can yield the same revenue as more narrowly based systems at lower tax rates. The combination of less direc"
196,"t intervention in the marketplace from special tax preferences, and the lower rates possible from broad-based systems, can have substantial benefits for economic efficiency. For instance, one commonly cited rule of thumb regarding economic efficiency costs of tax increases is that they rise proportionately faster than the tax rates. In other words, a 10 percent tax increase could raise the economic efficiency costs of a tax system by much more than 10 percent. Aside from the base-broadening that minimizes t"
197,"argeted tax preferences favoring specific types of investment or other business behavior, it is also desirable on the grounds of economic efficiency to extend the principle of tax neutrality to the broader structural features of a business tax system. For example, improvements in economic efficiency can also be gained by avoiding differences in tax treatment, such as the differences in the current system based on legal form of organization, source of financing, and the nature and location of foreign operati"
198,"ons. Removing such differences can shift resources to more productive uses, increasing economic performance and the standard of living of Americans. Shifting resources to more productive uses can result in a step up in the level of economic activity which would be measured as a one-time increase in the rate of growth. Tax changes that increase efficiency can also increase the long-term rate of economic growth if they increase the rate of technological change; however, not all efficiency-increasing tax chang"
199,"es will do so. Impact on the standard of living of Americans is also a useful criterion for evaluating policies to improve U.S. competitiveness. As was discussed earlier, narrower goals and policies, such as increasing the U.S. balance of trade through targeted tax breaks aimed at encouraging exports, are generally viewed as ineffective by economists. What determines the standard of living of Americans and how it compares to the standard of living in other countries is the productivity of American workers a"
200,"nd capital. That productivity is determined by factors such as education, technological innovation, and the amount of investment in the U.S. economy. Tax policy can contribute to American productivity in several ways. One, discussed in this statement, is through neutral taxation of investment alternatives. Another, which I have discussed on many occasions, is through fiscal policy. Borrowing to finance persistent federal deficits absorbs savings from the private sector reducing funds available for investmen"
201,"t. Higher saving and investment from a more balanced fiscal policy would contribute to increased productivity and a higher standard of living for Americans over the long term. A reformed business tax system should have attributes associated with high compliance rates. Because any tax system can be subject to tax gaps, the administrability of reformed systems should be considered as part of the debate for change. In general, a reformed system is most likely to have a small tax gap if the system has few tax p"
202,"references or complex provisions and taxable transactions are transparent. Transparency in the context of tax administration is best achieved when third parties report information both to the taxpayer and the tax administrator. Minimizing tax code complexity has the potential to reduce noncompliance for at least three broad reasons. First, it could help taxpayers to comply voluntarily with more certainty, reducing inadvertent errors by those who want to comply but are confused because of complexity. Second,"
203," it may limit opportunities for tax evasion, reducing intentional noncompliance by taxpayers who can misuse the complex code provisions to hide their noncompliance or to achieve ends through tax shelters. Third, reducing tax-code complexity could improve taxpayers’ willingness to comply voluntarily. Finally, the consideration of transition rules needs to be an integral part of the design of a new system. The effects of these rules can be too significant to leave them simply as an afterthought in the reform "
204,"process. The problems that I have reviewed today relating to the compliance costs, efficiency costs, equity, and tax gap associated with the current business tax system would seem to make a strong case for a comprehensive review and reform of our tax policy. Further, businesses operate in a world that is profoundly different—more competitive and more global—than when many of the existing provisions of the tax code were adopted. Despite numerous and repeated calls for reform, progress has been slow. I discus"
205,"sed reasons for the slow progress in a previous hearing on individual tax reform before this committee. One reason why reform is difficult to accomplish is that the provisions of the tax code that generate compliance costs, efficiency costs, the tax gap and inequities also benefit many taxpayers. Reform is also difficult because, even when there is agreement on the amount of revenue to raise, there are differing opinions on the appropriate balance among the often conflicting objectives of equity, efficiency"
206,", and administrability. This, in turn, leads to widely divergent views on even the basic direction of reform. However, I have described some basic principles that ought to guide business tax reform. One of them is revenue sufficiency. Fiscal necessity, prompted by the nation’s unsustainable fiscal path, will eventually force changes to our spending and tax policies. We must fundamentally rethink policies and everything must be on the table. Tough choices will have to be made about the appropriate degree of "
207,"emphasis on cutting back federal programs versus increasing tax revenue. Other principles, such as broadening the tax base and otherwise promoting tax neutrality, could help improve economic performance. While economic growth alone will not solve our long-term fiscal problems, an improvement in our overall economic performance makes dealing with those problems easier. The recent report of the President’s Advisory Panel on Federal Tax Reform recommended two different tax reform plans. Although each plan is i"
208,"ntended to improve economic efficiency and simplify the tax system, neither of them addresses the growing imbalance between federal spending and revenues that I have highlighted. One approach for getting the process of comprehensive fiscal reform started would be through the establishment of a credible, capable, and bipartisan commission, to examine options for a combination of selected entitlement and tax reform issues. Mr. Chairman and Members of the Committee, this concludes my statement. I would be plea"
209,"sed to answer any questions you may have at this time. For further information on this testimony, please contact James White on (202) 512-9110 or whitej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony include Jim Wozny, Assistant Director; Donald Marples; Jeff Arkin; and Cheryl Peterson. Individual Income Tax Policy: Streamlining, Simplification, and Additional Reform"
210,"s Are Desirable. GAO-06-1028T. Washington, D.C.: August 3, 2006. Tax Compliance: Opportunities Exist to Reduce the Tax Gap Using a Variety of Approaches. GAO-06-1000T. Washington, D.C.: July 26, 2006. Tax Compliance: Challenges to Corporate Tax Enforcement and Options to Improve Securities Basis Reporting. GAO-06-851T. Washington, D.C.: June 13, 2006. Understanding the Tax Reform Debate: Background, Criteria, & Questions. GAO-05-1009SP. Washington, D.C.: September 2005. Government Performance and Accountabi"
211,"lity: Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined. GAO-05-690. Washington, D.C.: Sept. 23, 2005. Tax Policy: Summary of Estimates of the Costs of the Federal Tax System. GAO-05-878. Washington, D.C.: August 26, 2005. Tax Compliance: Reducing the Tax Gap Can Contribute to Fiscal Sustainability but Will Require a Variety of Strategies. GAO-05-527T. Washington, D.C.: April 14, 2005. 21st Century Challenges: Reexamining the Base of the Federal Government. GAO-05-325SP. "
212,"Washington, D.C.: February 1, 2005. Tax Administration: Potential Impact of Alternative Taxes on Taxpayers and Administrators. GAO/GGD-98-37. Washington, D.C.: January 14, 1998. Corporate Income Tax Rates: International Comparisons. Washington, D.C.: November 2005. Taxing Capital Income: Effective Rates and Approaches to Reform. Washington, D.C.: October 2005. Effects of Adopting a Value-Added Tax. Washington, D.C.: February 1992. Brumbaugh, David L. Taxes and International Competitiveness. RS22445. Washing"
213,"ton, D.C.: May 19, 2006. Brumbaugh, David L. Federal Business Taxation: The Current System, Its Effects, and Options for Reform. RL33171. Washington, D.C.: December 20, 2005. Gravelle, Jane G.. Capital Income Tax Revisions and Effective Tax Rates. RL32099. Washington, D.C.: January 5, 2005. The Impact of International Tax Reform: Background and Selected Issues Relating to U.S. International Tax Rules and the Competitiveness of U.S. Businesses. JCX-22-06. Washington, D.C.: June 21, 2006. Options to Improve T"
214,"ax Compliance and Reform Tax Expenditures. JCS- 02-05. Washington, D.C.: January 27, 2005. The U.S. International Tax Rules: Background, Data, and Selected Issues Relating to the Competitiveness of U.S.-Based Business Operations. JCX- 67-03. Washington, D.C.: July 3, 2003. Background Materials on Business Tax Issues Prepared for the House Committee on Ways and Means Tax Policy Discussion Series. JCX-23-02. Washington, D.C.: April 4, 2002. Report to The Congress on Depreciation Recovery Periods and Methods. "
215,"Washington, D.C.: July 2000. Integration of The Individual and Corporate Tax Systems: Taxing Business Income Once. Washington, D.C.: January 1992. Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System. Washington, D.C.: November 2005. Over the past decade, several proposals for fundamental tax reform have been put forward. These proposals would significantly change tax rates, the tax base, and the level of tax (whether taxes are collected from individuals, businesses, or both). Some of the pro"
216,"posals would replace the federal income tax with some type of consumption tax levied only on businesses. Consumption taxes levied only on businesses include retail sales taxes (RST) and value-added taxes (VAT). The flat tax would also change the tax base to consumption but include both a relatively simple individual tax along with a business tax. A personal consumption tax, a consumption tax levied primarily on individuals, has also been proposed. Similar changes in the level at which taxes are collected co"
217,"uld be made while retaining an income tax base. This appendix provides a brief description of several of these proposals. The consumption tax that Americans are most familiar with is the retail sales tax, which in many states, is levied when goods or services are purchased at the retail level. The RST is a consumption tax because only goods purchased by consumers are taxed, and sales to businesses, including sales of investment goods, are generally exempt from tax. In contrast to an income tax, then, income"
218," that is saved is not taxed until it is used for consumption. Under a national RST, different tax rates could be applied to different goods, and the sale of some goods could carry a zero tax rate (exemption). However, directly taxing different individuals at different rates for the same good would be very difficult. A consumption VAT, which like the RST, is a business-level consumption tax levied directly on the purchase of goods and services. The two taxes differ in the manner in which the tax is collected"
219," and paid. In contrast to a retail sales tax, sales of goods and services to consumers and to businesses are taxable under a VAT. However, businesses can either deduct the amount of their purchases of goods and services from other businesses (under a subtraction VAT) or can claim a credit for tax paid on purchases from other businesses (under a credit VAT). Under either method, sales between businesses do not generate net tax liability under a VAT because the amount included in the tax base by businesses se"
220,"lling goods is equal to the amount deducted by the business purchasing goods. The only sales that generate net revenue for the government are sales between businesses and consumers, which is the same case as the RST. An income VAT would move the taxation of wage income to the business level as well. No individual returns would be necessary, so the burden of complying with the tax law would be eliminated for individuals. An income VAT would not allow businesses to deduct dividends, interest, or wages, so the"
221," income VAT remitted by businesses would include tax on these types of income. Calculations would not have to be made for different individuals, which would simplify tax administration and compliance burdens but not allow for treating different individuals differently. The flat tax was developed in the early 1980s by economists Robert Hall and Alvin Rabushka. The Hall-Rabushka flat tax proposal includes both an individual tax and a business tax. As described by Hall and Rabushka, the flat tax is a modificat"
222,"ion of a VAT; the modifications make the tax more progressive (less regressive) than a VAT. In particular, the business tax base is designed to be the same as that of a VAT, except that businesses are allowed to deduct wages and retirement income paid out as well as purchases from other businesses. Wage and retirement income is then taxed when received by individuals at the same rate as the business tax rate. By including this individual-level tax as well as the business tax, standard deductions can be made"
223," available to individuals. Individuals with less wage and retirement income than the standard deduction amounts would not owe any tax. A personal consumption tax would look much like a personal income tax. The major difference between the two is that under the consumption tax, taxpayers would include all income received, amounts borrowed, and cash flows received from the sale of assets, and then deduct the amount they saved. The remaining amount would be a measure of the taxpayer’s consumption over the year"
224,". When funds are withdrawn from bank accounts, or stocks or bonds are sold, both the original amount saved and interest earned are taxable because they are available for consumption. If withdrawn funds are reinvested in another qualified account or in stock or bonds, the taxable amount of the withdrawal would be offset by the deduction for the same amount that is reinvested. While the personal consumption tax would look like a personal income tax, the tax base would be the same as an RST. Instead of collect"
225,"ing tax on each sale of consumer products at the business level, a personal consumption tax would tax individuals annually on the sum of all their purchases of consumption goods. Because it is an individual-level tax, different tax rates could be applied to different individuals so that the tax could be made more progressive, and other taxpayer characteristics, such as family size, could be taken into account if desired. This is a work of the U.S. government and is not subject to copyright protection in the"
226," United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately."
227,"There are some similarities in how Medicare pays ASCs and hospital outpatient departments for the procedures they perform. However, the methods used by CMS to calculate the payment rates in each system, as well as the mechanisms used to revise the Medicare payment rates, differ. In 1980, legislation was enacted that enabled ASCs to bill Medicare for certain surgical procedures provided to Medicare beneficiaries. Under the ASC payment system, Medicare pays a predetermined, and generally all- inclusive, amoun"
228,"t per procedure to the facility. The approximately 2,500 surgical procedures that ASCs may bill for under Medicare are assigned to one of nine payment groups that contain procedures with similar costs, but not necessarily clinical similarities. All procedures assigned to one payment group are paid at the same rate. Under the Medicare payment system, when more than one procedure is performed at the same time, the ASC receives a payment for each of the procedures. However, the procedure that has the highest p"
229,"ayment rate receives 100 percent of the applicable payment, and each additional procedure receives 50 percent of the applicable payment. The Medicare payment for a procedure performed at an ASC is intended to cover the direct costs for a procedure, such as nursing and technician services, drugs, medical and surgical supplies and equipment, anesthesia materials, and diagnostic services (including imaging services), and the indirect costs associated with the procedure, including use of the facility and relate"
230,"d administrative services. The ASC payment for a procedure does not include payment for implantable devices or prosthetics related to the procedure; ASCs may bill separately for those items. In addition, the payment to the ASC does not include payment for professional services associated with the procedure; the physician who performs the procedure and the anesthesiologist or anesthetist bill Medicare directly for their services. Finally, the ASC payment does not include payment for certain other services th"
231,"at are not directly related to performing the procedure and do not occur during the time that the procedure takes place, such as some laboratory, X-ray, and other diagnostic tests. Because these additional services are not ASC procedures, they may be performed by another provider. In those cases, Medicare makes payments to those providers for the additional services. For example, a laboratory service needed to evaluate a tissue sample removed during an ASC procedure is not included in the ASC payment. The p"
232,"rovider that evaluated the tissue sample would bill and receive payment from Medicare for that service. Because ASCs receive one inclusive payment for the procedure performed and its associated services, such as drugs, they generally include on their Medicare claim only the procedure performed. In 1997, legislation was enacted that required the implementation of a prospective payment system for hospital outpatient departments; the OPPS was implemented in August 2000. Although ASCs perform only procedures, h"
233,"ospital outpatient departments provide a much broader array of services, including diagnostic services, such as X-rays and laboratory tests, and emergency room and clinic visits. Each of the approximately 5,500 services, including procedures, that hospital outpatient departments perform is assigned to one of over 800 APC groups with other services with clinical and cost similarities for payment under the OPPS. All services assigned to one APC group are paid the same rate. Similar to ASCs, when hospitals per"
234,"form multiple procedures at the same time, they receive 100 percent of the applicable payment for the procedure that has the highest payment rate, and 50 percent of the applicable payment for each additional procedure, subject to certain exceptions. Like payments to ASCs, payment for a procedure under the OPPS is intended to cover the costs of the use of the facility, nursing and technician services, most drugs, medical and surgical supplies and equipment, anesthesia materials, and administrative costs. Med"
235,"icare payment to a hospital for a procedure does not include professional services for physicians or other nonphysician practitioners. These services are paid for separately by Medicare. However, there are some differences between ASC and OPPS payments for procedures. Under the OPPS, hospital outpatient departments generally may not bill separately for implantable devices related to the procedure, but they may bill separately for additional services that are directly related to the procedure, such as certai"
236,"n drugs and diagnostic services, including X-rays. Hospital outpatient departments also may bill separately for additional services that are not directly related to the procedure and do not occur during the procedure, such as laboratory services to evaluate a tissue sample. Because they provide a broader array of services, and because CMS has encouraged hospitals to report all services provided during a procedure on their Medicare claims for rate-setting purposes, hospital claims may provide more detail abo"
237,"ut the services delivered during a procedure than ASC claims do. CMS set the initial 1982 ASC payment rates based on cost and charge data from 40 ASCs. At that time, there were about 125 ASCs in operation. Procedures were placed into four payment groups, and all procedures in a group were paid the same rate. When the ASC payment system was first established, federal law required CMS to review the payment rates periodically. In 1986, CMS conducted an ASC survey to gather cost and charge data. In 1990, using "
238,"these data, CMS revised the payment rates and increased the number of payment groups to eight. A ninth payment group was established in 1991. These groups are still in use, although some procedures have been added to or deleted from the ASC-approved list. Although payments have not been revised using ASC cost data since 1990, the payment rates have been periodically updated for inflation. In 1994, Congress required that CMS conduct a survey of ASC costs no later than January 1, 1995, and thereafter every 5 "
239,"years, to revise ASC payment rates. CMS conducted a survey in 1994 to collect ASC cost data. In 1998, CMS proposed revising ASC payment rates based on the 1994 survey data and assigned procedures performed at ASCs into payment groups that were comparable to the payment groups it was developing for the same procedures under the OPPS. However, CMS did not implement the proposal, and, as a result, the ASC payment system was not revised using the 1994 data. In 2003, MMA eliminated the requirement to conduct ASC"
240," surveys every 5 years and required CMS to implement a revised ASC payment system no later than January 1, 2008. During the course of our work, in August 2006, CMS published a proposed rule that would revise the ASC payment system effective January 1, 2008. In this proposed rule, CMS bases the revised ASC payment rates on the OPPS APC groups. However, the payment rates would be lower for ASCs. The initial OPPS payment rates, implemented in August 2000, were based on hospitals’ 1996 costs. To determine the O"
241,"PPS payment rates, CMS first calculates each hospital’s cost for each service by multiplying the charge for that service by a cost-to-charge ratio computed from the hospital’s most recently reported data. After calculating the cost of each service for each hospital, the services are grouped by their APC assignment, and a median cost for each APC group is calculated from the median costs of all services assigned to it. Using the median cost, CMS assigns each APC group a weight based on its median cost relati"
242,"ve to the median cost of all other APCs. To obtain a payment rate for each APC group, CMS multiplies the relative weight by a factor that converts it to a dollar amount. Beginning in 2002, as required by law, the APC group payment rates have been revised annually based on the latest charge and cost data. In addition, the payment rates for services paid under the OPPS receive an annual inflation update. We found many similarities in the additional services provided by ASCs and hospital outpatient departments"
243," with the top 20 procedures. Of the additional services billed with a procedure, few resulted in an additional payment in one setting but not the other. Hospitals were paid for some of the related additional services they billed with the procedures. In the ASC setting, other providers billed Medicare for these services and received payment for them. In our analysis of Medicare claims, we found many similarities in the additional services billed in the ASC or hospital outpatient department setting with the t"
244,"op 20 procedures. The similar additional services are illustrated in the following four categories of services: additional procedures, laboratory services, radiology services, and anesthesia services. First, one or more additional procedures was billed with a procedure performed in either the ASC or hospital outpatient department setting for 14 of the top 20 procedures. The proportion of time each additional procedure was billed in each setting was similar. For example, when a hammertoe repair procedure was"
245," performed, our analysis indicated that another procedure to correct a bunion was billed 11 percent of the time in the ASC setting, and in the hospital outpatient setting, the procedure to correct a bunion was billed 13 percent of the time. Similarly, when a diagnostic colonoscopy was performed, an upper gastrointestinal (GI) endoscopy was billed 11 percent of the time in the ASC setting, and in the hospital setting, the upper GI endoscopy was billed 12 percent of the time. For 11 of these 14 procedures, th"
246,"e proportion of time each additional procedure was billed differed by less than 10 percentage points between the two settings. For the 3 remaining procedures, the percentage of time that an additional procedure was billed did not vary by more than 25 percentage points between the two settings. See appendix III for a complete list of the additional procedures billed and the proportion of time they were billed in each setting. Second, laboratory services were billed with 10 of the top 20 procedures in the hos"
247,"pital outpatient department setting and 7 of the top 20 procedures in the ASC setting. While these services were almost always billed by the hospital in the outpatient setting, they were typically not billed by the ASCs. These laboratory services were present in our analysis in the ASC setting because they were performed and billed by another Medicare part B provider. Third, four different radiology services were billed with 8 of the top 20 procedures. Radiology services were billed with 5 procedures in the"
248," ASC setting and with 8 procedures in the hospital outpatient department setting. The radiology services generally were included on the hospital outpatient department bills but rarely were included on the ASC bills. Similar to laboratory services, hospital outpatient departments billed for radiology services that they performed in addition to the procedures. When radiology services were billed with procedures in the ASC setting, these services generally were performed and billed by another part B provider. "
249,"Fourth, anesthesia services were billed with 17 of the top 20 procedures in either the ASC or hospital outpatient settings and with 14 procedures in both settings. In virtually every case in the ASC setting, and most cases in the hospital outpatient department setting, these services were billed by another part B provider. According to our analysis, ASCs did not generally include any services other than the procedures they performed on their bills. However, in the hospital outpatient setting, some additiona"
250,"l services were included on the hospitals’ bills. We believe this is a result of the structure of the two payment systems. As ASCs generally receive payment from Medicare only for procedures, they typically include only those procedures on their bills. In contrast, hospital outpatient departments’ bills often include many of the individual items or services they provide as a part of a procedure because CMS has encouraged them to do so, whether the items or services are included in the OPPS payment or paid s"
251,"eparately. With the exception of additional procedures, there were few separate payments that could be made for additional services provided with the top 20 procedures because most of the services in our analysis were included in the Medicare payment to the ASC or hospital. Under both the Medicare ASC and OPPS payment systems, when more than one procedure is performed at the same time, the facility receives 100 percent of the applicable payment for the procedure that has the highest payment rate and 50 perc"
252,"ent of the applicable payment for each additional procedure. As this policy is applicable to both settings, for those instances in our analysis when an additional procedure was performed with one of the top 20 procedures in either setting, the ASC or hospital outpatient department received 100 percent of the payment for the procedure with the highest payment rate and 50 percent of the payment for each lesser paid procedure. Individual drugs were billed by hospital outpatient departments for most of the top "
253,"20 procedures, although they were not present on the claims from ASCs, likely because ASCs generally cannot receive separate Medicare payments for individual drugs. However, none of the individual drugs billed by the hospital outpatient departments in our analysis resulted in an additional payment to the hospitals. In each case, the cost of the particular drug was included in the Medicare payment for the procedure. In the case of the laboratory services billed with procedures in the ASC and hospital outpati"
254,"ent department settings, those services were not costs included in the payment for the procedure in either setting and were paid separately in each case. For both settings, the payment was made to the provider that performed the service. In the case of the hospital outpatient department setting, the payment was generally made to the hospital, while, for procedures performed at ASCs, payment was made to another provider who performed the service. Of the four radiology services in our analysis, three were sim"
255,"ilar to the laboratory services in that they are not included in the cost of the procedure and are separately paid services under Medicare. Therefore, when hospitals provided these services, they received payment for them. In the ASC setting, these services were typically billed by a provider other than the ASC, and the provider received payment for them. The fourth radiology service is included in the payment for the procedure with which it was associated. Therefore, no separate payment was made to either "
256,"ASCs or hospital outpatient departments. With regard to anesthesia services, most services were billed by and paid to a provider other than an ASC or hospital. As a group, the costs of procedures performed in ASCs have a relatively consistent relationship with the costs of the APC groups to which they would be assigned under the OPPS. That is, the APC groups accurately reflect the relative costs of procedures performed in ASCs. We found that the ASC-to-APC cost ratios were more tightly distributed around th"
257,"eir median cost ratio than the OPPS-to-APC cost ratios were around their median cost ratio. Specifically, 45 percent of all procedures in our analysis fell within 0.10 points of the ASC-to-APC median cost ratio, and 33 percent of procedures fell within 0.10 points of the OPPS-to-APC median cost ratio. However, the costs of procedures in ASCs are substantially lower than costs for the same procedures in the hospital outpatient setting. The APC groups reflect the relative costs of procedures provided by ASCs "
258,"as well as they reflect the relative costs of procedures provided in the hospital outpatient department setting. In our analysis, we listed the procedures performed at ASCs and calculated the ratio of the cost of each procedure to the cost of the APC group to which it would have been assigned, referred to as the ASC-to-APC cost ratio. We then calculated similar cost ratios for the same procedures exclusively within the OPPS. To determine an OPPS-to-APC cost ratio, we divided individual procedures’ median co"
259,"sts, as calculated by CMS for the OPPS, by the median cost of their APC group. Our analysis of the cost ratios showed that the ASC-to-APC cost ratios were more tightly distributed around their median than were the OPPS-to-APC cost ratios; that is, there were more of them closer to the median. Specifically, 45 percent of procedures performed in ASCs fell within a 0.10 point range of the ASC-to-APC median cost ratio, and 33 percent of those procedures fell within a 0.10 point range of the OPPS-to-APC median c"
260,"ost ratio in the hospital outpatient department setting (see figs. 1 and 2). Therefore, there is less variation in the ASC setting between individual procedures’ costs and the costs of their assigned APC groups than there is in the hospital outpatient department setting. From this outcome, we determined that the OPPS APC groups could be used to pay for procedures in ASCs. The median costs of procedures performed in ASCs were generally lower than the median costs of their corresponding APC group under the OP"
261,"PS. Among all procedures in our analysis, the median ASC-to-APC cost ratio was 0.39. The ASC-to-APC cost ratios ranged from 0.02 to 3.34. When weighted by Medicare volume based on 2004 claims data, the median ASC- to-APC cost ratio was 0.84. We determined that the median OPPS-to-APC cost ratio was 1.04. This analysis shows that when compared to the median cost of the same APC group, procedures performed in ASCs had substantially lower costs than when those same procedures were performed in hospital outpatie"
262,"nt departments. Generally, there are many similarities between the additional services provided in ASCs and hospital outpatient departments with one of the top 20 procedures, and few resulted in an additional Medicare payment to ASCs or hospital outpatient departments. Although costs for individual procedures vary, in general, the median costs for procedures are lower in ASCs, relative to the median costs of their APC groups, than the median costs for the same procedures in the hospital outpatient departmen"
263,"t setting. The APC groups in the OPPS reflect the relative costs of procedures performed in ASCs in the same way that they reflect the relative costs of the same procedures when they are performed in hospital outpatient departments. Therefore, the APC groups could be applied to procedures performed in ASCs, and the OPPS could be used as the basis for an ASC payment system, eliminating the need for ASC surveys and providing for an annual revision of the ASC payment groups. We recommend that the Administrator"
264," of CMS implement a payment system for procedures performed in ASCs based on the OPPS. The Administrator should take into account the lower relative costs of procedures performed in ASCs compared to hospital outpatient departments in determining ASC payment rates. We received written comments on a draft of this report from CMS (see app. IV). We also received oral comments from external reviewers representing two ASC industry organizations, AAASC and FASA. In commenting on a draft of this report, CMS stated "
265,"that our recommendation is consistent with its August 2006 proposed revisions to the ASC payment system. Industry representatives who reviewed a draft of this report did not agree or disagree with our recommendation for executive action. They did, however, provide several comments on the draft report. The industry representatives noted that we did not analyze the survey results to examine differences in per-procedure costs among single-specialty and multi-specialty ASCs. Regarding this comment, we initially"
266," considered developing our survey sample stratified by ASC specialty type. However, because accurate data identifying ASCs’ specialties do not exist, we were unable to stratify our survey sample by specialty type. The industry representatives asked us to provide more explanation in our scope and methodology regarding our development of a relative weight scale for Medicare ASC-approved procedures to capture the general variation in resources associated with performing different procedures. We expanded the di"
267,"scussion of how we developed the relative weight scale in our methodology section. Reviewers also made technical comments, which we incorporated where appropriate. We are sending a copy of this report to the Administrator of CMS and appropriate congressional committees. The report is available at no charge on GAO’s Web site at http://www.gao.gov. We will also make copies available to others on request. If you or your staff members have any questions about this report, please contact me at (202) 512-7119 or "
268,"kingk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made significant contributions to this report are listed in appendix V. The Medicare payment rates for ambulatory surgical centers (ASC), along with those of other facilities, are adjusted to account for the variation in labor costs across the country. To calculate payment rates for individual ASCs, the Centers for Medicare & Medicaid Services (CMS) "
269,calculates the share of total costs that are labor-related and then adjusts ASCs’ labor- related share of costs based on a wage index calculated for specific geographic areas across the country. The wage index reflects how the average wage for health care personnel in each geographic area compares to the national average health care personnel wage. The geographic areas are intended to represent the separate labor markets in which health care facilities compete for employees. In setting the initial ASC payme
270,"nt rates for 1982, CMS determined from the first survey of ASCs that one-third of their costs were labor-related. The labor-related costs included employee salaries and fringe benefits, contractual personnel, and owners’ compensation for duties performed for the facility. To determine the payment rates for each individual ASC, CMS multiplied one-third of the payment rate for each procedure—the labor- related portion—by the local area wage index. Each ASC received the base payment rate for two-thirds of the "
271,"payment rate—the nonlabor-related portion—for each procedure. The sum of the labor-related and nonlabor- related portions equaled each ASC’s payment rate for each procedure. In 1990, when CMS revised the payment system based on a 1986 ASC survey, CMS found ASCs’ average labor-related share of costs to be 34.45 percent and used this percentage as the labor-related portion of the payment rate. In a 1998 proposed rule, CMS noted that ASCs’ share of labor-related costs as calculated from the 1994 ASC cost surve"
272,"y had increased to an average of 37.66 percent, slightly higher than the percentage calculated from the 1986 survey. However, CMS did not implement the 1998 proposal. Currently, the labor-related proportion of costs from CMS’s 1986 survey, 34.45 percent, is used for calculating ASC payment rates. Using 2004 cost data we received from 290 ASCs that responded to our survey request for information, we determined that the mean labor-related proportion of costs was 50 percent, and the range of the labor-related "
273,"costs for the middle 50 percent of our ASC facilities was 43 percent to 57 percent of total costs. To compare the delivery of procedures between ASCs and hospital outpatient departments, we analyzed Medicare claims data from 2003. To compare the relative costs of procedures performed in ASCs and hospital outpatient departments, we collected cost and procedure data from 2004 from a sample of Medicare-participating ASCs. We also interviewed officials at CMS and representatives from ASC industry organizations,"
274," specifically, the American Association of Ambulatory Surgery Centers (AAASC) and FASA, physician specialty societies, and nine ASCs. To compare the delivery of additional services provided with procedures performed in ASCs and hospital outpatient departments, we identified all additional services frequently billed in each setting when one of the top 20 procedures with the highest Medicare ASC claims volume is performed. These procedures represented approximately 75 percent of all Medicare ASC claims in 200"
275,"3. Using Medicare claims data for 2003, we identified beneficiaries receiving one of the top 20 procedures in either an ASC or hospital outpatient department, then identified any other claims for those beneficiaries from ASCs, hospital outpatient departments, durable medical equipment suppliers, and other Medicare part B providers. We identified claims for the beneficiaries on the day the procedure was performed and the day after. We created a list that included all additional services that were billed at l"
276,east 10 percent of the time with each of the top 20 procedures when they were performed in ASCs. We created a similar list of additional services for each of the top 20 procedures when they were performed in hospital outpatient departments. We then compared the lists for each of the top 20 procedures between the two settings to determine whether there were similarities in the additional services that were billed to Medicare. To compare the Medicare payments for procedures performed in ASCs and hospital outp
277,"atient departments, we identified whether any additional services included in our analysis resulted in an additional payment. We used Medicare claims data from the National Claims History (NCH) files. These data, which are used by the Medicare program to make payments to health care providers, are closely monitored by both CMS and the Medicare contractors that process, review, and pay claims for Medicare services. The data are subject to various internal controls, including checks and edits performed by the"
278," contractors before claims are submitted to CMS for payment approval. Although we did not review these internal controls, we did assess the reliability of the NCH data. First, we reviewed all existing information about the data, including the data dictionary and file layouts. We also interviewed experts at CMS who regularly use the data for evaluation and analysis. We found the data to be sufficiently reliable for the purposes of this report. To compare the relative costs of procedures performed in ASCs and"
279," hospital outpatient departments, we first compiled information on ASCs’ costs and procedures performed. Because there were no recent existing data on ASC costs, we surveyed 600 ASCs, randomly selected from all ASCs, to obtain their 2004 cost and procedure data. We received response data from 397 ASC facilities. We assessed the reliability of these data through several means. We identified incomplete and inconsistent survey responses within individual surveys and placed follow-up calls to respondents to com"
280,"plete or verify their responses. To ensure that survey response data were accurately transferred to electronic files for our analytic purposes, two analysts independently entered all survey responses. Any discrepancies between the two sets of entered responses were resolved. We performed electronic testing for errors in accuracy and completeness, including an analysis of costs per procedure. As a result of our data reliability testing, we determined that data from 290 responding facilities were sufficiently"
281," reliable for our purposes. Our nonresponse analysis showed that there was no geographic bias among the facilities responding to our survey. The responding facilities performed more Medicare services than the average for all ASCs in our sample. To allocate ASCs’ total costs among the individual procedures they perform, we developed a method to allocate the portion of an ASC’s costs accounted for by each procedure. We constructed a relative weight scale for Medicare ASC-approved procedures that captures the "
282,"general variation in resources associated with performing different procedures. The resources we used were the clinical staff time, surgical supplies, and surgical equipment used during the procedures. We used cost and quantity data on these resources from information CMS had collected for the purpose of setting the practice expense component of physician payment rates. For procedures for which CMS had no data on the resources used, we used information we collected from medical specialty societies and physi"
283,"cians who work for CMS. We summed the costs of the resources for each procedure and created a relative weight scale by dividing the total cost of each procedure by the average cost across all of the procedures. We assessed the reliability of these data through several means. We compared electronic CMS data with the original document sources for a large sample of records, performed electronic testing for errors in accuracy and completeness, and reviewed data for reasonableness. Based on these efforts, we det"
284,"ermined that data were sufficiently reliable for our purposes. To calculate per-procedure costs with the data from the surveyed ASC facilities, we first deducted costs that Medicare considers unallowable, such as advertising and entertainment costs. (See fig. 3 for our per- procedure cost calculation methodology.) We also deducted costs for services that Medicare pays for separately, such as physician and nonphysician practitioner services. We then separated each facility’s total costs into its direct and i"
285,"ndirect costs. We defined direct costs as those associated with the clinical staff, equipment, and supplies used during the procedure. Indirect costs included all remaining costs, such as support and administrative staff, building expenses, and outside services purchased. To allocate each facility’s direct costs across the procedures it performed, we applied our relative weight scale. We allocated indirect costs equally across all procedures performed by the facility. For each procedure performed by a respo"
286,"nding ASC facility, we summed its allocated direct and indirect costs to determine a total cost for the procedure. To obtain a per-procedure cost across all ASCs, we arrayed the calculated costs for all ASCs performing that procedure and identified the median cost. To compare per-procedure costs for ASCs and hospital outpatient departments, we first obtained from CMS the list of ambulatory payment classification (APC) groups used for the outpatient prospective payment system (OPPS) and the procedures assign"
287,"ed to each APC group. We also obtained from CMS the OPPS median cost of each procedure and the median cost of each APC group. We then calculated a ratio between each procedure’s ASC median cost, as determined by the survey, and the median cost of each procedure’s corresponding APC group under the OPPS, referred to as the ASC-to-APC cost ratio. We also calculated a ratio between each ASC procedure’s median cost under the OPPS and the median cost of the procedure’s APC group, using the data obtained from CMS,"
288," referred to as the OPPS-to-APC cost ratio. To evaluate the difference in procedure costs between the two settings, we compared the ASC-to- APC and OPPS-to-APC cost ratios. To assess how well the relative costs of procedures in the OPPS, defined by their assignment to APC groups, reflect the relative costs of procedures in the ASC setting, we evaluated the distribution of the ASC-to-APC and OPPS-to-APC cost ratios. To calculate the percentage of labor-related costs among our sample ASCs, for each ASC, we di"
289,"vided total labor costs by total costs, after deducting costs not covered by Medicare’s facility payment. We then determined the range of the percentage of labor-related costs among all of our ASCs and between the 25th percentile and the 75th percentile, as well as the mean and median percentage of labor-related costs. We performed our work from April 2004 through October 2006 in accordance with generally accepted government auditing standards. Appendix III: Additional Procedures Billed with the Top 20 ASC "
290,"Procedures, 2003 (percentage) N/A (percentage) In addition to the contact named above, key contributors to this report were Nancy A. Edwards, Assistant Director; Kevin Dietz; Beth Cameron Feldpush; Marc Feuerberg; and Nora Hoban."
291,"IRS’s mission is to provide America’s taxpayers top-quality service by helping them to understand and meet their tax responsibilities and to enforce the law with integrity and fairness to all. During fiscal year 2015, IRS collected more than $3.3 trillion; processed more than 243 million tax returns and other forms; and issued more than $403 billion in tax refunds. IRS employs about 90,000 people in its Washington, D.C., headquarters and at more than 550 offices in all 50 states, U.S. territories, and some "
292,"U.S. embassies and consulates. Each filing season IRS provides assistance to tens of millions of taxpayers over the phone, through written correspondence, online, and face-to-face. The scale of these operations alone presents challenges. In carrying out its mission, IRS relies extensively on computerized information systems, which it must effectively secure to protect sensitive financial and taxpayer data for the collection of taxes, processing of tax returns, and enforcement of federal tax laws. Accordingl"
293,"y, it is critical for IRS to effectively implement information security controls and an agency- wide information security program in accordance with federal law and guidance. Cyber incidents can adversely affect national security, damage public health and safety, and compromise sensitive information. Regarding IRS specifically, two recent incidents illustrate the impact on taxpayer and other sensitive information: In June 2015, the Commissioner of the IRS testified that unauthorized third parties had gained"
294," access to taxpayer information from its Get Transcript application. According to officials, criminals used taxpayer- specific data acquired from non-department sources to gain unauthorized access to information on approximately 100,000 tax accounts. These data included Social Security information, dates of birth, and street addresses. In an August 2015 update, IRS reported this number to be about 114,000, and that an additional 220,000 accounts had been inappropriately accessed. In a February 2016 update, "
295,"the agency reported that an additional 390,000 accounts had been accessed. Thus, about 724,000 accounts were reportedly affected. The online Get Transcript service has been unavailable since May 2015. In March 2016, IRS stated that as part of its ongoing security review, it had temporarily suspended the Identity Protection Personal Identification Number (IP PIN) service on IRS.gov. The IP PIN is a single-use identification number provided to taxpayers who are victims of identity theft (IDT) to help prevent "
296,"future IDT refund fraud. The service on IRS’s website allowed taxpayers to retrieve their IP PINs online by passing IRS’s authentication checks. These checks confirm taxpayer identity by asking for personal, financial and tax-related information. The IRS stated that it was conducting further review of the IP PIN service and is looking at further strengthening the security features before resuming service. As of April 7, the online service was still suspended. The Commissioner of Internal Revenue has overall"
297," responsibility for ensuring the confidentiality, integrity, and availability of the information and systems that support the agency and its operations. Within IRS, the senior agency official responsible for information security is the Associate CIO, who heads the IRS Information Technology Cybersecurity organization. As we reported in March 2016, IRS has implemented numerous controls over key financial and tax processing systems; however, it had not always effectively implemented access and other controls,"
298," including elements of its information security program. Access controls are intended to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities. These controls include identification and authentication, authorization, cryptography, audit and monitoring, and physical security controls, among others. In our most recent review we found that IRS had improved access controls, but some weaknesses remain. Identifying and authenticating users—such as through use"
299,"r account-password combinations—provides the basis for establishing accountability and controlling access to a system. IRS established policies for identification and authentication, including requiring multifactor authentication for local and network access accounts and establishing password complexity and expiration requirements. It also improved identification and authentication controls by, for example, expanding the use of an automated mechanism to centrally manage, apply, and verify password requireme"
300,"nts. However, weaknesses in identification and authentication controls remained. For example, the agency used easily guessable passwords on servers supporting key systems. Authorization controls limit what actions users are able to perform after being allowed into a system and should be based on the concept of “least privilege,” granting users the least amount of rights and privileges necessary to perform their duties. While IRS established policies for authorizing access to its systems, it continued to per"
301,"mit excessive access in some cases. For example, users were granted rights and permissions in excess of what they needed to perform their duties, including for an application used to process electronic tax payment information and a database on a human resources system. Cryptography controls protect sensitive data and computer programs by rendering data unintelligible to unauthorized users and protecting the integrity of transmitted or stored data. IRS policies require the use of encryption and it continued "
302,"to expand its use of encryption to protect sensitive data. However, key systems we reviewed had not been configured to encrypt sensitive user authentication data. Audit and monitoring is the regular collection, review, and analysis of events on systems and networks in order to detect, respond to, and investigate unusual activity. IRS established policies and procedures for auditing and monitoring its systems and continued to enhance its capability by, for example, implementing an automated mechanism to log "
303,"user activity on its access request and approval system. But it had not established logging for two key applications used to support the transfer of financial data and access and manage taxpayer accounts; nor was the agency consistently maintaining key system and application audit plans. Physical security controls, such as physical access cards, limit access to an organization’s overall facility and areas housing sensitive IT components. IRS established policies for physically protecting its computer resour"
304,"ces and physical security controls at its enterprise computer centers, such as a dedicated guard force at each of its computer centers. However, the agency had yet to address weaknesses in its review of access lists for both employees and visitors to sensitive areas. IRS also had weaknesses in configuration management controls, which are intended to prevent unauthorized changes to information system resources (e.g., software and hardware) and provide assurance that systems are configured and operating secur"
305,"ely. Specifically, while IRS developed policies for managing the configuration of its information technology (IT) systems and improved some configuration management controls, it did not, for example, ensure security patch updates were applied in a timely manner to databases supporting 2 key systems we reviewed, including a patch that had been available since August 2012. To its credit, IRS had established contingency plans for the systems we reviewed, which help ensure that when unexpected events occur, cri"
306,"tical operations can continue without interruption or can be promptly resumed, and that information resources are protected. Specifically, IRS had established policies for developing contingency plans for its information systems and for testing those plans, as well as for implementing and enforcing backup procedures. Moreover, the agency had documented and tested contingency plans for its systems and improved continuity of operations controls for several systems. Nevertheless, the control weaknesses can be "
307,"attributed in part to IRS’s inconsistent implementation of elements of its agency-wide information security program. The agency established a comprehensive framework for its program, including assessing risk for its systems, developing system security plans, and providing employees with security awareness and specialized training. However, IRS had not updated key mainframe policies and procedures to address issues such as comprehensively auditing and monitoring access. In addition, the agency had not fully "
308,"addressed previously identified deficiencies or ensured that its corrective actions were effective. During our most recent review, IRS told us it had addressed 28 of our prior recommendations; however, we determined that 9 of these had not been effectively implemented. The collective effect of the deficiencies in information security from prior years that continued to exist in fiscal year 2015, along with the new deficiencies we identified, are serious enough to merit the attention of those charged with gov"
309,"ernance of IRS and therefore represented a significant deficiency in IRS’s internal control over financial reporting systems as of September 30, 2015. To assist IRS in fully implementing its agency-wide information security program, we made two new recommendations to more effectively implement security-related policies and plans. In addition, to assist IRS in strengthening security controls over the financial and tax processing systems we reviewed, we made 43 technical recommendations in a separate report w"
310,"ith limited distribution to address 26 new weaknesses in access controls and configuration management. Implementing these recommendations—in addition to the 49 outstanding recommendations from previous audits—will help IRS improve its controls for identifying and authenticating users, limiting users’ access to the minimum necessary to perform their job-related functions, protecting sensitive data when they are stored or in transit, auditing and monitoring system activities, and physically securing its IT fa"
311,"cilities and resources. Table 1 below provides the number of our prior recommendations to IRS that were not implemented at the beginning of our fiscal year 2015 audit, how many were resolved by the end of the audit, new recommendations, and the total number of outstanding recommendations at the conclusion of the audit. In commenting on drafts of our reports presenting the results of our fiscal year 2015 audit, the IRS Commissioner stated that while the agency agreed with our new recommendations, it will rev"
312,"iew them to ensure that its actions include sustainable fixes that implement appropriate security controls balanced against IT and human capital resource limitations. In addition, IRS can take steps to improve its response to data breaches. Specifically, in December 2013 we reported on the extent to which data breach policies at eight agencies, including IRS, adhered to requirements and guidance set forth by the Office of Management and Budget and the National Institute of Standards and Technology. While th"
313,"e agencies in our review generally had policies and procedures in place that reflected the major elements of an effective data breach response program, implementation of these policies and procedures was not consistent. With respect to IRS, we determined that its policies and procedures generally reflected key practices, although the agency did not require considering the number of affected individuals as a factor when determining if affected individuals should be notified of a suspected breach. In addition"
314,", IRS did not document lessons learned from periodic analyses of its breach response efforts. We recommended that IRS correct these weaknesses, but the agency has yet to fully address them. The importance of protecting taxpayer information is further highlighted by the billions of dollars that have been lost to IDT refund fraud, which continues to be an evolving threat. IRS develops estimates of the extent of IDT refund fraud to help direct its efforts to identify and prevent the crime. While its estimates "
315,"have inherent uncertainty, IRS estimated that it prevented or recovered $22.5 billion in fraudulent IDT refunds in filing season 2014 (see figure 1). However, IRS also estimated, where data were available, that it paid $3.1 billion in fraudulent IDT refunds. Because of the difficulties in knowing the amount of undetectable fraud, the actual amount could differ from these estimates. IRS has taken steps to address IDT refund fraud; however, it remains a persistent and continually changing threat. IRS recogniz"
316,"ed the challenge of IDT refund fraud in its fiscal year 2014-2017 strategic plan and increased resources dedicated to combating IDT and other types of refund fraud. In fiscal year 2015, IRS reported that it staffed more than 4,000 full-time equivalents and spent about $470 million on all refund fraud and IDT activities. As described above, IRS received an additional $290 million for fiscal year 2016 to improve customer service, IDT identification and prevention, and cybersecurity efforts and the agency plan"
317,"s to use $16.1 million of this funding to help prevent IDT refund fraud, among other things. The administration requested an additional $90 million and an additional 491 full-time equivalents for fiscal year 2017 to help prevent IDT refund fraud and reduce other improper payments. IRS estimates that this $90 million investment in IDT refund fraud and other improper payment prevention would help it protect $612 million in revenue in fiscal year 2017, as well as protect revenue in future years. IRS has taken "
318,"action to improve customer service related to IDT refund fraud. For example, between the 2011 and 2015 filing seasons, IRS experienced a 430 percent increase in the number of telephone calls to its Identity Theft Toll Free Line—as of March 19, 2016, IRS had received over 1.1 million calls to this line. Moreover, 77 percent of callers seeking assistance on this telephone line received it compared to 54 percent during the same period last year. Average wait times during the same period have also decreased—tax"
319,"payers are waiting an average of 14 minutes to talk to an assistor, a decrease from 27 minutes last year. IRS also works with third parties, such as tax preparation industry participants, states, and financial institutions to try to detect and prevent IDT refund fraud. In March 2015, the IRS Commissioner convened a Security Summit with industry and states to improve information sharing and authentication. IRS officials said that 40 state departments of revenue and 20 tax industry participants have officiall"
320,"y signed a partnership agreement to enact recommendations developed and agreed to by summit participants. IRS plans to invest a portion of the $16.1 million it received in fiscal year 2016 into identity theft prevention and refund fraud mitigation actions from the Security Summit. These efforts include developing an Information Sharing and Analysis Center where IRS, states, and industry can share information to combat IDT refund fraud. Even though IRS has prioritized combating IDT refund fraud, fraudsters a"
321,"dapt their schemes to identify weaknesses in IDT defenses, such as gaining access to taxpayers’ tax return transcripts through IRS’s online Get Transcript service. According to IRS officials, with access to tax transcripts, fraudsters can create historically consistent returns that are hard to distinguish from a return filed by a legitimate taxpayer, potentially making it more difficult for IRS to identify and detect IDT refund fraud. Without additional action by IRS and Congress, the risk of issuing fraudu"
322,"lent IDT refunds could grow. We previously made recommendations to IRS to help it better combat IDT refund fraud: Authentication. In January 2015, we reported that IRS’s authentication tools have limitations and recommended that IRS assess the costs, benefits and risks of its authentication tools. For example, individuals can obtain an e-file PIN by providing their name, Social Security number, date of birth, address, and filing status for IRS’s e-file PIN application. Identity thieves can easily find this "
323,"information, allowing them to bypass some, if not all, of IRS’s automatic checks, according to our analysis and interviews with tax software and return preparer associations and companies. After filing an IDT return using an e-file PIN, the fraudulent return would proceed through IRS’s normal return processing. In November 2015, IRS officials told us that the agency had developed guidance for its Identity Assurance Office to assess costs, benefits, and risk, and that its analysis will inform decision-making"
324," on authentication-related issues. IRS also noted that the methods of analysis for the authentication tools will vary depending on the different costs and other factors for authenticating taxpayers in different channels, such as online, phone, or in-person. In February 2016, IRS officials told us that the Identity Assurance Office plans to complete a strategic plan for taxpayer authentication across the agency in September 2016. While IRS is taking steps, it will still be vulnerable until it completes and u"
325,"ses the results of its analysis of costs, benefits, and risk to inform decision-making. Form W-2, Wage and Tax Statement (W-2) Pre-refund Matching. In August 2014 we reported that the wage information that employers report on Form W-2 is not available to IRS until after it issues most refunds, and that if IRS had access to W-2 data earlier, it could match such information to taxpayers’ returns and identify discrepancies before issuing billions of dollars of fraudulent IDT refunds. We recommended that IRS as"
326,"sess the costs and benefits of accelerating W-2 deadlines. In response to our recommendation, IRS provided us with a report in September 2015 discussing (1) adjustments to IRS systems and work processes needed to use accelerated W-2 information, (2) the potential impacts on internal and external stakeholders, and (3) other changes needed to match W-2 data to tax returns prior to issuing refunds, such as delaying refunds until W-2 data are available. In December 2015, the Consolidated Appropriations Act of 2"
327,"016 amended the tax code to accelerate W-2 filing deadlines to January 31. IRS’s report will help IRS determine how to best implement pre- refund W-2 matching, given the new January 31st deadline for filing W-2s. Additionally, we suggested that Congress should consider providing the Secretary of the Treasury with the regulatory authority to lower the threshold for electronic filing of W-2s, which could make more W-2 information available to IRS earlier. External Leads. IRS partners with financial institutio"
328,"ns and other external parties to obtain information about emerging IDT refund trends and fraudulent returns that have passed through IRS detection systems. In August 2014, we reported that IRS provides limited feedback to external parties on IDT external leads they submit and offers external parties limited general information on IDT refund fraud trends and recommended that IRS provide actionable feedback to all lead generating third parties. In November 2015, IRS reported that it had developed a database t"
329,"o track leads submitted by financial institutions and the results of those leads. IRS also stated that it had held two sessions with financial institutions to provide feedback on external leads provided to IRS. In December 2015, IRS officials stated that the agency sent a customer satisfaction survey asking financial institutions for feedback on the external leads process and was considering other ways to provide feedback to financial institutions. In April 2016, IRS officials stated they plan to analyze pr"
330,"eliminary survey results by mid-April 2016. Additionally, IRS officials reported that the agency shared information with financial institutions in March 2016 and plans to do so on a quarterly basis, with the next information sharing session scheduled in June 2016. IRS and industry partners have characterized that returns processing and refund issuance during this filing season has been generally smooth. Through April 1, 2016, IRS had processed about 95 million returns and issued 76 million refunds totaling "
331,"about $215 billion. While IRS experienced a major system failure in February that halted returns processing for about a day, the agency reported that it had minimal effect on overall processing of returns and refunds. In addition to filing returns, many taxpayers often call IRS for assistance. IRS’s telephone service has generally improved in 2016 over last year. From January 1 through March 19, 2016 IRS received about 35.4 million calls to its automated and live assistor telephone lines, about a 2 percent "
332,"decrease compared to the same period last year. Of the 13.4 million calls seeking live assistance, IRS had answered 9.1 million calls—a 75 percent increase over the 5.2 million calls answered during the same period last year. IRS anticipated that 65 percent of callers seeking live assistance would receive it this filing season, which runs through April 18, and 47 percent of callers would receive live assistance through the entire 2016 fiscal year. As of March 19, 2016, 75 percent of callers had received liv"
333,"e assistance, an increase from 38 percent during the same period last year. Further, the average wait time to speak to an assistor also decreased from 24 to 9 minutes. As we reported in March 2016, however, IRS’s telephone level of service for the full fiscal year has yet to reach the levels it had achieved in earlier years. IRS attributed this year’s service improvement to a number of factors. Of the additional $290 million IRS received in December 2015, it allocated $178.4 million (61.5 percent) for taxpa"
334,"yer services to make measurable improvements in its telephone level of service. With the funds, IRS hired 1,000 assistors who began answering taxpayer calls in March, in addition to the approximately 2,000 seasonal assistors it had hired in fall 2015. To help answer taxpayer calls before March, IRS officials told us that they detailed 275 staff from one of its compliance functions to answer telephone calls. IRS officials said they believe this step was necessary because the additional funding came too late "
335,"in the year to hire and train assistors to fully cover the filing season. IRS also plans to use about 600 full-time equivalents of overtime for assistors to answer telephone calls and respond to correspondence in fiscal year 2016, compared to fewer than 60 full-time equivalents of overtime used in fiscal year 2015. In December 2014, we recommended that IRS systematically and periodically compare its telephone service to the best in business to identify gaps between actual and desired performance. IRS disagr"
336,"eed with this recommendation, noting that it is difficult to identify comparable organizations. We do not agree with IRS’s position; many organizations run call centers that would provide ample opportunities to benchmark IRS’s performance. In fall 2015, Department of the Treasury (Treasury) and IRS officials said they had no plans to develop a comprehensive customer service strategy or specific goals for telephone service tied to the best in the business and customer expectations. Without such a strategy, T"
337,"reasury and IRS can neither measure nor effectively communicate to Congress the types and levels of customer service taxpayers should expect and the resources needed to reach those levels. Therefore, in December 2015 we suggested that Congress consider requiring that Treasury work with IRS to develop a comprehensive customer service strategy. In April 2016, IRS officials told us that the agency established a team to consider our prior work in developing this strategy or benchmarking its telephone service. I"
338,"n summary, while IRS has made progress in implementing information security controls, it needs to continue to address weaknesses in access controls and configuration management and consistently implement all elements of its information security program. The risks IRS and the public are exposed to have been illustrated by recent incidents involving public- facing applications, highlighting the importance of securing systems that contain sensitive taxpayer and financial data. In addition, fully implementing k"
339,"ey elements of a breach response program will help ensure that when breaches of sensitive data do occur, their impact on affected individuals will be minimized. Weaknesses in information security can also increase the risk posed by identity theft refund fraud. IRS needs to establish an approach for addressing identity theft refund fraud that is informed by assessing the cost, benefits, and risks of IRS’s various authentication options and improving the reliability of fraud estimates. While this year’s tax f"
340,"iling season has generally gone smoothly and IRS has improved customer service, it still needs to develop a comprehensive approach to customer service that will meet the needs of taxpayers while ensuring that their sensitive information is adequately protected. Chairman Hatch, Ranking Member Wyden, and Members of the Committee, this concludes my statement. I look forward to answering any questions that you may have at this time. If you have any questions regarding this statement, please contact Gregory C. W"
341,"ilshusen at (202) 512-6244 or wilshuseng@gao.gov, Nancy Kingsbury at (202) 512-2928 or kingsburyn@gao.gov, or James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov or Jessica K. Lucas-Judy at (202) 512-9110 or LucasJudyJ@gao.gov. Other key contributors to this statement include Jeffrey Knott, Neil A. Pinney, and Joanna M. Stamatiades (assistant directors); Dawn E. Bidne; Mark Canter; James Cook; Shannon J. Finnegan; Lee McCracken; Justin Palk; J. Daniel Paulk; Erin Saunders Rath; and Daniel Swartz. Th"
342,"is is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately."
343,"In 1991, we reported that, historically, INS leadership had allowed INS’ organizational structure to become decentralized without adequate controls. Specifically, its regional structure had created geographical separation among INS programs and hampered resource allocation and consistent program implementation. The field structure designed to carry out INS’ enforcement functions was bifurcated between districts and Border Patrol sectors, resulting in uncoordinated, overlapping programs. In addition, only a "
344,"single senior INS headquarters manager supervised INS’ 33 district directors and 21 Border Patrol chiefs. In 1994, with the appointment of a new Commissioner, INS implemented an organizational structure intended to remedy at least two problems. First, the headquarters operations office’s unrealistically large span of control resulting in uneven and poorly coordinated field performance. Second, the lack of focus on program planning resulting from the operations office’s preoccupation with matters that should"
345," have been handled by field managers. The Commissioner shifted some management authority to officials closer to field activities. While INS made some progress toward achieving its reorganization goals, its organizational structure is still in a state of flux and some problems persist. For example, in 1997 we reported that the responsibilities and authority of the Office of Field Operations and Office of Programs were unclear. We recommended, among other things, that the INS Commissioner provide written guid"
346,"ance on (1) the responsibilities and authorities of these two offices and (2) the appropriate coordination and communication methods between these two offices, and between the Office of Programs and field offices. Although INS has taken some steps to implement our 1997 recommendations, they have yet to be completed because, according to INS, these recommendations relate to INS restructuring that is currently under study. As previously mentioned, INS’ mission involves carrying out two primary functions—enfor"
347,"cing immigration laws and providing services or benefits to eligible legal immigrants. These functions often translate into competing priorities at the program level that need to be balanced for effective program implementation. All too often, the emphasis placed on one over the other results in ineffective enforcement or poor benefit delivery. An example of this inability to balance these priorities can be found in our September 2000 report on the processing of visas for specialty occupations, called H-1B "
348,"visas. The performance appraisal process for staff that evaluates the merits of applications filed with INS (called adjudicators) focused mainly on the number of applications reviewed, not the quality of the review. INS rewarded those adjudicators who processed the greatest number of applications over those who processed fewer applications. Some adjudicators told us that because of pressure to adjudicate cases quickly, they did not routinely use investigations staff to look into potentially fraudulent appli"
349,"cations because doing so would take more time and reduce the number of applications they could complete. INS investigators following up on approved applications found instances of fraud; for example, they found employers who created shell corporations and false credentials and documents for aliens ineligible for H-1B employment. We found other examples where the goal of providing timely service delivery has negatively impacted INS’ enforcement goal of providing benefits to only eligible aliens. In our May 2"
350,"001 report on INS application processing, we stated that INS’ policy is to grant work authorization to applicants who file for adjustment of status to that of a permanent resident before it adjudicates their application. This policy is intended to prevent aliens from having to wait for INS to adjudicate their application before they can work. However, in fiscal year 2000 INS denied about 80,000 applicants for adjustment of status (about 14 percent of all the adjustment of status applications completed) and "
351,"had to revoke their work authorization. Because these aliens had work authorization while waiting for their application to be processed, they could have developed a work history that may have facilitated their obtaining employment even after INS’ efforts to officially revoke their work authorization. A senior INS official stated that the policy to grant work authorization before the adjustment of status application is decided is intended to be fair to the majority of adjustment of status applicants who are "
352,"approved. An investigation into INS’ initiative to process naturalization applications more quickly found the initiative to be fraught with quality and integrity problems resulting in ineligible applicants receiving citizenship. According to a Department of Justice Office of Inspector General (OIG) report on INS’ Citizenship USA initiative launched in 1995, INS made the timely completion of naturalization applications its guiding principle at the expense of accuracy and quality in determining eligibility. A"
353,"s a result of the problems found, INS instituted naturalization quality control procedures to enhance the integrity of the process. We are finding a similar situation in our ongoing review for this subcommittee of INS’ efforts to deter immigration benefit fraud. We will discuss this and other issues related to immigration benefit fraud in a report to be released later this year. Other researchers have also found that INS had difficulty in balancing its enforcement and service delivery priorities. For exampl"
354,"e, the Visa Waiver Program allows nationals of certain counties to enter the United States with just a passport. No visa is required. According to a Department of Justice OIG report, abuse of the program poses a threat to national security and increases illegal immigration. The report found that aliens used stolen passports from Visa Waiver countries to illegally enter the United States. In one case, the OIG found that 27 stolen Icelandic passports had been used to smuggle children into the United States.Al"
355,"though the passport numbers of the stolen Icelandic passports had been entered into a lookout database, INS airport inspectors were not entering the passport numbers of passengers arriving with Icelandic passports into the lookout database. INS officials told the OIG investigators that manually keying in these passport numbers into the system would take too long and would hamper INS’ ability to inspect all passengers from a flight within 45 minutes, as mandated by law. An INS contractor that evaluated INS’ "
356,"immigration benefits process in 1999 found that INS needed to strengthen the integrity of the process. The study found that INS had no standard quality control program for ensuring that applications were processed consistently. Although some adjudicators believed the number of fraudulent applications submitted was significantly higher than the number they were detecting, they received little training in fraud detection. According to the report, some management and operations personnel indicated that perform"
357,"ance evaluations in large part are based on the quantity of applications processed. The report concluded that whether employees receive incentives and rewards depends more on the quantity of applications processed rather than on fraud detection. Therefore, adjudicators had no incentives to actively search out fraud. As we reported in our applications processing report, despite these pressures to complete applications more quickly, INS’ backlog of applications increased to about 4 million applications by the"
358," end of fiscal year 2000, a four-fold increase since 1994. As of September 30, 2001 about 767,000 applicants out of almost 3 million with pending applications had been waiting at least 21 months for INS to process their application. In our 1997 management report, we found that poor communication was a problem, especially between headquarters and field units. For example, field and policy manuals were out of date and there was not one place that program staff could go for direction. Over one half of the empl"
359,"oyees we surveyed in preparing that report believed that INS had poor communications and that information was disseminated poorly. As noted earlier in our testimony, how INS’ Office of Programs and Office of Field Operations were to coordinate was still unclear. Our recent work shows that coordination and communication is still a problem. For example, although both the Border Patrol and INS’ Office of Investigations have anti-smuggling units that conduct alien smuggling investigations, these units operate t"
360,"hrough separate chains of command with different reporting structures. In May 2000, we reported that alien smuggling was a growing problem, and that the Border Patrol and Investigations anti-smuggling units operated autonomously, resulting in a lack of program coordination. Further, this lack of coordination sometimes led to different anti-smuggling units opening investigations on the same target. INS Investigations officials told us that the autonomy of the individual units and the lack of a single chain o"
361,"f command to manage INS’ anti-smuggling investigations were major obstacles to building a more effective anti-smuggling program. Communicating the necessary information to the appropriate individuals has also been a problem. In our H-1B report, we stated that adjudicators told us that they did not have easy access to case-specific information that would have helped them correctly decide whether an application should be approved or denied. For example, evidence of a fraudulent employer or falsified worker cr"
362,"edentials either was not available to the adjudicator or could only be accessed through a time-consuming and complicated process. Consequently, a previously denied application could be resubmitted and approved by a different adjudicator. At the time of our review, INS officials told us that INS was in the process of upgrading the computer system that tracks H-1B applications, which could make more accurate and up to date information available on-line for adjudicators. Our work and the work of an INS contrac"
363,"tor both found that INS did not have a structure in place to manage the information that adjudicators needed to make correct decisions. Information systems were not easily accessible to all adjudicators, so these systems were generally not queried as part of the adjudication process. INS had no single repository of information where adjudicators could find the most up to date information on such things as adjudication processes and legal and regulatory policies. In one case, the lack of communication and un"
364,"clear policies and procedures had tragic consequences. In January 1999, police in Texas obtained a warrant for the arrest of Rafael Resendez-Ramirez, the “railway killer” who traveled around the United States by freight train and committed murders near railroad lines. In early 1999 police contacted INS Investigations staff in Houston Texas several times about placing a “border lookout” for Resendez-Ramirez in case he was apprehended at the border. According to a Department of Justice OIG report, none of the"
365," Investigations staff contacted by the police thought to inform the police about the existence of IDENT, INS’ automated fingerprint identification system. The Investigations staff also failed to enter a lookout in IDENT in case Resendez-Ramirez was apprehended trying to cross the border. On June 1, 1999, the Border Patrol apprehended Resendez-Ramirez trying to cross illegally and had him processed through the IDENT system. Because no border lookout had been placed, however, the Border Patrol voluntarily ret"
366,"urned him to Mexico in accordance with standard Border Patrol practices. He subsequently returned illegally to the United States and committed four more murders before he was captured. INS’ Houston investigations staff provided OIG investigators with various reasons as to why they did not mention IDENT or its lookout capability to police or enter a lookout in IDENT, including the following: They were unfamiliar with IDENT and how it worked. They never received any IDENT training. They were unaware IDENT had"
367," a lookout feature. They thought IDENT was a system primarily for the Border Patrol to use. The OIG concluded that the lack of knowledge about IDENT was largely the result of broader problems in the way INS implemented and monitored IDENT. INS failed to (1) (1) ensure that components outside of the Border Patrol, such as Investigations, understood IDENT policies, particularly the lookout policy and (2) provide adequate IDENT training for all INS staff. INS and the FBI are currently working on integrating ID"
368,"ENT with the FBI’s automated fingerprint system to improve the quality and accuracy of criminal identification so that such mistakes can be averted in the future. Effective communication has also been a problem between INS and local communities. In August 2001, we reported that since 1994 as INS’ Border Patrol has increased enforcement efforts in certain locations as part of its strategy to deter illegal entry along the southwest border, illegal alien traffic shifted to other locations. Officials from some "
369,"border communities told us that they were caught by surprise by the increase in the number of illegal aliens apprehended in their communities. INS has recognized the need to improve communications with the public regarding its strategy and its potential implications and has increased its outreach efforts. INS has had long-standing difficulty developing and fielding information systems to support its program operations. In 1990, we reported that INS managers and field officials did not have adequate, reliabl"
370,"e, and timely information to effectively carry out the Service’s mission. We also reported that INS had not conducted a comprehensive agency-wide information needs assessment. As a result, program and management data were kept in a loose collection of automated systems as well as a number of ad-hoc labor-intensive manual systems. Effectively using information technology continues to remain a challenge for INS. In August 2000, we reported that INS did not have a “blueprint” to guide the development of its in"
371,"formation systems. The absence of such a plan increases the risk that the information systems in which hundreds of millions of dollars are invested each year will not be well integrated or compatible and will not support mission needs. In December 2000, we reported that INS had limited capability to effectively manage its planned and ongoing information technology investments. While INS has some important information technology management capabilities in place, it has to do considerable work to fully implem"
372,"ent mature and effective processes. The Department of Justice agreed with our recommendation that INS develop and submit a plan to Justice for implementing investment management process improvements. INS is in the process of developing this plan. The lack of adequate information technology systems has significantly impacted INS’ ability to perform its core missions. As we reported in our applications processing report, INS headquarters and field staff cited automation problems as the number one factor affec"
373,"ting INS’ ability to process applications in a timely manner to reduce backlogs. INS has no national case management system for applications filed at its 33 district offices. Most of these offices process applications manually. As a result, these offices cannot determine the number of pending cases, identify problem areas or bottlenecks, establish processing priorities, deploy staff based on workload, and ensure cases are processed in the order received. Due to the lack of any automated system, staff spend "
374,"considerable time responding to applicants’ inquires on the status of their case, which takes time away from application processing. Existing INS systems used to process applications do not provide accurate and reliable data. In our applications processing report we stated that the system INS Service Centers use to process some applications frequently fails to operate and does not always update data to INS’ mainframe computer as it should. This lack of automation has resulted in INS expending considerable t"
375,"ime and effort to obtain the data it needs. In our applications processing report we also stated that lack of reliable data was the primary reason INS undertook a time-consuming and costly hand-count of all pending applications in September 2000. INS undertook the hand-count to get an accurate count of pending applications hoping to obtain an unqualified opinion on its fiscal year 2000 financial statements. According to INS officials, the cost to complete this hand-count was high in terms of lost production"
376," and staff time. INS suspended nearly all case processing for 2-3 weeks. Due to the lack of accurate data in its computer systems, INS will have to do another hand-count of all pending applications at the end of fiscal year 2001 if it hopes to obtain an unqualified opinion on its financial statement. As a result of this lack of accurate data, INS has also approved more visas than the Congress has allowed. According to an INS contractor study, INS’ system that tracks these visas was not designed to keep a ru"
377,"nning total of the number of visas issued and to compare it against the annual limit to ensure that only the allowable number is approved. Consequently, in fiscal year 1999, INS approved approximately 137,000 to 138,000 H-1B visas, well over the 115,000 limit. Program management issues at INS have caused continuing concern. Our work indicates that INS needs to improve its program management in several fundamental areas, including having efficient processes and clear policies and procedures, providing adequa"
378,"te staff training, and aligning its workforce with its workload. The INS contractor study on immigration benefits processing found that INS’ processes were inefficient. For example, INS staff spends considerable time re-entering the same data into various INS computer systems. INS did not consistently adjudicate applications because the procedures used to process applications varied by office, most field offices allowed adjudicators to review cases using minimal guidelines, and standard quality controls wer"
379,e lacking. The study made numerous recommendations on how to make the processes more efficient and improve quality control. We stated in our applications processing report that INS was developing a strategic plan to reengineer applications processing. INS will make decisions regarding the contractor’s recommendations after completing two related strategic plans - the plan to reengineer applications processing and the information technology strategic plan. Both are in the early planning stages. INS estimated
380," that it will take 5 years or more to develop and implement the reengineered processes and implement a service-wide automated system to process applications. Adequate staff training is also a critical aspect of program management. As noted earlier in our testimony, an INS contractor study found that INS adjudicators received little training in fraud detection. According to a November 2000 INS report prepared as part of INS’ Government Performance and Results Act reporting requirements, the INS workforce is "
381,"not well supported in terms of training. Advanced training classes have been cut back or delayed. According to the report, because of the growing workforce and these training cutbacks, INS will have a larger portion of its workforce that is relatively inexperienced and inadequately trained for its work."
382,"While TCE and perchlorate are both DOD-classified emerging contaminants, there are key distinctions between the contaminants that affect the extent to which they are regulated, and the information that may be needed before further steps are taken to protect human health and the environment. Since 1989, a maximum contaminant level (MCL) under the Safe Drinking Water Act has been in place for TCE. In contrast, EPA has not adopted an MCL for perchlorate, although recent government- sponsored studies have raise"
383,"d concerns that even low-levels of exposure to perchlorate may pose serious risks to infants and fetuses of pregnant women. We provided details about EPA’s evolving standards for TCE and the evolving knowledge of its health effects in our May 2007 report and June 2007 testimony on issues related to drinking water contamination on Camp Lejeune. TCE is a colorless liquid with a sweet, chloroform-like odor that is used mainly as a degreaser for metal parts. The compound is also a component in adhesives, lubric"
384,"ants, paints, varnishes, paint strippers, and pesticides. At one time, TCE was used as an extraction solvent for cosmetics and drug products and as a dry-cleaning agent; however, its use for these purposes has been discontinued. DOD has used the chemical in a wide variety of industrial and maintenance processes. More recently, the department has used TCE to clean sensitive computer circuit boards in military equipment such as tanks and fixed wing aircraft. Because TCE is pervasive in the environment, most p"
385,"eople are likely to be exposed to TCE by simply eating, drinking, and breathing, according to the Department of Health and Human Services’ Agency for Toxic Substances and Disease Registry (ATSDR). Industrial wastewater is the primary source of release of TCE into water systems, but inhalation is the main route of potential environmental exposure to TCE. ATSDR has also reported that TCE has been found in a variety of foods, with the highest levels in meats, at 12 to 16 ppb, and U.S. margarine, at 440 to 3,60"
386,"0 ppb. In fact, HHS’s National Health and Nutrition Examination Survey (NHANES) suggested that approximately 10 percent of the population had detectable levels of TCE in their blood. Inhaling small amounts of TCE may cause headaches, lung irritation, poor coordination, and difficulty concentrating, according ATSDR’s Toxicological Profile. Inhaling or drinking liquids containing high levels of TCE may cause nervous system effects, liver and lung damage, abnormal heartbeat, coma, or possibly death. ATSDR also"
387," notes that some animal studies suggest that high levels of TCE may cause liver, kidney, or lung cancer, and some studies of people exposed over long periods to high levels of TCE in drinking water or workplace air have shown an increased risk of cancer. ATSDR’s Toxicological Profile notes that the National Toxicology Program has determined that TCE is “reasonably anticipated to be a human carcinogen” and the International Agency for Research on Cancer has determined that TCE is probably carcinogenic to hum"
388,"ans— specifically, kidney, liver and cervical cancers, Hodgkin’s disease, and non- Hodgkin’s lymphoma—based on limited evidence of carcinogenicity in humans and additional evidence from studies in experimental animals. Effective in 1989, EPA adopted an MCL of 5 ppb of TCE in drinking water supplies pursuant to the Safe Drinking Water Act. Despite EPA’s regulation of TCE as a drinking water contaminant, concerns over serious long-term effects associated with TCE exposures have prompted additional scrutiny by"
389," both governmental and nongovernmental scientific organizations. For example, ATSDR initiated a public health assessment in 1991 to evaluate the possible health risks from exposure to contaminated drinking water on Camp Lejeune. The health concerns over TCE have been further amplified in recent years after scientific studies have suggested additional risks posed by human exposure to TCE. ATSDR is continuing to develop information about the possible long-term health consequences of these potential exposures "
390,"in a subregistry to the National Exposure Registry specifically for hazardous waste sites. As we previously reported with respect to Camp Lejeune, those who lived on base likely had a higher risk of inhalation exposure to volatile organic compounds such as TCE, which may be more potent than ingestion exposure. Thus, pregnant women who lived in areas of base housing with contaminated water and conducted activities during which they could inhale water vapor—such as bathing, showering, or washing dishes or clo"
391,"thing—likely faced greater exposure than those who did not live on base but worked on base in areas served by the contaminated drinking water. Concerns about possible adverse health effects and government actions related to the past drinking water contamination on Camp Lejeune have led to additional activities, including new health studies, claims against the federal government, and federal inquiries. As a consequence of these growing concerns—and of anxiety among affected communities about these health eff"
392,"ects and related litigation—ATSDR has undertaken a study to examine whether individuals who were exposed in utero to the contaminated drinking water are more likely to have developed certain childhood cancers or birth defects. This research, once completed later in 2007, is expected to help regulators understand the effects of low levels of TCE in our environment. In addition, some former residents of Camp Lejeune have filed tort claims and lawsuits against the federal government related to the past drinkin"
393,"g water contamination. As of June 2007, about 850 former residents and former employees had filed tort claims with the Department of the Navy related to the past drinking water contamination. According to an official with the U.S. Navy Judge Advocate General—which is handling the claims on behalf of the Department of the Navy—the agency is currently maintaining a database of all claims filed. The official said that the Judge Advocate General is awaiting completion of the latest ATSDR health study before dec"
394,"iding whether to settle or deny the pending claims in order to base its response on as much objective scientific and medical information as possible. According to DOD, any future reassessment of TCE toxicity may result in additional reviews of DOD sites that utilized the former TCE toxicity values, as the action levels for TCE cleanup in the environment may change. As we discussed in our May 2005 report and April 2007 testimony, EPA has not established a standard for limiting perchlorate concentrations in d"
395,"rinking water under the SDWA. Perchlorate has emerged as a matter of concern because recent studies have shown that it can affect the thyroid gland, which helps to regulate the body’s metabolism and may cause developmental impairments in the fetuses of pregnant women. Perchlorate is a primary ingredient in propellant and has been used for decades by the Department of Defense, the National Aeronautics and Space Administration, and the defense industry in manufacturing, testing, and firing missiles and rocket"
396,"s. Other uses include fireworks, fertilizers, and explosives. It is readily dissolved and transported in water and has been found in groundwater, surface water, drinking water, and soil across the country. The sources of perchlorate vary, but the defense and aerospace industries are the greatest known source of contamination. Scientific information on perchlorate was limited until 1997, when a better detection method became available for perchlorate, and detections (and concern about perchlorate contaminati"
397,"on) increased. In 1998, EPA first placed perchlorate on its Contaminant Candidate List, the list of contaminants that are candidates for regulation, but the agency concluded that information was insufficient to determine whether perchlorate should be regulated under the SDWA. EPA listed perchlorate as a priority for further research on health effects and treatment technologies and for collecting occurrence data. In 1999, EPA required water systems to monitor for perchlorate under the Unregulated Contaminant"
398," Monitoring Rule to determine the frequency and levels at which it is present in public water supplies nationwide. Interagency disagreements over the risks of perchlorate exposure led several federal agencies to ask the National Research Council (NRC) of the National Academy of Sciences to evaluate perchlorate’s health effects. In 2005, NRC issued a comprehensive review of the health effects of perchlorate ingestion, and it reported that certain levels of exposure may not adversely affect healthy adults. Ho"
399,"wever, the NRC-recommended more studies on the effects of perchlorate exposure in children and pregnant women and recommended a reference dose of 0.0007 milligrams per kilogram per day. In 2005, the EPA adopted the NRC recommended reference dose, which translates to a drinking water equivalent level (DWEL) of 24.5 ppb. If the EPA were to develop a drinking water standard for perchlorate, it would adjust the DWEL to account for other sources of exposure, such as food. Although EPA has taken some steps to con"
400,"sider a standard, in April 2007 EPA again decided not to regulate perchlorate—citing the need for additional research—and kept perchlorate on its Contaminant Candidate List. Several human studies have shown that thyroid changes occur in human adults at significantly higher concentrations than the amounts typically observed in water supplies. However, more recent studies have since provided new knowledge and raised concerns about potential health risks of low-level exposures, particularly for infants and fet"
401,"uses. Specifically, in October 2006, researchers from the Centers for Disease Control and Prevention (CDC) published the results of the first large study to examine the relationship between low-level perchlorate exposure and thyroid function in women with lower iodine levels. About 36 percent of U.S. women have these lower iodine levels. The study found decreases in a thyroid hormone that helps regulate the body’s metabolism and is needed for proper fetal neural development. Moreover, in May 2007, FDA relea"
402,"sed a preliminary exposure assessment because of significant public interest in the issue of perchlorate exposure from food. FDA sampled and tested foods such as tomatoes, carrots, spinach, and cantaloupe; and other high water content foods such as apple and orange juices; vegetables such as cucumbers, green beans, and greens; and seafood such as fish and shrimp for perchlorate and found widespread low-level perchlorate levels in these items. FDA is also planning to publish, in late 2007, an assessment of e"
403,"xposure to perchlorate from foods, based on results from its fiscal year 2005-2006 Total Diet Study—a market basket study that is representative of the U.S. diet. Some federal funding has been directed to perchlorate studies and cleanup activities. For example, committee reports related to the DOD and EPA appropriations acts of fiscal year 2006 directed some funding for perchlorate cleanup. In the Senate committee report for the Department of Health and Human Services fiscal year 2006 appropriations act, th"
404,"e committee encouraged support for studies on the long-term effects of perchlorate exposure. The Senate committee report for FDA’s fiscal year 2006 appropriations act directed FDA to continue conducting surveys of perchlorate in food and bottled water and to report the findings to Congress. In the current Congress, legislation has been introduced that would require EPA to establish a health advisory for perchlorate, as well as requiring public water systems serving more than 10,000 people to test for perchl"
405,"orate and disclose its presence in annual consumer confidence reports. Other pending legislation would require EPA to establish a national primary drinking water standard for perchlorate. DOD has certain responsibilities with regard to emerging contaminants such as TCE that are regulated by EPA or state governments, but its responsibilities and cleanup goals are less definite for emerging contaminants such as perchlorate that lack federal regulatory standards. As we have previously reported, DOD must comply"
406," with any cleanup standards and processes under all applicable environmental laws, regulations, and executive orders, including the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), the Resource Conservation and Recovery Act (RCRA) and the Clean Water Act’s National Pollutant Discharge Elimination System (NPDES), and the SDWA. DOD’s designation of perchlorate as an emerging contaminant reflects the department’s recognition that the chemical has a significant potential i"
407,"mpact on people or the Department’s mission. DOD’s recognition of a substance as an emerging contaminant can lead DOD to decide to take to certain cleanup efforts even in the absence of a federal regulatory standard. In addition, federal laws enacted in fiscal years 2004 and 2005 required DOD to conduct health studies and evaluate perchlorate found at military sites. For example, the Ronald W. Reagan National Defense Authorization Act for fiscal year 2005 stated that the Secretary of Defense should develop "
408,"a plan for cleaning up perchlorate resulting from DOD activities when the perchlorate poses a health hazard and continue evaluating identified sites. As we reported in our 2005 perchlorate report, DOD has sometimes responded at the request of EPA and state environmental authorities— which have used a patchwork of statutes, regulations, and general oversight authorities—to act (or require others, including DOD, to act) when perchlorate was deemed to pose a threat to human health and the environment. For exam"
409,"ple, pursuant to its authority under the Clean Water Act’s NPDES program, Texas required the Navy to reduce perchlorate levels in wastewater discharges at the McGregor Naval Weapons Industrial Reserve Plant to 4 parts per billion, the lowest level at which perchlorate could be detected. Similarly, after sampling required as part of a RCRA permit detected perchlorate, Utah officials required ATK Thiokol, an explosives and rocket fuel manufacturer, to install a monitoring well to determine the extent of perch"
410,"lorate contamination at their facility and take steps to prevent additional releases of perchlorate. In addition, EPA and state officials also told us during our 2005 review that they have sometimes used their general oversight responsibilities to protect water quality and human health to investigate and sample groundwater and surface water areas for perchlorate. For example, EPA asked Patrick Air Force Base and the Cape Canaveral Air Force Station, Florida, to sample groundwater for perchlorate near rocket"
411," launch sites. Previously, both installations had inventoried areas where perchlorate was suspected and conducted limited sampling. DOD officials did not find perchlorate at Patrick Air Force Base and, according to an EPA official, the Department of the Air Force said it would not conduct additional sampling at either installation until there was a federal standard for perchlorate. Finally, according to EPA, in the absence of a federal perchlorate standard, at least eight states have established nonregulato"
412,"ry action levels or advisories for perchlorate ranging from 1 part per billion to 51 parts per billion. (See table 1.) Massachusetts is the only state to have established a drinking water standard—set at 2 ppb. The California Department of Health Services reports that California will complete the rulemaking for its proposed standard of 6 ppb later this year. States have used these thresholds to identify the level at which some specified action must be taken by DOD and other facilities in their state, in the"
413," absence of a federal standard. For example, Oregon initiated in-depth site studies to determine the cause and extent of perchlorate contamination when concentrations of 18 ppb or greater are found. Nevada required the Kerr-McGee Chemical site in Henderson to treat groundwater and reduce perchlorate concentration releases to 18 ppb, which is Nevada’s action level for perchlorate. Utah officials told us that while the state did not have a written action level for perchlorate, it may require the responsible p"
414,"arty to undertake cleanup activities if perchlorate concentrations exceed 18 ppb. DOD is undertaking a number of activities to address emerging contaminants in general, including the creation of the Materials of Evolving Regulatory Interest Team (MERIT) to systematically address the health, environmental, and safety concerns associated with emerging contaminants. As noted above, DOD is required to follow EPA regulations for monitoring and cleanup of TCE. In addition, DOD is working with ATSDR, which has pro"
415,"jected a December 2007 completion date for its current study of TCE’s health effects on pregnant women and their children. In the absence of a federal standard, DOD has adopted its own perchlorate policies for sampling and cleanup activities or is working under applicable state guidelines. DOD created MERIT to help address the health, environmental, and safety concerns associated with emerging contaminants. According to DOD, MERIT has focused on materials that have been or are used by DOD, or are under deve"
416,"lopment for use, such as perchlorate, TCE, RDX, DNT and new explosives, naphthalene, perfluorooctanoic acid (PFOA), hexavalent chromium (i.e., chromium VI), beryllium, and nanomaterials. MERIT’s initiatives include pollution prevention, detection/analytical methods, human health studies, treatment technologies, lifecycle cost analysis, risk assessment and risk management, and public outreach. Another of MERIT’s activities was to create an Emerging Contaminant Action List of materials that DOD has assessed a"
417,"nd judged to have a significant potential impact on people or DOD’s mission. The current list includes five contaminants—perchlorate, TCE, RDX, naphthalene, and hexavalent chromium. To be placed on the action list, the contaminant will generally have been assessed by MERIT for its impacts on (1) environment, safety, and health (including occupational and public health), (2) cleanup efforts, (3) readiness and training, (4) acquisition, and (5) operation and maintenance activities. In 1979, EPA issued nonenfo"
418,"rceable guidance establishing “suggested no adverse response levels” for TCE in drinking water. These levels provided EPA’s estimate of the short- and long-term exposure to TCE in drinking water for which no adverse response would be observed and described the known information about possible health risks for these chemicals. However, the guidance for TCE did not suggest actions that public water systems should take if TCE concentrations exceeded those values. Subsequently, in 1989, EPA set an enforceable M"
419,"CL for TCE of 5 micrograms per liter, equivalent to 5 ppb in drinking water. The new standard served as a regulatory basis for many facilities to take concrete action to measure and control TCE. According to EPA’s Region 4 Superfund Director, for example, 46 sites on Camp Lejeune have since been identified for TCE cleanup. The Navy and EPA have selected remedies for 30 of those sites, and the remaining 16 are under active investigation. The first Record of Decision was signed in September 1992 and addressed"
420," contamination of groundwater in the Hadnot Point Area, one of Camp Lejeune’s water systems. Remedies to address groundwater contamination include groundwater “pump and treat” systems, in-situ chemical oxidation, and monitored natural attenuation. DOD contends that it is aggressively treating TCE as part of its current cleanup program. It notes that the department uses much less TCE than in the past and requires strict handling procedures and pollution prevention measures to prevent exposure to TCE and the "
421,"release of TCE into the environment. Specifically, DOD has replaced products containing TCE with other types of cleaning agents such as citrus-based agents, mineral oils and other non-toxic solutions. In the absence of a federal perchlorate standard, DOD has adopted its own policies with regard to sampling and cleanup. The 2003 Interim Policy on Perchlorate Sampling required the military services—Army, Navy, Air Force, and Marines—to sample on active installations (1) where a reasonable basis existed to sus"
422,"pect that a perchlorate release occurred as a result of DOD activities, and (2) a complete human exposure pathway likely existed or (3) where a particular installation must do so under state laws or applicable federal regulations such as the NPDES permit program. However, DOD’s interim policy on perchlorate did not address cleanup responsibilities nor did it address contamination at closed installations. As we detailed in our previous work, DOD only sampled for perchlorate on closed installations when reque"
423,"sted by EPA or a state agency, and only cleaned up active and closed installations when required by a specific environmental law, regulation, or program such as the environmental restoration program at formerly used defense sites. For example, at EPA’s request, the U.S. Army Corps of Engineers (Corps) installed monitoring wells and sampled for perchlorate at Camp Bonneville, a closed installation near Vancouver, Washington. Utah state officials also reported to us that DOD removed soil containing perchlorat"
424,"e at the former Wendover Air Force Base in Utah, where the Corps found perchlorate in 2004. However, as we previously reported, DOD cited reluctance to sample on or near active installations because of the lack of a federal regulatory standard for perchlorate. In the absence of a federal standard, DOD has also worked with individual states on perchlorate sampling and cleanup. For example, in October 2004, DOD and California agreed to prioritize perchlorate sampling at DOD facilities in California, including"
425," identifying and prioritizing the investigation of areas on active installations and military sites (1) where the presence of perchlorate is likely based on previous and current defense-related activities and (2) near drinking water sources where perchlorate was found. In January 2006, DOD updated its policy with the issuance of its Policy on DOD Required Actions Related to Perchlorate. The new policy applies broadly to DOD’s active and closed installations and formerly used defense sites within the United "
426,"States, its territories and possessions. It directs DOD to test for perchlorate and take certain cleanup actions. The policy also acknowledges the importance of EPA direction in driving DOD’s response to emerging contaminants. It stated, for example, that its adoption of 24 ppb as the current level of concern for managing perchlorate was in response to EPA’s adoption of an oral reference dose that translates to a Drinking Water Equivalent Level of 24.5 ppb. The policy also states that when EPA or the states"
427," adopt standards for perchlorate, “DOD will comply with applicable state or federal promulgated standards whichever is more stringent.” The 2006 policy directs DOD to test for perchlorate when it is reasonably expected that a release has occurred. If perchlorate levels exceed 24 ppb, a site-specific risk assessment must be conducted. When an assessment indicates that the perchlorate contamination could result in adverse health effects, the site must be prioritized for risk management. DOD uses a relative-ri"
428,"sk site evaluation framework across DOD to evaluate the risks posed by one site relative to other sites and to help prioritize environmental restoration work and to allocate resources among sites. The policy also directs DOD’s service components to program resources to address perchlorate contamination under four DOD programs— environmental restoration, operational ranges, DOD-owned drinking water systems, and DOD wastewater effluent discharges. Under the 2006 perchlorate policy, DOD has sampled drinking wa"
429,"ter, groundwater, and soil where the release of perchlorate may result in human exposure and responded where it has deemed appropriate to protect public health. As we have reported, DOD is responsible for a large number of identified sites with perchlorate contamination, and the department has allotted significant resources to address the problem. According to DOD, sampling for perchlorate has occurred at 258 active DOD installations or facilities. Through fiscal year 2006, DOD reported spending approximate"
430,"ly $88 million on perchlorate-related research activities, including $60 million for perchlorate treatment technologies, $9.5 million on health and toxicity studies, and $11.6 million on pollution prevention. Additional funds have been spent on testing technology and cleanup. DOD also claims credit for other efforts, including strict handling procedures to prevent the release of perchlorate into the environment and providing information about perchlorate at DOD facilities and DOD’s responses. For example, D"
431,"OD posts the results of its perchlorate sampling, by state, on MERIT’s Web site. As we have previously reported, DOD must comply with cleanup standards and processes under applicable laws, regulations and executive orders, including EPA drinking water standards and state-level standards. In the absence of a federal perchlorate standard, DOD has also initiated perchlorate response actions to clean up perchlorate contamination at several active and formerly used defense sites under its current perchlorate pol"
432,"icy. For example, at Edwards Air Force Base in California, DOD has treated 32 million gallons of ground water under a pilot project for contaminants that include perchlorate. In addition, DOD has removed soil and treated groundwater at the Massachusetts Military Reservation and Camp Bonneville in Washington State. In conclusion, Mr. Chairman, DOD faces significant challenges, and potentially large costs, in addressing emerging contaminants, particularly in light of the scientific developments and regulatory"
433," uncertainties surrounding these chemicals and materials. To help address them, DOD recently identified five emerging contaminants for which it is developing risk management options. As in the case of TCE, DOD took action to address contamination after EPA established an MCL in 1989. DOD has stated that further efforts to address perchlorate would require a regulatory standard from EPA and/or the states. The fact that some states have moved to create such standards complicates the issue for DOD by presentin"
434,"g it with varying cleanup standards across the country. As the debate over a federal perchlorate standard continues, the recently- issued health studies from CDC and FDA may provide additional weight to the view that the time for such a standard may be approaching. Until one is adopted, DOD will continue to face the challenges of differing regulatory requirements in different states and continuing questions about whether its efforts to control perchlorate contamination are necessary or sufficient to protect"
435," human health. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have at this time. For further information about this testimony, please contact John Stephenson at (202) 512-3841 or stephensonj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Contributors to this testimony include Steven Elstein, Assistant Director and Terrance Horne"
436,"r, Senior Analyst. Marc Castellano, Richard Johnson, and Alison O’Neill also made key contributions. Defense Health Care: Issues Related To Past Drinking Water Contamination at Marine Corps Base Camp Lejeune, GAO-07-933T (June 12, 2007). Defense Health Care: Activities Related To Past Drinking Water Contamination at Marine Corps Base Camp Lejeune, GAO-07-276 (May 11, 2007). Perchlorate: EPA Does Not Systematically Track Incidents of Contamination, GAO-07-797T (April 25, 2007). Environmental Information: EPA"
437," Actions Could Reduce the Availability Of Environmental Information To The Public, GAO-07-464T (February 6, 2007). Military Base Closures: Opportunities Exist to Improve Environmental Cleanup Cost Reporting and to Expedite Transfer of Unneeded Property, GAO-07-166 (January 30, 2007). Perchlorate: A System to Track Sampling and Cleanup Results Is Needed, GAO-05-462 (May 20, 2005). Military Base Closures: Updated Status of Prior Base Realignments and Closures, GAO-05-138 (January 13, 2005). Environmental Cont"
438,"amination: DOD Has Taken Steps To Improve Cleanup Coordination At Former Defense Sites But Clearer Guidance Is Needed To Ensure Consistency, GAO-03-146 (March 28, 2003). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to rep"
439,roduce this material separately.
440,"As you know, the cost of the Decennial Census has steadily increased during the past 40 years, in part because the nation’s population has steadily grown larger, more diverse, and increasingly difficult to enumerate. For example, at about $13 billion, the 2010 Census was the costliest U.S. census in history and was 56 percent more costly than the $8.1 billion 2000 Census (in constant 2010 dollars). To help save costs, in preparing for the 2020 Census, the Bureau has been researching and testing new methods "
441,and technologies to redesign the Census to more cost-effectively count the population while maintaining high-quality results. The Bureau’s research and testing has focused on four redesign areas: Reengineering address canvassing: This involves reengineering processes for updating the Bureau’s address list and maps of the nation to reduce the need for employing field staff to walk every street in the nation to verify addresses. Optimizing self-response: Includes efforts to maximize the self- response of hous
442,"eholds by, among other things, offering an Internet response option. As we have previously reported, to deliver the Internet response option, the Bureau would need to, among other things, design and develop an Internet response application, develop and acquire the IT infrastructure to support a large volume of data processing and storage, and plan communication and outreach strategies to motivate households to respond via the Internet. Using administrative records: This includes expanding the use of data pr"
443,"eviously obtained by other federal and state government agencies and commercial sources to reduce the need for costly and labor-intensive follow-up work. My colleague will address the Bureau’s progress on using administrative records in his statement today. Reengineering field operations: This includes reducing the number of visits to households, automating the management of enumerator work to conduct non-response follow-up, and automating and optimizing case assignment and routing for enumerators to reduce"
444," the staffing, infrastructure, and field offices required for the 2020 Census. The Bureau has conducted several major field tests to examine the potential for each of these redesign areas: In mid-2014 the Bureau conducted the 2014 Census Test in the Maryland and Washington, D.C., areas to test new methods for conducting self-response and non-response follow-up. In early 2015 the Bureau completed the Address Validation Test, which was used to examine new methods for updating the Bureau’s address list. In mid"
445,"-2015 the Bureau conducted the 2015 Census Test in Arizona to test, among other things, the use of a field operations management system to automate data collection operations and provide real-time data and the ability to reduce the non-response follow-up workload using data previously provided to the government, as well as enabling enumerators to use their personally owned mobile devices to collect census data. Also in mid-2015, the Bureau conducted an optimizing self-response test in Savannah, Georgia, and"
446," the surrounding area, which was intended to further explore methods of encouraging households to respond using the Internet, such as using advertising and outreach to motivate respondents, and enabling households to respond without a Bureau-issued identification number. More recently, the Bureau began its National Content Test, which is currently ongoing and intended to, among other things, continue to test self-response modes and contact strategies and refine estimates of national self-response and Intern"
447,"et response rates. These tests were intended to inform the first version of the Bureau’s 2020 Census Operational Plan, which is intended to outline design decisions that drive how the 2020 Census will be conducted. As part of these decisions, the Bureau has committed to aspects of the 2020 Census redesign. The operational plan articulated 326 total design decision points, which vary widely in their complexity, importance, and urgency. As of October 6, 2015, the Bureau had made decisions for about 47 percent"
448," of them related to each of the four redesign areas. For example, the Bureau has decided to conduct 100 percent of address canvassing (i.e., identifying all addresses where people could live) in the office, and target a subset of up to 25 percent for in-the-field address canvassing; offer an Internet self-response option, as well as alternative response options via telephone and paper for limited circumstances; allow people to respond without a unique census identification use mobile devices for enumerators"
449," to conduct field data collection; use administrative records to enumerate vacant units; use enterprise solutions to support the 2020 Census, when practicable; and reduce the field footprint by half in comparison to the 2010 Census (e.g., 6 regional census centers instead of 12 and up to 250 field offices instead of nearly 500). Figure 1 provides an overview of the Bureau’s current plans and assumptions for the 2020 Census, resulting from the October 2015 operational plan. As a result of these decisions, th"
450,"e Bureau estimates saving $5.2 billion. Specifically, the Bureau estimated that repeating the design of the 2010 Census for 2020 would cost approximately $17.8 billion (in constant 2020 dollars), while successfully implementing the four redesign areas is expected to result in an overall 2020 Census cost of $12.5 billion (in constant 2020 dollars). Table 1 illustrates the estimated cost savings associated with each redesign area. Moving forward, the Bureau plans to conduct additional research and testing and"
451," further refine the design through 2018. By August 2017, the Bureau plans to begin preparations for end-to-end testing, which is intended to test all systems and operations to ensure readiness for the 2020 Census. Figure 2 shows the timeline for planned 2020 Census research and testing. Concurrent with redesigning the decennial census, the Bureau has also begun a significant effort to modernize and consolidate its survey data collection and processing functions. This is being undertaken through an enterpris"
452,"e-wide IT initiative called Census Enterprise Data Collection and Processing (CEDCAP). This initiative is a large and complex modernization program intended to deliver a system-of-systems for all the Bureau’s survey data collection and processing functions—rather than continuing to rely on unique, survey-specific systems with redundant capabilities. For the 2020 Census, CEDCAP is expected to deliver the systems and IT infrastructure needed to implement the Bureau’s redesign areas. For example: To reengineer"
453," field work, CEDCAP is expected to implement a new dynamic operational control system to track and manage field work. This system is to be able to make decisions about which visits enumerators should attempt on a daily basis using real-time data, as well as provide automated route planning to make enumerator travel more efficient. CEDCAP also includes testing the use of mobile devices, either government-furnished or employee-owned, to automate data collection in the field. To maximize self-response with the"
454," Internet response option, CEDCAP is responsible for developing and testing a web-based survey application and exploring options for establishing the IT infrastructure to support the increased volume of data processing and storage that will be needed. CEDCAP consists of 12 projects that are to deliver capabilities incrementally, over the course of at least 10 releases. The Bureau plans to roll out capabilities for the 2020 Census incrementally through 6 of these releases, while also deploying capabilities f"
455,"or other surveys such as the American Community Survey and Economic Census. The Bureau expects to reuse selected systems, make modifications to other systems, and develop or acquire additional systems and infrastructure. As of August 2015, the CEDCAP program was projected to cost about $548 million through 2020. However, the Bureau’s past efforts to implement new approaches and systems have not always gone well. As one example, during the 2010 Census, the Bureau planned to use handheld mobile devices to sup"
456,"port field data collection for the census, including following up with nonrespondents. However, due to significant problems identified during testing of the devices, cost overruns, and schedule slippages, the Bureau decided not to use the handheld devices for non-response follow-up and reverted to paper-based processing, which increased the cost of the 2010 Census by up to $3 billion and significantly increased its risk as it had to switch its operations to paper-based operations as a backup. Last month’s i"
457,"ssuance of the 2020 Census Operational Plan, which documents many key decisions about the redesign of the 2020 Census, represents progress; however, the Bureau faces critical challenges in delivering the IT systems needed to support the redesign areas. Specifically, with preparations for end-to-end testing less than 2 years away, the window to implement CEDCAP, which is intended to be the backbone of the 2020 Census, is narrow. Additionally, while the Bureau has demonstrated improvements in IT management, a"
458,"s we have previously reported, it faces critical gaps in its IT workforce planning and information security. Until it takes actions we have previously recommended to address these challenges, the Bureau is at risk of cost overruns, schedule delays, and performance shortfalls, which will likely diminish the potentially significant cost savings that it estimates will result from redesigning the census for 2020. The Bureau has not prioritized key IT-related decisions, which is a trend we have reported for the "
459,"past few years. Specifically, in April 2014, we reported the Bureau had not prioritized key IT research and testing needed for the design decisions planned for the end of 2015. In particular, the Bureau had not completed the necessary plans and schedules for research and testing efforts and had not prioritized what needed to be done in time for the 2015 design decisions—a milestone that had already been pushed back by a year (see fig. 3). We concluded that, given the current trajectory and the lack of suppo"
460,"rting schedules and plans, it was unlikely that all planned IT-related research and testing activities would be completed in time to support the 2015 design decisions—which ultimately came to fruition (as discussed later). In light of these ongoing challenges, we recommended in our April 2014 report that the Bureau prioritize its IT-related research and testing projects that need to be completed to support the design decisions and develop schedules and plans to reflect the new prioritized approach. The Bure"
461,"au agreed with our recommendations and has taken steps to address them. For example, in September 2014, the Bureau released a plan that identified inputs, such as research questions, design components, and testing, that were needed to inform the operational design decisions expected in the fall of 2015. However, as we reported in February 2015, the Bureau had not yet determined how key IT research questions that had been identified as critical inputs into the design decisions—estimating the Internet self- r"
462,"esponse rate and determining the IT infrastructure for security and scalability needed to support Internet response—were to be answered. We therefore recommended that the Bureau, among other things, develop methodologies and plans for answering key IT-related research questions in time to inform key design decisions. While the recent 2020 Census Operational Plan documents many key IT- related decisions about the redesign of the census, other critical questions, including the ones identified in our February "
463,"2015 report, remain unanswered. Of greater concern, the Bureau does not intend to answer these and other questions until 2016 through 2018. Specifically, there are several significant IT decisions that are being deferred, which have implications on the CEDCAP program’s ability to have production- ready systems in place in time to conduct end-to-end testing. For example, the Bureau does not plan to decide on the projected demand that the IT infrastructure and systems would need to accommodate or whether the "
464,"Bureau will build or buy the needed systems until June 2016, at the earliest; the high-level design and description of the systems (referred to as the solutions architecture) until September 2016—leaving about a year to, among other things, build or acquire, integrate, and test the systems that are intended to serve as the backbone to the 2020 Census before preparations for end-to-end testing begins in August 2017; and the strategy for the use of mobile devices for field work until October 2017. Figure 4 il"
465,"lustrates several key IT-related decisions that have been deferred which will impact preparations for the end-to-end test and 2020 Census. Unless the Bureau makes these key decisions soon, it will likely run out of time to put CEDCAP systems in place. Institutionalizing key IT management controls, such as IT governance, system development methodology, and requirements management processes, helps establish a consistent and repeatable process for managing and overseeing IT investments and reduces the risk of "
466,"experiencing cost overruns, schedule slippages, and performance shortfalls, like those that affected the previous census. However, in September 2012, we reported that the Bureau lacked a sufficiently mature IT governance process to ensure that investments are properly controlled and monitored, did not have a comprehensive system development methodology, and continued to have long-standing challenges in requirements management. We made several recommendations to address these issues, and the Bureau took acti"
467,"ons to fully implement each of the recommendations. For example, the Bureau addressed gaps in policies and procedures related to IT governance, such as establishing guidelines on the frequency of investment review board meetings and thresholds for escalation of cost, risk, or impact issues; finalized its adoption of an enterprise system development life-cycle methodology, which included the short incremental development model, referred to as Agile, and a process for continuously improving the methodology ba"
468,"sed on lessons learned; and implemented a consistent requirements development tool that includes guidance for developing requirements at the strategic mission, business, and project levels and is integrated with its enterprise system development life-cycle methodology. As a result, the Bureau has established a consistent process for managing and overseeing its IT investments. Effective workforce planning is essential to ensure organizations have the proper skills, abilities, and capacity for effective manag"
469,"ement. While the Bureau has made progress in IT workforce planning efforts, many critical IT competency gaps remain to be filled. In September 2012 we reported, among other things, that the Bureau had not developed a Bureau-wide IT workforce plan; identified gaps in mission-critical IT occupations, skills, and competencies; or developed strategies to address gaps. Accordingly, we recommended that the Bureau establish a repeatable process for performing IT skills assessments and gap analyses and establish a "
470,"process for directorates to coordinate on IT workforce planning. In response, in 2013 the Bureau completed an enterprise-wide competency assessment and identified several mission-critical gaps in technical competencies. In 2014, the Bureau established documents to institutionalize a strategic workforce planning process, identified actions and targets to close the competency gaps by December 2015, and established a process to monitor quarterly status reports on the implementation of these actions. However, a"
471,"s we reported in February 2015, while these are positive steps in establishing strategic workforce planning capabilities, the Bureau’s workforce competency assessment identified several mission-critical gaps that would challenge its ability to deliver IT-related initiatives, such as the IT systems that are expected to be delivered by CEDCAP. For example, the Bureau found that competency gaps existed in cloud computing, security integration and engineering, enterprise/mission engineering life- cycle, require"
472,"ments development, and Internet data collection. The Bureau also found that enterprise-level competency gaps existed in program and project management, budget and cost estimation, systems development, data analytics, and shared services. The Bureau has taken steps to regularly monitor and report on the status of its efforts to close competency gaps and has completed several notable actions. For example, in August 2015, the Bureau filled the position of Decennial IT Division Chief and in September 2015 award"
473,"ed an enterprise-wide IT services contract for systems engineering and integration support. However, more work remains for the Bureau to close competency gaps critical to the implementation of its IT efforts. Most significantly, in July 2015, the Chief Information Officer resigned. As of October 2015, the Bureau was working to fill that gap and had an acting Chief Information Officer temporarily in the position. Additionally, there are other gaps in key positions, such as the Chief of the Office of Informat"
474,"ion Security and Deputy Chief Information Security Officer, Big Data Center Chief, Chief Cloud Architect, and the CEDCAP Assistant Chief of Business Integration, who is responsible for overseeing the integration of schedule, risks, and budget across the 12 projects. According to Bureau officials, they are working to address these gaps. Critical to the Bureau’s ability to perform its data collection and analysis duties are its information systems and the protection of the information they contain. A data bre"
475,"ach could result in the public’s loss of confidence in the Bureau, thus affecting its ability to collect census data. To ensure the reliability of their computerized information, agencies should design and implement controls to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities. Inadequate design or implementation of access controls increases the risk of unauthorized disclosure, modification, and destruction of sensitive information and disruption of"
476," service. In January 2013, we reported on the Bureau’s implementation of information security controls to protect the confidentiality, integrity, and availability of the information and systems that support its mission. We concluded that the Bureau had a number of weaknesses in controls intended to limit access to its systems and information, as well as those related to managing system configurations and unplanned events. We attributed these weaknesses to the fact that the Bureau had not fully implemented a"
477," comprehensive information security program, and made 115 recommendations aimed at addressing these deficiencies. The Bureau expressed broad agreement with the report and said it would work to find the best ways to address our recommendations. As of October 29, 2015, the Bureau had addressed 66 of the 115 recommendations we made in January 2013. Of the remaining open recommendations, we have determined that 30 require additional actions by the Bureau, and for the other 19 we have work under way to evaluate "
478,"if they have been fully addressed. The Bureau’s progress toward addressing our security recommendations is encouraging. However, more work remains to address the recommendations. A cyber incident recently occurred at the Bureau, and while it appears to have had limited impact, it demonstrates vulnerabilities at the Bureau. Specifically, in July 2015, the Bureau reported that it had been targeted by a cyber attack aimed at gaining access to its Federal Audit Clearinghouse, which contains non-confidential inf"
479,"ormation from state and local governments, nonprofit organizations, and Indian tribes to facilitate oversight of federal grant awards. According to Bureau officials, the breach was limited to this database on a segmented portion of the Bureau’s network that does not touch administrative records or sensitive respondent data protected under Title 13 of the U.S. Code, and the hackers did not obtain the personally identifiable information of census and survey respondents. Given that the Bureau is planning to bu"
480,"ild or acquire IT systems to collect the public’s personal information for the 2020 Census in ways that it has not for previous censuses (e.g., web-based surveys, cloud computing, and enabling mobile devices to collect census data), continuing to implement our recommendations and apply IT security best practices as it implements CEDCAP systems must be a high priority. As a result of the Bureau’s challenges in key IT internal controls and its looming deadline, we identified CEDCAP as an IT investment in need"
481," of attention in our February 2015 High-Risk report. We recently initiated a review of the CEDCAP program for your subcommittees, and expect to issue a report in the spring of 2016. In conclusion, the Bureau is pursuing initiatives to significantly reform its outdated and inefficient methods of conducting decennial censuses. However, with less than 2 years remaining until the Bureau plans to have all systems and processes for the 2020 Census developed and ready for end-to-end testing, it faces challenges th"
482,"at pose significant risk to 2020 Census program. These include the magnitude of the planned changes to the design of the census, the Bureau’s prior track record in executing large-scale IT projects, and the current lack of a permanent Chief Information Officer, among others. Moreover, the Bureau’s preliminary decision deadline has come and gone, and many IT-related decisions have been deferred to 2016 through 2018. Consequently, it is running out of time to develop, acquire, and implement the production sys"
483,"tems it will need to deliver the redesign and achieve its projected $5.2 billion in cost savings. The Bureau needs to take action to address the specific challenges we have highlighted in prior reports. If these actions are not taken, cost overruns, schedules delays, and performance shortfalls may diminish the potentially significant cost savings that the Bureau estimates will result from redesigning the census for 2020. Chairmen Meadows and Hurd, Ranking Members Connolly and Kelly, and Members of the Subco"
484,"mmittees, this completes my prepared statement. I would be pleased to respond to any questions that you may have. If you have any questions concerning this statement, please contact Carol Cha, Director, Information Technology Acquisition Management Issues, at (202) 512-4456 or chac@gao.gov. Other individuals who made key contributions include Shannin O’Neill, Assistant Director; Andrew Beggs; Lee McCracken; and Jeanne Sung. This is a work of the U.S. government and is not subject to copyright protection in "
485,"the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately."
486,"Each military service—the Army, the Navy, the Air Force, and the Marine Corps—is responsible for assessing and making decisions regarding the ammunition in its inventory. The Army, as the Single Manager for Conventional Ammunition (SMCA), is responsible for centrally managing the demilitarization of all conventional ammunition including non-SMCA- managed items, for which capability, technology, and facilities exist to complete demilitarization and disposal. The services determine if the conventional ammunit"
487,"ion in their accounts is unserviceable or above their needs, and if so, transfer the ammunition to installations as specified by the SMCA. However, before proceeding with demilitarization, any serviceable conventional ammunition that is beyond a service’s needs is to be offered to the other services through an annual cross-leveling process. The services are to screen all conventional ammunition inventories that are beyond their needs by the other military services. Once the screening is complete, the servic"
488,"e can transfer ammunition to the demilitarization account as DOD excess, except when safety issues require immediate disposal. As shown in figure 1, once it has been determined that the conventional ammunition is unserviceable or DOD excess, the services deliver the ammunition to one of the seven demilitarization depots in the United States and the ammunition is incorporated into the CAD stockpile. Appendix III provides a map of the seven demilitarization depots and an explanation of the demilitarization me"
489,"thods used by the Army. Multiple DOD entities have responsibilities related to managing and overseeing conventional ammunition, with the Army having a prominent role. The Secretary of the Army serves as DOD’s SMCA and is responsible for centrally managing all aspects of the life cycle management of conventional ammunition, from research and development through demilitarization and disposal. The Program Executive Office for Ammunition has been designated the SMCA Executor and is responsible for executing all"
490," the functions of the SMCA. The Program Executive Office for Ammunition works with Joint Munitions Command and the Aviation and Missile Command to manage the demilitarization of conventional ammunition at seven Army depots and several commercial firms. The Program Executive Office for Ammunition budgets and funds the demilitarization and disposal of all munitions in the CAD stockpile. In addition, for ammunition, such as Bullpup rockets, that has no demilitarization process, the Program Executive Office for"
491," Ammunition plans, programs, budgets, and funds a joint-service research and development program to develop the necessary capability, technology, and facilities to demilitarize the ammunition. Within the Army Materiel Command, Army Aviation and Missile Command is responsible for the demilitarization of missiles and components, and the Joint Munitions Command is responsible for demilitarization of all remaining conventional ammunition. Army Aviation and Missile Command develops and implements the annual miss"
492,"ile demilitarization operating plan, and Joint Munitions Command does the same for the CAD stockpile. Furthermore, Joint Munitions Command provides logistics and sustainment support to the Program Executive Office for Ammunition and the Army Aviation and Missile Command. Joint Munitions Command also oversees the storage of the CAD stockpile, maintains the CAD stockpile database, and arranges the transportation of conventional ammunition to the demilitarization site when necessary. The military departments h"
493,"ave a process for collecting and sharing data on conventional ammunition through inventory stratification reports that they are required to prepare at least annually. They use these reports to identify inventory owned by one department that may be available to meet the needs of another department, as well as to identify both inventory deficiencies and excesses. DOD Manual 4140.01 Volumes 6 and 10 direct the military departments to assess the ability of the ammunition inventory to meet their needs by stratif"
494,"ying their inventories into various categories and requires them to prepare a report at least annually for internal purposes that lists the current inventory levels of all ammunition. The annual internal report divides the inventory into the categories of requirement-related munitions stock, economic retention munitions stock, contingency retention munitions stock, and potential reutilization and disposal stock. The manual also directs the departments to develop an external report identifying inventory in t"
495,"he same categories for each ammunition listed. The military departments are to use these reports, among other things, to identify opportunities for redistributing ammunition to meet unfilled needs in other military departments. The reports are then distributed to the other military departments to provide visibility. In addition, the Office of the Executive Director for Conventional Ammunition, which facilitates this process, compares the data in the inventory reports with data on planned procurements of amm"
496,"unition. After the departments share their annual reports on ammunition inventory, including which ammunition could be reutilized; department officials participate in the Quad Services Review and review all the other departments’ stratification reports to identify potential cross-leveling opportunities and request logistics data for items of interest. DOD guidance indicates that this cross-leveling process should be used to offset individual procurements of the military departments in coordination with the "
497,"Under Secretary of Defense for Acquisition, Technology, and Logistics. For example, the Executive Director for Conventional Ammunition reported in September 2014 that DOD avoids an average of $72 million annually in procurement costs by using the redistribution process regarding each service’s inventory holdings that exceed their needs. During the fiscal year 2014 redistribution process, the services transferred approximately 5 million items among each other, of which approximately 3 million were small-cali"
498,"ber items such as ammunition for rifles or pistols, about 2 million were for larger-caliber weapons such as mortars, and about 383,000 were a mixture of other types of ammunition. According to the Office of the Executive Director for Convention Ammunition’s Fiscal Year 2014 Cross-leveling End of Year Report, the potential acquisition cost avoidance achieved in the 2014 cross-leveling process totaled about $104.2 million. DOD guidance requires that at the end of the annual cross-leveling process, any remaini"
499,"ng unclaimed potential reutilization and disposal stock should either be claimed by another military department, recategorized, or designated for disposal, whether through the Defense Logistics Agency Disposition Services Account, or the CAD stockpile, as appropriate. We last reported on DOD’s management of conventional ammunition in March 2014. We found that the Army’s annual stratification report, which shows the status of ammunition inventory at a given point in time, did not include information on all u"
500,"sable ammunition items because it did not include missiles managed by the Army Aviation and Missile Command. Since the Army’s missiles were not included in the annual stratification report, they were not considered during the cross-leveling process. Further, we found that items above the services’ needs in a prior year that had been placed into the CAD stockpile were not considered in the cross- leveling process. We made recommendations to improve data sharing among the services, and DOD concurred with all "
501,"of these recommendations. Among our recommendations was to include missiles managed by the Army Aviation and Missile Command in the annual stratification report, and DOD stated that starting with the March 2014 annual stratification meeting the Army would provide missile information for the cross-leveling process. As a result, 100 Javelin missiles were identified for transfer from the Army to the Marine Corps in fiscal year 2015, potentially saving the Marine Corps an estimated $3 million. Further, we recom"
502,"mended the Army include information on ammunition that in a previous year was unclaimed by another service and had been categorized for disposal. In response, DOD officials stated that all of the military services have visibility into the Army system that tracks ammunition categorized for disposal and they would direct the military services to consider such ammunition in the cross-leveling process. In 2015, the Navy and the Air Force identified materiel worth about $488,000 in the CAD stockpile from prior y"
503,"ears they could use. The services maintain information on their conventional ammunition; however, some inventory records for ammunition in the CAD stockpile have incorrect or incomplete information on its condition and weight. As discussed earlier, each service has its own inventory information system to maintain its conventional ammunition inventory, which includes any unserviceable ammunition or ammunition above its needs in its custody. Consolidated information from the military services on the ammunitio"
504,"n in the CAD stockpile is maintained in the Army’s Logistics Modernization Program (LMP). DOD Instruction 5160.68 directs the services to provide the SMCA with data on ammunition transferred for demilitarization and disposal operations. LMP has information on the location and quantity of all items in the CAD stockpile, but some records have incomplete or incorrect data on condition and weight. Further, according to DOD officials, each item has a condition code assigned to it by the service when placed into "
505,"the CAD stockpile, and the condition code is not updated while the item is in the Service officials stated that when they are considering pulling stockpile.an item from the stockpile to fill a current need, they generally inspect the condition of the item to determine whether the condition code of the item is still accurate and the item is useable. At times, the services have found particular items with a condition code indicating the materiel was serviceable, but the item’s shelf life had expired, while ot"
506,"her ammunition had performance issues that made it unacceptable. Further, we found that DOD does not have the weight data for a number of items in the CAD stockpile. Federal Government state that an entity should have controls to ensure that all transactions are complete and accurately recorded. In our review of data in the LMP database from 2012 to February 2015 the number of records without assigned weight increased from 2,223 (out of 34,511 records) to 2,829 (out of 36,355 records), which shows the probl"
507,"em is growing. Although some of the records that are missing weight data have very few items in storage, there are several items with significant quantities, such as 3.8 million of chaff countermeasures, 125,000 of 75 millimeter projectiles, and 109,000 of 155 millimeter ammunition. LMP lists the gross weight of an individual item (shell, missile, or cartridge), however, officials involved in the demilitarization of conventional ammunition use pro-weight, which includes the weight of the item plus its packa"
508,"ging. Pro-weight is used because the demilitarization process has to recycle, or otherwise dispose of all packaging material and containers in addition to destroying the ammunition. The CAD stockpile weights are described in short tons, which is equal to 2,000 lbs. DOD uses weight data as a metric in managing the demilitarization of conventional ammunition. More specifically, SMCA officials use weight for (1) developing cost estimates for demilitarization projects; (2) determining what conventional ammuniti"
509,"on should be demilitarized; (3) reporting the size of the CAD stockpile to the military services, the Office of the Secretary of Defense, and Congress; (4) forecasting the amount of conventional ammunition to be transferred into the CAD stockpile in the future; and (5) reporting on what ammunition has been demilitarized. The absence of weight data for some of the items in the CAD stockpile understates the size and composition of the CAD stockpile, thereby affecting DOD’s estimations of its demilitarization "
510,"needs. According to DOD officials, the reasons for the missing data in the CAD stockpile are related to the types of items transferred into the stockpile, such as older ammunition stocks that do not have complete weight data, nonstandard ammunition, foreign ammunition used for testing, components removed from larger weapons, and ammunition with records that migrated from legacy data systems. DOD officials stated they are trying to correct current records with missing or inaccurate data, particularly weight."
511," In some cases, such as older stocks, the only solution is to locate and physically weigh the ammunition item(s). DOD officials have not weighed the items because they said it would be costly and labor intensive. However, since the items without weight data are not factored into DOD’s demilitarization determination, DOD is not positioned to optimally demilitarize the most ammunition possible with the given resources available. Further, as discussed above, the number of records without weight data has increa"
512,"sed over the years, which indicates that SMCA continues to accept materiel into the CAD stockpile without weight data. Officials from all the military services said they have access to LMP and they have used LMP to search the CAD stockpile for materiel they could use, but information on DOD excess is not widely shared with other government agencies such as the Department of Homeland Security, which also uses ammunition for purposes such as training exercises. Specifically, the military services have achieve"
513,"d benefits such as cost avoidances from access to the information in LMP on the CAD stockpile. For example, an Air Force need for 280,000 rounds of 40 millimeter ammunition was met by the remanufacture of Navy 40 millimeter shells drawn from the CAD stockpile, which according to Joint Munitions Command officials saved an estimated $30 million. Also, the Marine Corps identified the need for signal flares at security check points in Iraq and Afghanistan, so they pulled 95,594 flares out of the CAD stockpile, "
514,"which according to Marine Corps officials saved the service an estimated $3.8 million. When the services have been able to fulfill needs by drawing ammunition from the CAD stockpile, financial benefits have arisen both in reduced demilitarization costs over time and reduced new procurements. DOD also has reduced its demilitarization costs by transferring some excess ammunition to other government agencies as opposed to demilitarizing the ammunition, but has made such transfers only on a limited basis. For e"
515,"xample, in fiscal year 2014 DOD provided 38 million rounds of small arms ammunition to the Federal Bureau of Investigation and 7.5 million rounds of small arms ammunition to the U.S. Marshals Service. Officials stated that the Joint Munitions Command and Army Deputy Chief of Staff for Logistics (G-4) used informal methods to communicate with other government agencies on available excess ammunition. Recognizing that there are benefits to such transfers, the Office of the Executive Director for Conventional A"
516,"mmunition, in its Fiscal Year 2014 Cross-Leveling End of Year Report, included remarks indicating efforts should be made to include other government agencies in the cross-leveling process. Communicating with other government agencies on available excess ammunition could help reduce the CAD stockpile. Section 346 of Ike Skelton National Defense Authorization Act, as amended, requires, among other things, that serviceable small arms ammunition and ammunition components in excess of military needs not be demil"
517,"itarized, destroyed, or disposed of unless in excess of commercial demands or certified as unserviceable or unsafe by the Secretary of Defense. Before offering the excess serviceable small arms ammunition for commercial sale, however, this provision outlines a preference that DOD offer the small arms ammunition and ammunition components for purchase or transfer to other Federal government agencies and departments, or for sale to state and local law enforcement, firefighting, homeland security, and emergency"
518," management agencies as permitted by law. According to officials, DOD does not have a formal process for offering the excess small arms ammunition and components to other government agencies. This manual references 10 U.S.C. § 2576a, under which DOD is permitted to transfer (sell or donate) ammunition to federal or state agencies where the Secretary of Defense determines that the ammunition is “(A) suitable for use by the agencies in law enforcement activities, including counter-drug and counter-terrorism a"
519,"ctivities; and (B) excess to the needs of the Department of Defense.” The ammunition must also be part of the existing stock of DOD, accepted by the recipient agency on an as-is, where-is basis, transferred without the expenditure of any funds available to DOD for the procurement of defense equipment, and transferred such that all costs incurred subsequent to the transfer of the property are borne or reimbursed by the recipient agency. Finally, there is a stated preference for those applications indicating "
520,"that the transferred property will be used in counter-drug or counter-terrorism activities of the recipient agency. training and qualification requirements. However, due to budget constraints the Department of Homeland Security reduced the number of training classes. If DOD guidance outlining a systematic process to share information on excess ammunition had been in place, the Department of Homeland Security could have possibly been aware of and obtained selected ammunition needed for training classes. Stan"
521,"dards for Internal Control in the Federal Government states that management should ensure there are adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on the agency achieving its goals. Transfers of ammunition to other government agencies, subject to certain requirements, could support DOD’s goal of reducing its CAD stockpile in a manner consistent with section 346 of the Ike Skelton National Defense Authorization Act for Fiscal Yea"
522,"r 2011 as amended. Without establishing a systematic means to communicate with and provide other government agencies with information on available excess serviceable ammunition, government agencies could be spending their funds to procure ammunition that DOD has awaiting demilitarization and could provide to them. In addition, without such a means, DOD could miss opportunities to reduce its overall demilitarization and maintenance costs by transferring such ammunition to other government agencies. DOD has i"
523,"dentified a number of challenges in managing the demilitarization of conventional ammunition, and has taken actions to address them. These challenges include compliance with environmental regulations; treaties regarding certain types of ammunition; services’ forecasts of excess, obsolete, and unserviceable ammunition; and annual funding. DOD officials stated they have identified the following challenges and are taking actions to address these challenges: Environmental Regulation Compliance: SMCA officials s"
524,"tated they must follow environmental laws in demilitarizing conventional ammunition and their compliance is governed by environmental permits that cover the design and operation of facilities that deal with waste management, noise, air, water, and land emissions. Many munitions are harmful to human health and the environment, and demilitarizing large quantities of ammunition requires the rigorous control and processing of toxic substances. Some of the demilitarization processes generate additional environme"
525,"ntal hazards, such as air pollutants and waste water. Figure 2 shows the release of air pollutants from the open burning of munitions. Other demilitarization processes, such as open detonation, generate noise pollution affecting the local community. According to SMCA officials, open burn and open detonation are the primary and cheapest methods to demilitarize conventional ammunition; further, some munitions can only be demilitarized by this process. All seven depots that demilitarize conventional ammunition"
526," have the capability to demilitarize ammunition through open burn/open detonation. However, officials stated there are environmental concerns with open burn/open detonation that may force DOD to use alternate and more costly methods of disposal, like closed disposal technology, in the future. For example, officials at one demilitarization facility noted that they generally operated their open detonation demolition ranges at less than 50 percent of capacity (weight of explosive charge) due to air and noise p"
527,"ollution concerns. According to DOD officials, DOD works to ensure compliance with various environmental regulations by applying for and maintaining permits issued by federal and state agencies that regulate its demilitarization operations. Officials indicated that these permits are granted by federal and state agencies and specify which pollutants can be released and in what quantities, as well as describe in detail how each process controls pollutants and meets applicable standards. If environmental regul"
528,"ations change, DOD officials indicated they may need to renew their permits; if the permits are revised, DOD may be required to fund capital investments in equipment and processes to conform to the requirements of any new permits. SMCA officials stated they address these challenges by including in each annual demilitarization plan sufficient work for each depot to exercise existing environmental permits so the permits do not lapse. Also, they recycle or remanufacture, when possible, materiel that otherwise "
529,"would be destroyed. Finally, the officials indicated that they contract with private companies to conduct some of the demilitarization work as well. Treaty Compliance: The U.S. government is considering two treaties that, if ratified, would significantly impact U.S. demilitarization operations. One treaty is the Convention on Cluster Munitions and the other is the Convention on the Prohibition of the Use, Stockpiling, Production and Transfer of Anti-Personnel Mines and on Their Destruction. DOD has an inven"
530,"tory of 471,726 tons of cluster munitions and 23,436 tons of anti-personnel landmines that will have to be disposed of if the United States ratifies the two treaties. Specifically, the conventions require the destruction of the respective cluster munitions and landmines inventories, and to comply, DOD officials stated that they would be forced to prioritize disposal of these weapons without concern to maximizing the reduction of the CAD stockpile. Service Forecasts: SMCA officials said that DOD’s demilitari"
531,"zation budget request frequently does not match actual funding needs. The request is based upon the estimated disposal costs required to reduce the existing CAD stockpile, as well as costs for disposing of ammunition the services forecast they will submit for disposal. Each of the services is required to submit a 5-year forecast on the amount of ammunition they expect to turn in for demilitarization each year. However, program officials indicate the services’ forecasts are generally inaccurate, which can ma"
532,"ke demilitarization planning challenging. In 2010, the Army Audit Agency found that Army officials had significantly understated the forecasted annual additions the services would transfer to the CAD stockpile from 2005 to March 2009, and these estimates were based on the projections furnished by the services. The Army Audit Agency recommended the Joint Conventional Ammunition Policies and Procedures 7 (Demilitarization and Disposal) be revised to help the military services develop better forecasts for addi"
533,"tions to the stockpile. In their 2013 follow-up report, the Army Audit Agency found that the Joint Conventional Ammunition Policies and Procedures 7 (Demilitarization and Disposal) had been revised in 2011; however, the forecast additions for fiscal year 2012 were still inaccurate. SMCA officials told us that they still received inaccurate forecast information from the services. The SMCA officials stated they have no control over the ammunition the services actually transfer year to year, and they accept al"
534,"l excess, obsolete, and unserviceable conventional ammunition into the CAD stockpile, even if it exceeds forecasts. DOD officials stated they do not have options to address any problems caused by unplanned additions to the CAD stockpile, although DOD recalculates the demilitarization plan to include the additional ammunition when appropriate. Annual Funding: SMCA officials stated that the Army requests less funding than needed to meet its critical requirement each year, which could result in the CAD stockpi"
535,"le growing if the amount of ammunition demilitarized is less than the amount of ammunition transferred from the services during the year. The critical requirement is the funding necessary to demilitarize 3 percent of the existing stockpile and the full amount of ammunition the services plan to add to the CAD stockpile during the year. In December 2013, Army Audit Agency reported the Army Deputy Chief of Staff for Logistics (G-4) estimated the critical funding level for the demilitarization of conventional a"
536,"mmunition at approximately $185 million. Further, the report stated that the conventional ammunition demilitarization program is considered a lower priority when compared to other needs. The Department of the Army’s budget request for conventional ammunitions demilitarization in fiscal year 2015 was $114 million and for fiscal year 2016 it was $113 million. Officials stated that the amount of funding has caused them to be reluctant to initiate projects that increase demilitarization capacity or efficiency, "
537,"since these capabilities may not be utilized in the future due to funding shortfalls. Furthermore, officials state they lack Research, Development, Test, and Evaluation (RDT&E) funding to develop demilitarization processes for the disposal of some materiel in the CAD stockpile that cannot be demilitarized using current processes, but they expect these funds will be increased in fiscal year 2017. SMCA addresses the funding challenge each year by developing an annual demilitarization plan to dispose of as muc"
538,"h of the CAD stockpile as it can based on the amount of funding they receive. DOD officials have estimated the average cost to store, maintain, and dispose of excess, obsolete, and unserviceable conventional ammunition. DOD officials stated that in fiscal year 2015, it costs on average about $42 per ton to store conventional ammunition. This number was determined using the estimated cost to perform annual inventory counts, surveillance inspections of ammunition, and housekeeping movement of stocks to manage"
539," the storage space. Additionally, DOD officials stated that in fiscal year 2015, it costs on average about $2,000 per ton to demilitarize conventional ammunition. This cost is driven by the quantities and the complexity of the items being demilitarized. DOD has not conducted a formal analysis comparing the costs of storing excess, obsolete, and unserviceable conventional ammunition with the costs of its demilitarization and disposal. Based on our review of key DOD conventional ammunition demilitarization gu"
540,"idance, there is no requirement to conduct a cost comparison. DOD officials told us that since there is a large difference in the cost to store and the cost to demilitarize ammunition based on their estimates, they believe there is no need to conduct a formal analysis. Further, DOD officials stated their mission is to demilitarize all conventional ammunition in the CAD stockpile and the annual decisions on what to demilitarize are based on achieving that goal. For information on how SMCA officials determine"
541," what conventional ammunition to demilitarize, see appendix IV. Efficient management of the CAD stockpile and DOD’s demilitarization effort is important to ensure that as much hazardous material is disposed of as possible using the resources available. In order to meet its goals, the department needs accurate data, which requires complete and accurate documentation of the items transferred into the stockpile each year by the services, as well as ammunition already in the stockpile. Standards for Internal Co"
542,"ntrol in the Federal Government state that an entity should have controls to ensure that all transactions are complete and accurately recorded. DOD does maintain data on conventional ammunition in the stockpile and uses it to manage demilitarization efforts, but officials have not fully maintained accurate and complete weight data on some ammunition items, which factors into their decision making about what to demilitarize in a given year. Without complete and accurate data, DOD is not well positioned to ma"
543,"ke the best demilitarization decisions and to use demilitarization resources as efficiently as possible. Furthermore, efficient management of the CAD stockpile is not solely a matter of demilitarization, since some materiel in it potentially could be transferred to other agencies, in keeping with DOD regulations and statutory requirements. Such transfers could allow DOD to reduce demilitarization costs and the size of the CAD stockpile while also reducing the need for other government agencies to procure ne"
544,"w stocks of ammunition. While at times transfers have led to cost savings, there has not been a formal means to regularly communicate with external stakeholders about the availability of excess ammunition in the stockpile, which is necessary to meet DOD’s goals. Without a systematic means to communicate information on excess ammunition to other government agencies, DOD will miss opportunities to reduce the CAD stockpile and demilitarization costs through transfers. To improve the efficiency of DOD’s convent"
545,"ional demilitarization efforts, including systematically collecting and maintaining key information about the items in its CAD stockpile and sharing information on excess items with other government agencies, we recommend that the Secretary of Defense direct the Secretary of the Army to take the following two actions. To improve the completeness and accuracy of information on the weight of items in the CAD stockpile—the key measure used by DOD to manage the conventional ammunition demilitarization operation"
546,"— establish a plan to (1) identify and record, to the extent possible, the missing or inaccurate weight information for existing ammunition records in the CAD stockpile and (2) ensure that all items transferred to the CAD stockpile, including for example components removed from larger weapons and nonstandard ammunition, have the appropriate weight data. To improve the visibility and awareness of serviceable excess ammunition in the CAD stockpile that could potentially be transferred to other government agen"
547,"cies, develop a systematic means to make information available to other government agencies on excess ammunition that could be used to meet their needs. We provided a draft of this report to DOD for review and comment. In its written comments, reproduced in appendix V, DOD concurred with both of the recommendations. DOD also provided technical comments on the draft report, which we incorporated as appropriate. DOD concurred with our first recommendation that the Secretary of the Army establish a plan to (1)"
548," identify and record, to the extent possible, the missing or inaccurate weight information for existing ammunition records in the CAD stockpile and (2) ensure that all items transferred to the CAD stockpile, including for example components removed from larger weapons and nonstandard ammunition, have the appropriate weight data. DOD stated that Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics would ensure that the Secretary of the Army is tasked to identify and record, to "
549,"the extent practicable, weight data for the existing CAD stockpile and for items transferred to the CAD stockpile in the future. In response to our second recommendation that the Secretary of the Army develop a systematic means to make information available to other government agencies on excess ammunition that could be used to meet their needs, DOD stated that Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics would ensure that the Secretary of the Army is tasked to develop"
550," a systematic means to make information available to other government agencies on excess ammunition. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense; the Secretaries of the Army, the Navy, and the Air Force; and the Commandant of the Marine Corps. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-5257 or merrittz@gao.gov"
551,". Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix VI. The Department of Defense (DOD) has policies and procedures that help govern the demilitarization of excess, obsolete, and unserviceable conventional ammunition and DOD officials involved in the demilitarization of conventional ammunition stated they believe the policies and guidance issued are effe"
552,"ctive to govern demilitarization. Additionally, depots have used the policies and guidance to develop their own implementing guidance and standard operating procedures for use at their locations. For example, Tooele Army Depot developed a letter of instruction for the inspection and disposal of inert material and Crane Army Ammunition Plant has developed several standard operating procedures to govern the base’s demilitarization processes. The table below provides an overview of key DOD policies on demilita"
553,"rization. DOD Instruction 5025.01, DOD Issuances Program, establishes guidance for directives, instructions, manuals, and charters such as frequency of updates, length, purpose, and appropriate approval level. The guidance documents we reviewed in the table above conform to the requirements under DOD Instruction 5025.01: DOD Instruction 5025.01 provides that directives, instructions, and manuals (issuances) published before March 25, 2012 should be updated or cancelled within 10 years of their publication d"
554,"ate, and that those published or changed after that date will be processed for cancellation by the Directives Division on the 10-year anniversary of their original publication dates, unless an extension is approved. That said, even for those issuances not required to be cancelled within 10 years, an issuance is not considered current when it is not within 10 years of its publication date. The directives, instructions and manuals we reviewed in the table above conformed to this requirement. For example, DOD "
555,"Directive 5160.65, Single Manager for Conventional Ammunition (SMCA) was published on August 1, 2008. Therefore, it is not required to be updated or cancelled until August 2018. DOD Instruction 5025.01 provides that directives should not be more than 10 pages in length (including enclosures, with no procedures, and with the exception of charters); instructions not more than 50 pages (including enclosures) or they should be divided into volumes; and manuals should be divided into two or more volumes if more "
556,"than 100 pages are required. The directives, instructions, and manuals we reviewed in the table above were within the established parameters. For example, DOD Instruction 5160.68 is 21 pages, which is within the required maximum limit of 50 pages for instructions not divided into multiple volumes. DOD Instruction 5025.01 requires that DOD directives exclusively establish policy, assign responsibility, and delegate authority to the DOD Components. Directives will not contain procedures. DOD instructions eith"
557,"er implement policy or establish policy and assign responsibilities, and may provide general procedures for carrying out or implementing those policies. DOD manuals provide detailed procedures for implementing policy established in instructions and directives. The directives, instructions, and manuals we reviewed in the table above established and implemented policy as required. For example, DOD Instruction 5160.68 assigns responsibilities and mission functions for conventional ammunition management to the "
558,"Secretary of the Army, the military services, and USSOCOM. DOD Instruction 5025.01 states that, generally, directives are to be signed by the Secretary of Defense or Deputy Secretary of Defense. Depending on the nature of the instruction, instructions must be signed by the component head in the Office of the Secretary of Defense, his or her Principal Deputy, or Office of the Secretary of Defense Presidentially-appointed, Senate-confirmed official. Manuals must be signed by an individual in one of these posi"
559,"tions, as authorized by their chartering directives. The directives, instructions, and manuals we reviewed in the table above were signed by the appropriate officials. For example, DOD Directive 5160.65 was appropriately signed by the Deputy Secretary of Defense. DOD Instruction 5025.01 states that charters must define the scope of functional responsibility and identify all delegated authorities for the chartered organization. The SMCA charter defines responsibility and authorities, for example, by delegati"
560,"ng to the Deputy Commanding General for Army Materiel Command the role of Executive Director for Conventional Ammunition and provides authorities as needed to execute the SMCA mission. To assess the extent to which the Department of Defense (DOD) has adequately maintained and shared information on the quantity, value, condition, and location of excess, obsolete, and unserviceable conventional ammunition for each military service, we reviewed DOD’s inventory data on excess, obsolete, and unserviceable conven"
561,"tional ammunition held in the conventional ammunition awaiting demilitarization and disposal (CAD) stockpile as of February 2015 to determine how complete and accurate the data are. The scope of the audit was limited to the materiel in the CAD stockpile and ammunition in the services’ inventory that was unserviceable or in excess of the services’ needs. We interviewed Army, Navy, Marine Corps, and Air Force officials to determine how they manage unserviceable ammunition and serviceable ammunition that is be"
562,"yond the services’ needs. We also determined the extent to which the information in the services’ ammunition inventory systems is useful for their purposes. We interviewed Single Manager for Conventional Ammunition (SMCA) and service officials to learn how information on excess, obsolete, and unserviceable ammunition is shared. After initial discussions with DOD officials, we determined that the department does not consider the value of ammunition in the management of its CAD stockpile so we did not review "
563,"the value of the conventional ammunition. Further, we conducted a data reliability assessment of the Air Force Combat Ammunition System, the Navy’s Ordnance Information System, the Marine Corp’s Ordnance Information System – Marine Corps, and the Army’s Logistics Modernization Program by reviewing the services’ responses to questionnaires on the internal controls they use to manage their systems. We applied Standards for Internal Control in Federal Government as our criteria, and found that the data was suf"
564,"ficiently reliable for determining whether DOD adequately maintained information on the quantity, value, condition, and location of excess, obsolete, and unserviceable conventional ammunition in its accounts and for our reporting purposes. The questions we sent the services solicited information on the controls they had implemented in their ammunition information systems. The questions seek to determine if there were controls that restricted access to the information system to prevent unauthorized access or"
565," inappropriate use and that there were data quality controls that ensured completeness, accuracy, authorization, and validity of all transactions. We interviewed service officials in the Army, Navy, Air Force, and Marine Corps to learn how ammunition is managed once the decision is made to demilitarize and transfer it to the CAD stockpile. We also interviewed officials on the visibility, accessibility, accuracy, and usefulness of the data on the CAD stockpile and determine if they have identified problems r"
566,"egarding the reliability of the data. Lastly, we reviewed policies and legislation to determine what guidance was provided on communicating excess conventional ammunition to other government agencies, and we interviewed SMCA officials about the extent to which they communicate the availability of excess ammunition to other government agencies and the challenges involved with making conventional ammunition available to government entities outside of DOD. To examine challenges, if any, DOD has identified in m"
567,"anaging the current and anticipated CAD stockpile, and if so, actions taken to address those challenges, we reviewed DOD reports on the management of the current CAD stockpile to identify any problem areas and DOD’s plans to address these problems. We visited McAlester Army Ammunition Plant and examined the management of its ammunition demilitarization operation to include storage practices and a variety of methods to destroy the ammunition. We selected McAlester Army Ammunition Plant to visit because a lar"
568,"ge portion of the CAD stockpile was stored there, and it used several methods to demilitarize ammunition. We also contacted the other six depots that store and demilitarize ammunition and requested the same information on the management of their respective ammunition demilitarization operations.in the Army, Navy, Air Force, and Marine Corps to identify challenges they face in managing the stockpile and discuss the actions they have taken to address the challenges. We interviewed SMCA officials and officials"
569," To describe DOD’s average costs of storing and maintaining items in the CAD stockpile and the average costs of the disposal of items in the stockpile, we obtained fiscal year 2015 cost estimates for storing and demilitarizing ammunition from the Army Materiel Command’s Joint Munitions Command, and interviewed officials about what factors were used to develop these cost estimates. We also reviewed a 2013 DOD report on the cost of demilitarizing conventional ammunition to determine the factors that drive dem"
570,"ilitarization costs. Additionally, we interviewed Army officials on the process they use to make demilitarization decisions. To describe DOD’s policies and procedures governing the demilitarization of excess, obsolete, and unserviceable conventional ammunition and discuss the extent to which they are consistent with DOD guidance for developing policies and procedures, we obtained policies, procedures, and guidance on demilitarization. We determined that these policies, procedures, and guidance would be cons"
571,"idered adequate if they conformed to DOD guidance on directives and instructions. Therefore, we compared the requirements in DOD Instruction 5025.01, with the guidance governing demilitarization of conventional ammunition and determined whether DOD followed this instruction on how guidance documents should be developed and how often they should be updated.To determine the extent to which DOD policies and procedures on demilitarization of conventional ammunition are effective, we interviewed officials in the"
572," Army and contacted the demilitarization depots to obtain their opinions on the effectiveness and usefulness of DOD policies and procedures governing the demilitarization of conventional ammunition. We visited or contacted the following offices during our review. Unless otherwise specified, these organizations are located in or near Washington, D.C. Office of the Under Secretary of Defense for Acquisition, Technology U.S. Special Operations Command, Tampa, Florida Defense Logistics Agency Program Executive "
573,"Office for Ammunition, Dover, New Jersey Office of the Executive Director for Conventional Ammunition, Dover, Office of the Assistant Secretary of the Army (Acquisition, Logistics and Technology) Headquarters, Department of the Army, Army Deputy Chief of Staff for Logistics (G-4) U.S. Army Materiel Command, Huntsville, Alabama U. S. Army Joint Munitions Command, Rock Island, Illinois U.S. Army Aviation and Missile Command, Huntsville, Alabama McAlester Army Ammunition Plant, McAlester, Oklahoma Office of th"
574,"e Chief of Naval Operations, Director for Material Readiness & Logistics (N4) Naval Supply Systems Command, Mechanicsburg, Pennsylvania U. S. Marine Corps Headquarters U.S. Marine Corps Systems Command, Quantico, Virginia U.S. Air Force Headquarters U.S. Air Force Life Cycle Management Center Readiness, Ogden, We conducted this performance audit from August 2014 to July 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obt"
575,"ain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Army has seven demilitarization locations that store 98 percent of the conventional ammunition awaiting demilitarization and disposal (CAD) Stockpile. Figure 3 below shows these seven demilitarization locations, the amount of the CAD stockpile at "
576,"those locations, and the demilitarization capabilities at each location. 1. Autoclave - Autoclave capability removes and reclaims main charge cast explosives (such as TNT) from projectiles and bombs. Munitions are prepared for the autoclave by disassembly or cutting to expose the main explosive charge. They are placed in the autoclave and the vessel is heated using steam. As the munitions body heats up, the explosive melts and flows to the bottom of the autoclave for collection in heated kettles. 2. Hot Wat"
577,"er Washout - Washout capability removes and reclaims main cast explosive charges from projectiles, bombs, and mines. Munitions are prepared for washout by disassembly to expose the main explosive charge. Munitions are placed over a washout tank where low-pressure hot water is injected into the cavity to wash out the explosives into a recovery tank. 3. Cryofracture - Cryofracture involves the cooling of the munitions in a liquid nitrogen bath, followed by fracture of the embrittled item(s) in a hydraulic pre"
578,"ss and the subsequent thermal treatment of the fractured munitions debris in order to destroy the explosives and decontaminate any residual metal parts. 4. Hydrolysis – Hydrolysis uses a sodium hydroxide solution to dissolve the aluminum casing and expose the energetic materials contained within. The sodium hydroxide solution then reacts with the energetic materials, breaking them down and rendering them inert. 5. Improved Munitions Convention Download – Joint Munitions Command officials describe this as a "
579,"process developed to demilitarize artillery projectiles that contain submunitions, which are small bombs. The base plate of the projectile is removed to access the submunitions and they are removed for disposition on the open detonation range. The metal parts including the projectile body and base plate are often reused in the manufacture of new rounds. 6. Incineration - Incineration provides an environmentally acceptable means to destroy munitions not suitable for other demilitarization methods and reclaim"
580," the metal scrap for sale. Small munitions and/or components are fed on conveyor(s) into the incinerator where they burn or detonate. Metal residues are discharged and collected for salvage. 7. INERT – According to Joint Munitions Command officials, INERT is the shredding, cutting, or mutilation of munitions items, components, or packaging that do not contain energetic materials. 8. Open Burn/Open Detonation - Open burn and open detonation are the intentional combustion or detonation of explosives or muniti"
581,"ons, without control or containment of the reaction, and are the preferred method for cost-effective demilitarization of many items. Open burn and open detonation techniques were the primary means used to demilitarize munitions for several decades. 9. Slurry Emissions Manufacturing Facility – According to Joint Munitions Command officials this facility combines energetic material recovered from munitions items with other commercial ingredients to produce blasting charges the mining industry uses. 10. Steamo"
582,"ut - Steamout is similar to hot water washout in that both processes essentially melt out energetic fillers in large-caliber projectiles, bombs, and other munitions. With the steamout process, items are placed on an inclined cradle, and steam is jetted in to melt out the fill. The molten slurry is collected and sent to corrugate cooling pans. The pans are held in a vented and heated hood until the water is all evaporated and the explosive solidifies. The solidified explosive is broken into chunks, boxed, an"
583,"d then according to Joint Munitions Command officials, used as donor material for open detonation projects. 11. White Phosphorus Plant - The White Phosphorus-Phosphoric Acid Conversion Plant provides an environmentally acceptable means to demilitarize munitions containing white phosphorus by converting it into phosphoric acid. The munitions are punched to expose the white phosphorus and quickly burned. Smoke from the burning munitions is pulled through a closed loop ducting system into the wet scrubber in t"
584,"he acid plant system for conversion to phosphoric acid. The phosphoric acid is collected and packaged for sale. Metal parts are discharged and collected for salvage. To determine what conventional ammunition should be demilitarized, Joint Munitions Command officials stated they use a database tool called the Demilitarization Optimizer. To develop an annual demilitarization plan, the optimizer produces an initial list of projects, in tons, that will result in demilitarizing the most ammunition possible based"
585," on factors entered into the optimizer. Officials stated they use the optimizer as a starting point in developing the annual demilitarization plan; they make adjustments to the optimizer output to maintain demilitarization capability at the depots and to balance the work load over the years. For the demilitarization of missiles, Army Aviation and Missile Command officials stated they do not use the optimizer because they prepare their plan using the number of missiles; however, they consider many of the sam"
586,"e factors in determining what missiles to demilitarize in a given year. The optimizer is a database tool used to determine the ammunition, with the exception of missiles, that will be demilitarized, given certain parameters (e.g., inventory, depot capability and capacity, funding, transportation costs, and any mandatory workload requirements). The optimizer has been used by Joint Munitions Command since 1999 as a tool to assist in demilitarization program planning, provide justification to answer questions "
587,"received from Congress as well as Army headquarters, and provide the most economic allocation of resources among the government depots. Further, the optimizer provides Joint Munitions Command with an auditable trail of decision making and an ability to provide a quick response to “what if” questions. The optimizer database uses several data points to determine what items should be demilitarized: 1. Demilitarization inventory and forecasted additions to the CAD stockpile – the amount of ammunition currently "
588,"in the CAD stockpile and the estimated amount of ammunition that the services determine they will add to the stockpile that year. 2. Depot capability, capacity, and costs of carrying out demilitarization – depot capability is the type of demilitarization work the depot has the ability to conduct. For example, most of the depots have the capability to conduct demilitarization through open burn and open detonation. Depot capacity is the amount of work that the depot has the ability to conduct by demilitarizat"
589,"ion capability. For example, Letterkenny Munitions Center has the capacity to demilitarize 3,500 tons of ammunition each year by open burn and 1,250 tons by open detonation. The cost of carrying out demilitarization is an estimate, prepared by the depot, of the cost to demilitarizing specific ammunition using a particular demilitarization capability. Data on storage costs is not entered into the optimizer for cost calculations. 3. Funding – the amount of funding available for demilitarization based on the c"
590,"urrent fiscal year budget allocation. 4. Packing, crating, handling, and transportation – the cost of moving ammunition to the appropriate demilitarization location. 5. Mandatory workloads – any directives or management initiatives that would change the priority of demilitarization work that must be conducted. For example, if the United States signed the Convention on Cluster Munitions, DOD would be required to demilitarize all cluster munitions within 8 years. This information would be entered into the opt"
591,"imizer to ensure the treaty requirement would be met. Joint Munitions Command officials cautioned that there are some inherent uncertainties in the optimizer process that affect the outcome. One of the uncertainties is the incoming workload. While Joint Munitions Command has an estimate of how much inventory will be generated each year for demilitarization, the estimates are not perfect and leave uncertainty in the quantity of items that will be turned over for demilitarization and the time at which those i"
592,"tems will enter the CAD stockpile. Joint Munitions Command officials stated that the optimizer provides a good starting point for decision-making, based on the specific parameters described above, but they do not assign demilitarization projects based solely on the optimizer output. Officials stated that the optimizer produces a list of projects, based on tons, that would be most economical to demilitarize for that given year. However, adjustments are made to balance complex, expensive demilitarization proj"
593,"ects with simple, inexpensive demilitarization projects. Since the optimizer attempts to maximize the amount of conventional ammunition demilitarized, it tends to recommend a number of inexpensive projects. This results in pushing the expensive demilitarization projects into the future, which may increase future demilitarization costs. Therefore, to maintain a balance between future demilitarization funding needs and the current funding provided for demilitarization, officials replace some of the inexpensiv"
594,"e projects the optimizer recommends with expensive projects. Additionally, officials make adjustments to the optimizer results to ensure each depot is provided sufficient work to maintain demilitarization capabilities. Officials are concerned that if they do not provide some work to each of the depots, the depots would lose their demilitarization capability because some processes require specialized skills or training and retaining those personnel would be impossible if demilitarization was curtailed for a "
595,"significant amount of time. The loss of trained personnel would create a significant deficit in training and delay the restart of any future demilitarization operations. Further, officials are concerned they risk losing their environmental permits if demilitarization operations were stopped at an installation for a significant amount of time. For fiscal year 2015, the Joint Munitions Command and Program Executive Office for Ammunition officials stated they planned a demilitarization program of about $71 mil"
596,"lion, which would destroy about 67,640 tons of ammunition. Demilitarization officials at the Aviation and Missile Command stated they use similar factors in determining what missiles to demilitarize, including the location of the missiles, the capabilities and capacity of the depots, the estimated cost to demilitarize, and the funding available. Officials stated the Aviation and Missile Command does not use the optimizer tool, but instead the demilitarization officials coordinate with Product Manager Demili"
597,"tarization to develop an annual missile demilitarization execution plan. In addition to the factors listed above, officials also consider the safety inspections that have been conducted on each missile and push any potentially unsafe-to-store items to the top of the demilitarization list. While Aviation and Missile Command demilitarization officials do not currently use an optimizer tool, they stated that they are considering whether an optimizer database would be feasible for use with missiles. For fiscal "
598,"year 2015, the Aviation and Missile Command and Program Executive Office Ammunition officials stated they planned a demilitarization program of about $43 million, which would destroy about 141,598 missiles and components. In addition to the contact named above, Carleen Bennett (Assistant Director), George Bustamante, Lindsey Cross, Chaneé Gaskin, Kevin Keith, Carol Petersen, Michael Silver, Amie Steele, Alexander Welsh, Erik Wilkins-McKee, and Michael Willems made key contributions to this report."
599,"DOE is responsible for a nationwide complex of facilities created during World War II and the Cold War to research, produce, and test nuclear weapons. Much of the complex is no longer in productive use, but it contains vast quantities of radioactive waste related to the production of nuclear material, such as plutonium-contaminated sludge, and hazardous waste, such as solvents and hazardous chemicals. Since the 1980s, DOE has been planning and carrying out activities around the complex to clean up, contain,"
600," safely store, and dispose of these materials. It is a daunting challenge, involving the development of complicated technologies and costing about $220 billion over 70 years or more. DOE has reported completing its cleanup work at 74 of the 114 sites in the complex, but those were small and the least difficult to deal with. The sites remaining to be cleaned up present enormous challenges to DOE. DOE’s cleanup program is carried out primarily under two environmental laws. Under section 120 of CERCLA, EPA mus"
601,"t, where appropriate, evaluate hazardous waste sites at DOE’s facilities to determine whether the waste sites qualify for inclusion on the National Priorities List, EPA’s list of the nation’s most serious hazardous waste sites. For each facility listed on the National Priorities List, section 120(e) (2) of CERCLA requires DOE to enter into an interagency agreement with EPA for the completion of all necessary remedial actions at the facility. These agreements often include the affected states as parties to t"
602,"he agreements. These agreements may be known as Federal Facility Agreements or Tri- Party Agreements. Under amendments to RCRA contained in section 105 of the Federal Facility Compliance Act of 1992, DOE generally must develop site treatment plans for its mixed-waste sites. These plans are submitted for approval to states authorized by EPA to perform regulatory responsibilities for RCRA within their borders or to EPA if the state does not have the required authority. Upon approval of the treatment plans, th"
603,"e state or EPA must issue an order requiring compliance with the approved plan. The agreements are generally known as Federal Facility Compliance orders. DOE carries out its cleanup program through the Assistant Secretary for Environmental Management and in consultation with a variety of stakeholders. These include the federal EPA and state environmental agencies, county and local governmental agencies, citizen groups, advisory groups, Native American tribes, and other organizations. In most cases, DOE’s re"
604,gulators are parties to the compliance agreements. Other stakeholders advocate their views through various public involvement processes including site-specific advisory boards. Compliance agreements in effect at DOE sites can be grouped into three main types (see table 1). Agreements of the first type—those specifically required by CERCLA or by RCRA—are in effect at all of DOE’s major sites. They tend to cover a relatively large number of cleanup activities and have the majority of schedule milestones that 
605,"DOE must meet. By contrast, agreements that implement court-ordered settlements exist at only a few DOE sites, tend to be focused on a specific issue or concern, and have fewer associated schedule milestones. These agreements are typically between DOE and states. The remaining agreements are based on either federal or state environmental laws and address a variety of purposes, such as cleaning up spills of hazardous waste or remediating groundwater contamination, and have a wide-ranging number of milestones"
606,". Most of the milestones DOE must meet are contained in the compliance agreements at its six largest sites—Hanford, Savannah River, Idaho Falls, Rocky Flats, Oak Ridge, and Fernald. These six DOE sites are important because they receive about two-thirds of DOE’s cleanup funding. In all, these sites account for 40 of the agreements and more than 4,200 milestones. DOE reported completing about two-thirds of the 7,186 milestones contained in its compliance agreements as of December 2001. Of the 4,558 milestone"
607,"s completed, about 80 percent were finished by the original due date for the milestone. The remainder of the completed milestones were finished either after the original due date had passed or on a renegotiated due date, but DOE reported that the regulators considered the milestones to be met. DOE’s six largest sites reported completing a total of 2,901 of their 4,262 milestones and met the original completion date for the milestones an average of 79 percent of the time. As table 2 shows, this percentage va"
608,"ried from a high of 95 percent at Rocky Flats to a low of 47 percent at Savannah River. Besides the 1,334 milestones currently yet to be completed, additional milestones will be added in the future. Although DOE has completed many of the milestones on time, for several reasons DOE’s success in completing milestones on time is not a good measure of progress in cleaning up the weapons complex. Specifically: Many of the milestones do not indicate what cleanup work has been accomplished. For example, many miles"
609,"tones require completing an administrative requirement that may not indicate what, if any, actual cleanup work was performed. At DOE’s six largest sites, DOE officials reported that about 73 percent of the 2,901 schedule milestones completed were tied to administrative requirements, such as obtaining a permit or submitting a report. Some agreements do not have a fixed number of milestones, and additional milestones are added over time as the scope of work is more fully defined. For example, one of Idaho Fal"
610,"ls’ compliance agreements establishes milestones for remedial activities after a record of decisionhas been signed for a given work area. Four records of decision associated with the agreement have not yet been approved. Their approval will increase the number of enforceable milestones required under that agreement. Many of the remaining milestones are tied to DOE’s most expensive and challenging cleanup work, much of which still lies ahead. Approximately two-thirds of the estimated $220 billion cost of cle"
611,"aning up DOE sites will be incurred after 2006. DOE has reported that the remaining cleanup activities present enormous technical and management challenges, and considerable uncertainties exist over the final cost and time frame for completing the cleanup. Even though schedule milestones are of questionable value as a measure of cleanup progress, the milestones do help regulators track DOE’s activities. Regulators at the four sites we visited said that the compliance agreements they oversee and the mileston"
612,es associated with those agreements provide a way to bring DOE into compliance with existing environmental laws and regulations. They said the agreements also help to integrate the requirements under various federal laws and allow regulators to track annual progress against DOE’s milestone commitments. Regulators have generally been flexible in agreeing with DOE to change milestone dates when the original milestone could not be met. DOE received approval to change milestone deadlines in over 93 percent of t
613,"he 1,413 requests made to regulators. Only 3 percent of DOE’s requests were denied. Regulators at the four sites we visited told us they prefer to be flexible with DOE on accomplishing an agreement’s cleanup goals. For example, they generally expressed willingness to work with DOE to extend milestone deadlines when a problem arises due to technology limitations or engineering problems. Because regulators have been so willing to adjust milestones, DOE officials reported missing a total of only 48 milestones,"
614," or about 1 percent of milestones that have been completed. Even in those few instances where DOE missed milestone deadlines and regulators were unwilling to negotiate revised dates, regulators have infrequently applied penalties available under the compliance agreements. DOE reported that regulators have taken enforcement actions only 13 times since 1988 when DOE failed to meet milestone deadlines. These enforcement actions resulted in DOE paying about $1.8 million in monetary penalties, as shown in table "
615,"3. In addition to or instead of regulators assessing monetary penalties, several DOE sites agreed to other arrangements valued at about $4 million. For example, for missing a milestone to open a transuranic waste storage facility at the Rocky Flats site, the site agreed to provide a $40,000 grant to a local emergency planning committee to support a chemical-safety-in- schools program. At the Oak Ridge site, because of delays in operating a mixed waste incinerator, site officials agreed to move up the comple"
616,"tion date for $1.4 million worth of cleanup work already scheduled. Also, at three sites—Paducah, Kentucky; Lawrence Livermore Main Site, California; and Nevada Test Site, Nevada—the regulators either did not impose penalties for missed milestones or the issue was still under discussion with DOE at the time of our review. The President’s budget submitted to the Congress does not provide information on the amount of funding requested for DOE’s compliance requirements. DOE sites prepare budget estimates that "
617,"include compliance cost estimates and submit them for consideration by DOE headquarters. However, DOE headquarters officials evaluate individual site estimates and combine them into an overall DOE-wide budget, taking into account broader considerations and other priorities that it must address as part of the give-and-take of the budget process. As a result, the final budget sent to the Congress has summary information on DOE’s programs and activities, but it provides no information on the portion of the bud"
618,"get needed to fund compliance requirements. DOE is not required to develop or present this information to the Congress. The President’s budget typically states that the DOE funding requested is sufficient to substantially comply with compliance agreements, but it does not develop or disclose the total amount of funding needed for compliance. Officials at DOE headquarters told us that budget guidance from the Office of Management and Budget does not require DOE to develop or present information on the cost o"
619,"f meeting compliance requirements, and they said doing so for the thousands of milestones DOE must meet would be unnecessarily burdensome. They said their approach has been to allocate funds appropriated by the Congress and make it the sites’ responsibility to use the funds in a way that meets the compliance agreement milestones established at the site level. Individual DOE sites develop information on the estimated cost of meeting compliance agreements, but the annual estimates are a flexible number. Sites"
620," develop these estimates because many of the compliance agreements require DOE to request sufficient funding each year to meet all of the requirements in the agreements. Also, DOE must respond to Executive Order 12088, which directs executive agencies to ensure that they request sufficient funds to comply with pollution control standards. Accordingly, each year DOE’s sites develop budget estimates that also identify the amount needed to meet compliance requirements. The sites’ process in developing these co"
621,"mpliance estimates shows that a compliance estimate is a flexible number. For example, two budget estimates typically completed by the sites each year are the “full requirements” estimate and the “target” estimate. The full requirements estimate identifies how much money a site would need to accomplish its work in what site officials consider to be the most desirable fashion. The target estimate reflects a budget strategy based primarily on the amount of funding the site received the previous year and is co"
622,"nsidered a more realistic estimate of the funding a site can expect to receive. For each of these budget estimates, DOE sites also include an estimate of their compliance costs. As a result of this process, DOE sites usually have at least two different estimates of their compliance costs for the same budget year. Table 4 shows how the compliance cost estimates related to compliance agreements changed under different budget scenarios at four DOE sites. The multiple estimates of compliance costs developed by "
623,"individual DOE sites indicate that DOE sites have alternative ways of achieving compliance in any given year. DOE site officials said that how much DOE plans to spend on compliance activities each year varies depending on the total amount of money available. Because many of the compliance milestones are due in the future, sites estimate how much compliance activity is needed each year to meet the future milestones. If sites anticipate that less money will be available, they must decide what compliance activ"
624,"ities are critical for that year and defer work on some longer-term milestones to future years. On the other hand, if more money is available, sites have an opportunity to increase spending on compliance activities earlier than absolutely necessary. DOE’s compliance agreements focus on environmental issues at specific sites and do not include information on the risks being addressed. As a result, they do not provide a means of setting priorities for risks among sites or a basis for decision-making across al"
625,"l DOE sites. Risk is only one of several factors considered in setting the milestones in compliance agreements. Other factors include the preferences and concerns of local stakeholders, business and technical risk, the cost associated with maintaining old facilities, and the desire to achieve demonstrable progress on cleanup. The schedules for when and in what sequence to perform the cleanup work reflect local DOE and stakeholder views on these and other factors and may not reflect the level of risk. For ex"
626,"ample, regulators at DOE’s Savannah River site told us that they were primarily concerned that DOE maintain a certain level of effort and they expected DOE to schedule cleanup activities to most efficiently clean up the site. DOE developed a decision model to determine how to allocate its cleanup dollars at Savannah River to achieve this efficiency. A group of outside reviewers assessing the system at the request of site management concluded that the model was so strongly weighted to efficiency that it was "
627,"unlikely that serious risks to human health or the environment could alter the sequencing of work. DOE officials said they revised the model so that serious risks receive greater emphasis. In response to concerns expressed by the Congress and others about the effectiveness of the cleanup program, DOE has made several attempts to develop a national, risk-based approach to cleanup, but has not succeeded. For example, in 1999, DOE pilot-tested the use of site risk profiles at 10 DOE offices. The profiles were "
628,"intended to provide risk information about the sites, make effective use of existing data at the sites, and incorporate stakeholder input. However, reviewers found that the site profiles failed to adequately address environmental or worker risks because the risks were not consistently or adequately documented. In 2001, DOE eliminated a support group responsible for assisting the sites with this effort, and the risk profiles are generally no longer being developed or used. A 1999 DOE-funded study to evaluate"
629," its efforts to establish greater use of risk-based decision-making concluded that none of the attempts had been successful. Common problems identified by the study included poor documentation of risks and inconsistent scoring of risks between sites. The study reported that factors contributing to the failure of these efforts included a lack of consistent vision about how to use risk to establish work priorities, the lack of confidence in the results by DOE personnel, the unacceptability of the approaches t"
630,"o stakeholders at the sites, and DOE’s overall failure to integrate any of the approaches into the decision- making process. However, the study concluded that the use of risk as a criterion for cleanup decision-making across DOE’s sites not only was essential, it was also feasible and practical, given an appropriate level of commitment and effort by DOE. DOE plans to shift its cleanup program to place greater focus on rapid reduction of environmental risk, signaling yet again the need for a national risk-ba"
631,"sed approach to cleanup. Without a national, risk-based approach to cleanup in place, DOE’s budget strategy had been to provide stable funding for individual sites and to allow the sites to determine what they needed most to accomplish. However, in a February 2002 report, DOE described numerous problems with the environmental management program and recommended a number of corrective actions. The report concluded that, among other things, the cleanup program was not based on a comprehensive, coherent, techni"
632,"cally supported risk prioritization; it was not focused on accelerating risk reduction; and it was not addressing the challenges of uncontrolled cost and schedule growth. The report recommended that DOE, in consultation with its regulators, move to a national strategy for cleanup. In addition, the report noted that the compliance agreements have failed to achieve the expected risk reduction and have sometimes not focused on the highest risk. The report recommended that DOE develop specific proposals and pre"
633,"sent them to the states and EPA with accelerated risk reduction as the goal. DOE’s new initiative provides additional funds for cleanup reform and is designed to serve as an incentive to sites and regulators to identify accelerated risk reduction and cleanup approaches. DOE’s fiscal year 2003 budget request includes a request for $800 million for this purpose. Moreover, the Administration has agreed to support up to an additional $300 million if needed for cleanup reforms. The set-aside would come from a re"
634,"duction in individual site funding levels and an increase in the overall funding level for the cleanup program. The money would be made available to sites that reach agreements with federal and state regulators on accelerated cleanup approaches. Sites that do not develop accelerated programs would not be eligible for the additional funds. As a result, sites that do not participate could receive less funding than in past years. To date, at least five major DOE sites with compliance agreements have signed let"
635,"ters of intent with their regulators outlining an agreement in principle to accelerate cleanup—Hanford, Idaho, Los Alamos, Oak Ridge, and Nevada Test Site. However, the letters of intent generally also include a provision that the letters do not modify the obligations DOE agreed to in the underlying compliance agreements. At Hanford, DOE and the regulators signed a letter of intent in March 2002 to accelerate cleanup at the site by 35 years or more. DOE and the regulators agreed to consider the greatest ris"
636,"ks first as a principle in setting cleanup priorities. They also agreed to consider, as targets of opportunity for accelerated risk reduction, 42 potential areas identified in a recent study at the site. While accelerating the cleanup may hold promise, Hanford officials acknowledged that many technical, regulatory, and operational decisions need to be made to actually implement the proposals in the new approach. DOE is proceeding with the selection and approval of accelerated programs at the sites, as well "
637,"as identifying the funding for those accelerated programs. At the same time, DOE is considering how best to develop a risk-based cleanup strategy. DOE’s Assistant Secretary for Environmental Management said that in developing the risk-based approach, DOE should use available technical information, existing reports, DOE’s own knowledge, and common sense to make risk-based decisions. Because DOE’s approach to risk assessment is under development, it is unclear whether DOE will be able to overcome the barriers"
638," encountered during past efforts to formalize a risk-assessment process. In the interim, DOE headquarters review teams were evaluating the activities at each site and were qualitatively incorporating risk into those evaluations. Compliance agreements have not been a barrier to previous DOE management improvements, but it is not clear if the agreements will be used to oppose proposed changes stemming from the February 2002 initiative. DOE has implemented or tried to implement a number of management initiativ"
639,"es in recent years to improve its performance and address uncontrolled cost and schedule growth. For example, in 1994, it launched its contract reform initiative; in 1995, it established its privatization initiative; and in 1998, it implemented its accelerated path- to-closure initiative. These initiatives affected how DOE approached the cleanup work, the relationship DOE had with its contractors, and, in some cases, the schedule for completing the work. Based on our review of past evaluations of these init"
640,"iatives and discussions with DOE officials and regulators at DOE sites, it appears that DOE proceeded with these initiatives without significant resistance or constraints as a result of the compliance agreements. Because DOE’s cleanup reform initiative is in its early stages, and site- specific strategies are only beginning to emerge, it is unclear how the site compliance agreements will affect implementation of DOE’s latest cleanup reforms. For example, it is not yet known how many sites will participate i"
641,"n DOE’s initiative and how many other sites will encounter cleanup delays because of reduced funding. However, early indications suggest caution. Parties to the agreements at the sites we visited were supportive of DOE’s overall efforts to improve management of the cleanup program, but expressed some concerns about proposals stemming from the February 2002 review of the program. They said that they welcome DOE’s efforts to accelerate cleanup and focus attention on the more serious environmental risks becaus"
642,"e such initiatives are consistent with the regulators’ overall goals of reducing risks to human health and the environment. Most regulators added, however, that DOE generally had not consulted with them in developing its reform initiative and they were concerned about being excluded from the process. Furthermore, they said DOE’s initiative lacked specific details and they had numerous questions about the criteria DOE will use to select sites and the process it will follow at those sites to develop an implem"
643,"entation plan to accelerate cleanup and modify cleanup approaches. Most regulators said they would not view as favorable any attempt by DOE to avoid appropriate waste treatment activities or significantly delay treatment by reducing funding available to sites. In such a case, these regulators are likely to oppose DOE’s initiative. They told us that they most likely would not be willing to renegotiate milestones in the compliance agreements if doing so would lead to delays in the cleanup program at their sit"
644,"es. In addition, these regulators said that if DOE misses the milestones after reducing the funding at individual sites, they would enforce the penalty provisions in the compliance agreements. The effect of compliance agreements on other aspects of DOE’s initiative, especially its proposal to reclassify waste into different risk categories to increase disposal options, is also unclear. Some of the proposed changes in waste treatment would signal major changes in DOE assumptions about acceptable waste treatm"
645,"ent and disposal options. For example, one change would eliminate the need to vitrify at least 75 percent of the high- level waste, which could result in disposing of more of the waste at DOE sites. In addition, DOE is considering the possibility of reclassifying much of its high-level waste as low-level mixed waste or transuranic waste based on the risk attributable to its actual composition. However, at all four sites we visited, regulators said that it is unclear how DOE’s proposed initiatives will be im"
646,"plemented, what technologies will be considered, and whether the changes will result in reduced cost and accelerated cleanup while adequately protecting human health and the environment. DOE generally did not seek input from site regulators or other stakeholders when developing its latest initiative. DOE’s review team leader said that when the review team visited individual sites, the team had not formulated its conclusions or recommendations and so did not seek regulators’ views. Furthermore, the team lead"
647,"er said that, during the review, DOE was holding internal discussions about improving ineffective cleanup processes, such as contracting procedures. To include regulators on the review team during these discussions, according to the team leader, could have created the impression that the criticism of DOE processes came from the regulators rather than from DOE and contractor staff. According to the Associate Deputy Assistant Secretary for Planning and Budget, since the review team’s proposals were made publi"
648,"c in February, DOE has held discussions with regulators at all sites and headquarters about implementing the proposals. In summary, Mr. Chairman, DOE faces two main challenges in going forward with its initiative. The first is following through on its plan to develop and implement a risk-based method to prioritize its various cleanup activities. Given past failed attempts to implement a risk-based approach to cleanup, management leadership and resolve will be needed to overcome the barriers encountered in p"
649,"ast attempts. The second challenge for DOE is following through on its plan to involve regulators in site implementation plans. DOE generally did not involve states and regulatory agencies in the development of its management initiative. Regulators have expressed concerns about the lack of specifics in the initiative, how implementation plans will be developed at individual sites, and about proposals that may delay or significantly alter cleanup strategies. Addressing both of these challenges will be import"
650,"ant to better ensure that DOE’s latest management initiative will achieve the desired results of accelerating risk reduction and reducing cleanup costs. Thank you, Mr. Chairman and Members of the Subcommittee. This concludes my testimony. I will be happy to respond to any questions that you may have. For future contacts regarding this testimony, please contact (Ms.) Gary Jones at (202) 512-3841. Chris Abraham, Doreen Feldman, Rich Johnson, Nancy Kintner-Meyer, Tom Perry, Ilene Pollack, Stan Stenersen, and B"
651,ill Swick made key contributions to this report.
652,"An unregulated child custody transfer, commonly referred to as rehoming, is not an adoption. It is a practice in which parents seek new homes for their children and place them without the safeguards and oversight of the courts or the child welfare system. This practice does not pertain exclusively to adopted children; biological children may also be subject to unregulated transfers. However, media reports and child welfare and adoption organizations have focused on unregulated transfers of adopted children "
653,"that involve families who may be unable or unwilling to deal with the emotional and behavioral challenges that may be caused by a child’s pre-adoption conditions. For example, some adopted children may have histories of long-term institutionalization (e.g., orphanages), abuse, or other traumatic experiences that affect their behavior. An adoption may be terminated as a result of a disruption, which occurs before the adoption is finalized, or a dissolution, which occurs after the adoption has been finalized,"
654," generally in a legal proceeding. Under these circumstances, the child would go into the child welfare system or be legally adopted by another family. In contrast, unregulated transfers occur when parents intend to permanently transfer custody of their child to a new family without following these steps. Sometimes the parents will use a document called a power of attorney to delegate to the new family certain authority for the care and control of the child, although such documents do not terminate the legal"
655," relationship between the adoptive parents and the child. Because power of attorney arrangements are generally not overseen by any state or federal agency, information on the whereabouts of a child subject to an unregulated transfer using a power of attorney can be limited or unknown. In addition, because families who engage in an unregulated transfer do not follow the steps required for a legally recognized adoption, there may be no checks to ensure that the new home is an appropriate place for the child. "
656,"There are different ways that a child can be adopted in the United States. International adoptions involve a child who was born in another country. Domestic adoptions can be adoptions from foster care, which involve children in the child welfare system whose biological parents have had their parental rights terminated. Other domestic adoptions include those conducted through private adoption agencies, attorneys, and others. Most domestic adoptions handled through private adoption agencies, attorneys, and ot"
657,"hers primarily involve infants or adoptions by a stepparent. Unregulated transfers do not follow the adoption process, which generally involves many steps to help ensure that the child is legally adopted and placed in an appropriate and permanent home. While the adoption process can be different depending on the state and type of adoption, it typically consists of: a home study performed by a licensed professional to assess the suitability of the prospective parents, such as their health, finances, and crim"
658,"inal history; an immigration application and petition, in the case of an international pre-adoption training for prospective parents, either online or in- person, for a specified number of hours on topics such as the adoption process and issues related to attachment and bonding; final approval of the adoption by a court, either in the United States or the child’s country of origin; and post-placement or post-adoption services, in some cases, which can range from information and referral services and peer su"
659,"pport groups to more intensive services for children with severe behavioral needs. For example, these intensive services can include mental health counseling, respite care programs to provide temporary relief for caregivers by placing children in short-term accommodations outside the home, and residential treatment, which involves extended treatment services to children while they reside outside the home. Multiple federal, state, and other agencies can be involved in different stages of the adoption process"
660,", depending on the type of adoption. Fees also vary by type of adoption; while foster care adoptions may not have any fees, international adoptions can involve substantial financial investments from families. International adoptions. As required under federal law and State Department regulations, international adoptions are generally conducted through accredited adoption agencies or approved persons. USCIS is involved in adjudicating immigration petitions for these children as well as setting federal home s"
661,"tudy requirements for international adoptions and determining the suitability and eligibility of prospective adoptive parents. The State Department also sets requirements for pre-adoption training that international adoption agencies and approved persons must provide for prospective parents. There are no federal requirements for post- adoption monitoring for international adoptions, according to State Department officials. However, officials said some countries of origin require adoptive families to provide"
662," periodic reports (e.g., according to the State Department’s website, one country requires families to provide reports every 6 months for 2 years following an international adoption). Individual states may also have separate licensing requirements for international adoption agencies operating in their state. Foster care adoptions. Foster care adoptions are typically conducted by state, county, and local child welfare agencies or private adoption agencies with which they contract. For these adoptions, states"
663," set requirements for home studies, pre-adoption training, and post-adoption services. Private domestic adoptions. States also set requirements for home studies, pre-adoption training, and post-adoption services for private domestic adoptions, generally through state licensing standards and other requirements for private adoption agencies, attorneys, and others. Some federal funding is available for adoption services, in addition to any funding from state, local, or other sources. Funding appropriated for T"
664,"itle IV-E of the Social Security Act makes up the large majority of federal funding dedicated to child welfare, comprising about 89 percent of federal child welfare appropriations (approximately $7.4 billion of nearly $8.3 billion) in fiscal year 2015, according to the Congressional Research Service. While the majority of these Title IV-E funds support children in the foster care system, the Title IV-E Adoption Assistance program provides grants to states for a portion of their costs to support families who"
665," adopted children with special needs, generally from foster care. For example, states provide ongoing monthly Adoption Assistance payments (subsidies) to eligible families that can be used to help pay for the costs of care for the child, which might include therapy and other post-adoption services. Funds appropriated for this program totaled about $2.5 billion in fiscal year 2015, comprising about 34 percent of Title IV-E program funding. In addition, Title IV-B of the Social Security Act, which is the prim"
666,"ary source of federal child welfare funding available for child welfare services, also provides funds that states can use to support adoptions by any family. For example, states may use funds to support pre- and post- adoption services, although funds can also be used for a variety of other purposes to keep children safe and in stable families. Federal appropriations for Title IV-B comprised about 8 percent of dedicated federal child welfare appropriations (approximately $664 million of nearly $8.3 billion)"
667," in fiscal year 2015. Table 1 provides a summary of federal child welfare funding that states can use for adoption services, including programs under Title IV-E and IV-B of the Social Security Act. In addition to these programs, states may use savings generated from changes made to the eligibility criteria for the Title IV-E Adoption Assistance program for adoption services. These changes made additional children eligible for federal Title IV-E Adoption Assistance payments, thereby potentially freeing up st"
668,"ate funds previously used for this purpose. The Preventing Sex Trafficking and Strengthening Families Act requires states to use 30 percent of these savings for post- adoption and related services. In addition, states may use different combinations of federal funds not specifically dedicated to child welfare to support adoption services, such as funds available under the Temporary Assistance to Needy Families block grants, Medicaid, and Social Services Block Grants. While states can use federal funds to sup"
669,"port adoption services for families, we reported in January 2013 that federal funding for services designed to prevent children from entering foster care—such as adoption support services—can be limited. HHS does not collect information on how much states spend in federal funds specifically for post-adoption services. In addition, our prior work has shown that some states may not have information on the extent to which they use these federal funds for adoption services. Although states are to use savings ge"
670,"nerated from changes to the Title IV-E Adoption Assistance program for child welfare services, we reported in May 2014 that only 21 states reported calculating these savings for fiscal year 2012, and 20 states reported difficulties performing the calculations. In 2014, the Donaldson Adoption Institute attempted to collect information on states’ annual post-adoption service budgets, excluding Title IV-E Adoption Assistance program subsidies. However, it reported that some states were unable to distinguish th"
671,"is budget item, especially when the primary programs that served adoptive families also served other families. It also reported that states with county-administered child welfare programs were unable to report total state budgets for post-adoption services. The Institute reported that annual budgets for these services ranged from $85,000 to $11.2 million in the 21 states that provided responses to the survey it conducted. International adoptions in the United States have changed over time from a system that"
672," predominantly involved the adoption of infants and toddlers to one that has involved an increasing proportion of older children and those with special needs. According to State Department data, less than 8 percent of children adopted internationally in fiscal year 2013 were younger than 1 year compared to over 40 percent in fiscal year 2004. In addition, one study reported in 2013 that nearly half of more than 1,000 parents surveyed who adopted internationally said their children had diagnosed special need"
673,"s. The State Department, HHS, and others have reported that the changing landscape of international adoptions is attributable to many different factors, including positive cultural factors and socio-economic conditions in other countries that have made it easier for biological families to take care of their children or to adopt domestically—decisions that have impacted the number of children eligible for adoption by U.S. families. About 7,000 children were adopted internationally in fiscal year 2013 compare"
674,"d to nearly 23,000 in fiscal year 2004 (see fig. 1). Children in foster care may also be more likely to have special needs than children in the general population. According to a national survey conducted in 2008 and 2009, more than 42 percent of children ages 18 months to 17 years who were placed in a foster family home following an investigation of abuse and neglect were found to be at risk for an emotional or behavioral problem and potentially in need of mental health services. Multiple studies have show"
675,"n that abuse and other maltreatment can cause changes in the brain development of children, and these changes may leave them more vulnerable to depression, post-traumatic stress disorder, and other behavioral or mental health issues. Studies show that children who are institutionalized—for example, in orphanages prior to being adopted by a family—are often subject to deprivation and neglect. Young children with a history of institutional care often show poor attention, hyperactivity, difficulty with emotion"
676," regulation, elevated levels of anxiety, and increased rates of attachment disorders. For example, they may develop Reactive Attachment Disorder, which is characterized by serious problems in emotional attachments to others. The physical, emotional, and social problems associated with this disorder may persist as the child grows older. Families who adopt children with severe behavioral or mental health issues may face situations which can put the family in crisis. For example, the adopted child may be viole"
677,"nt toward siblings or parents. One study reported in 2014 that in 23 percent of cases where adoptions were dissolved, the adopted child was a threat to the safety of other children in the home. Families may choose an unregulated child custody transfer because they were not sufficiently prepared for the challenges they experienced in their adoption, according to many child welfare and adoption stakeholders we interviewed. This lack of preparation may include inadequate information about the child’s health, a"
678,"n insufficient home study to make a good match, and minimal pre-adoption training for parents. Many stakeholders we interviewed—including officials from selected states, child welfare and adoption organizations, and adoption agencies— expressed concern with the adequacy of the information provided to prospective parents on the behavioral and mental health conditions of a child adopted internationally. Access to accurate information is critical to ensuring that a family is aware of the type of ongoing suppor"
679,"t they may need for the child. However, officials from 11 of 19 child welfare and adoption organizations and 5 of 15 adoption agencies said families who adopt internationally often do not receive complete information on a child’s medical and behavioral needs before adopting. State Department officials explained that some low-income countries lack sufficient mental health care providers, making it difficult for international adoption agencies to ensure that children are accurately evaluated prior to adoption"
680,". USCIS officials also said some countries do not allow prospective adoptive parents to review medical history documents until after an adoption is finalized for privacy reasons. Many stakeholders also expressed concern that families may not have undergone an adequate home study to ensure they are a good match for their adopted child, and several noted that the home study is a critical point in the pre-adoption process, when social workers or adoption agency staff try to determine how families will handle c"
681,"hallenges when parenting their adopted child. According to HHS officials, requirements for what should be assessed during a home study are determined by individual states for foster care adoptions. Home study requirements are determined by USCIS and the State Department for international adoptions. However, officials from 4 of 7 selected states and 8 of the 15 adoption agencies we interviewed expressed concerns about inconsistencies in the quality of home studies conducted by child welfare and adoption agen"
682,"cies across states. For example, Ohio officials said all child welfare and adoption agencies in their state are required to use a detailed home study format. They said they may not accept home studies conducted in other states that have less stringent requirements unless additional supporting documentation is provided, such as a background check and safety check of the home. Families also may not have received sufficient or targeted pre-adoption training to ensure they were prepared for their child’s specif"
683,"ic needs, particularly for international adoptions, according to most stakeholders we interviewed. For foster care adoptions, states each set their own training requirements for prospective parents, according to HHS officials. About half of all states require agencies facilitating these adoptions to provide prospective parents with at least 27 hours of training, according to data obtained from HHS officials in May 2015. Our seven selected states have requirements of 18 to 47 hours of training for foster car"
684,"e adoptions with some in-person required training in each state, according to state officials. Many of our selected states also use similar training models for foster care adoptions, including Parent Resources for Information, Development, and Education (PRIDE) and Model Approach to Partnerships in Parenting (MAPP), which were developed by various child welfare organizations. In contrast, State Department regulations require 10 hours of training for international adoptions, all of which can be online. This "
685,"training must cover topics defined by the federal regulations. Officials we interviewed from 5 of our selected states, 12 child welfare and adoption organizations, and 11 adoption agencies told us that this training may be insufficient, particularly since an increasing proportion of children adopted internationally are older and have special needs due to an extensive history of institutionalization and trauma. State Department officials told us they are considering revisions to pre-adoption training require"
686,"ments for international adoptions, which we discuss later in the report. States may set training requirements for international adoptions above the 10-hour minimum or may have required training topics. Two of our seven selected states require more than 10 hours of training, according to state officials. For example, Wisconsin officials told us the state requires 18 hours of training, and the same topics are required for international and foster care adoptions. This training covers issues such as attachment "
687,"in adoptive placement, the effects of abuse and neglect, and cultural sensitivity. In addition, this training includes opportunities to cover issues specific to the individual child (see table 2). State Department officials said international adoption agencies may also have their own training requirements beyond those of federal and state agencies. For example, officials from one international adoption agency said they require 30 hours of training for parents wishing to adopt abroad. This includes training "
688,"on grief and loss, the child’s country of origin and cultural differences, the impact of institutionalization, and potential challenges and service needs. These officials said this expanded training is more costly for both the agency and prospective parents, and that some prospective parents thought the training was too cumbersome or expensive. Officials in most of the selected states, child welfare and adoption organizations, and adoption agencies we interviewed expressed concern that families may choose a"
689,"n unregulated transfer when they cannot access post-adoption services to help them cope with or avoid reaching a crisis point in their adoption. Several of these stakeholders explained that an adopted child may deal with continuing issues of attachment, identity, and loss of previous caregivers or biological parents. While services to help adoptive families can include information, referrals, and peer support groups, families who adopted children with severe behavioral needs may need more intensive services"
690,", such as mental health counseling, respite care, and residential treatment. Many stakeholders we interviewed suggested that families considering unregulated transfers may particularly need these intensive services. All seven of our selected states provide some kind of post-adoption services for families who adopted from foster care and internationally. For example, Wisconsin officials said the state provides parent training, a 24-hour information hotline, referral services, and mechanisms to link families "
691,"to support groups and mentors, which are available to all adoptive families. Other types of services these selected states provide include lending libraries, newsletters, and brochures for parents. However, the seven selected states offered limited intensive services, particularly for international adoptions, according to our analysis of the information gathered from selected state officials. Officials from three states said their state offers counseling and other intensive services, such as case management"
692," and crisis intervention, to both families who adopted from foster care and internationally. However, officials from the six states that offer respite care and the four states that provide residential treatment told us their states provide these services exclusively to families who adopted from foster care. Some of these services have maximum time limits or are offered on a case-by-case basis. For example, Louisiana officials said their state offers respite care for up to 1 month, and Florida and Illinois o"
693,"fficials said their states offer residential treatment services to families who adopted from foster care on a case-by-case basis. In addition, our seven selected states provide varying levels of financial support to eligible adoptive families through subsidies and cash assistance programs, according to the information gathered from selected state officials. For example, Ohio officials described a state program that uses Title IV-B and state revenue funds to provide up to $10,000 per child per year to pay se"
694,"rvice providers in 2014, with an additional $5,000 available per year if the child is recommended for residential treatment by a mental health provider. In addition, all of our selected states received federal funds under the Title IV-E Adoption Assistance program to provide subsidies to eligible adoptive families; the maximum subsidy amounts ranged from $400 to $2,700 per month in 2014. However, they are generally only available to eligible families who adopted children with special needs from foster care,"
695," and information is limited on how much families use their subsidies for services, such as counseling, versus other expenses for their adopted child, such as food, clothing, and day care. The Donaldson Adoption Institute reported in April 2014 on a variety of post-adoption services provided by 49 states that responded to survey questions about such services. It found that about one-third of these states offered almost no post-adoption services other than a subsidy for adoptive families. In addition, the rep"
696,ort found that the majority of these states had services that were open exclusively to families who adopted from foster care. Officials in four of our seven selected states told us that the need for post- adoption services exceeded the funding available from state and federal programs. Our prior work has shown that child welfare agencies have struggled to meet the service needs of families. Our 2013 report found that local child welfare officials in four states we reviewed reported service gaps in multiple 
697,"areas, including counseling and mental health services. We also reported that state and local child welfare agencies may face difficult decisions when determining which activities—aimed at preserving families and preventing a child from entering foster care—to prioritize and fund, particularly in light of the ongoing fiscal challenges these agencies face. Similar to our selected states, officials from 12 of the 15 adoption agencies we interviewed said they provide some level of post-adoption services to fam"
698,"ilies, such as information and referrals. Officials in 4 of the 15 adoption agencies said they provide intensive services, ranging from trauma-focused therapy to a weekend respite care program. Officials from six adoption agencies noted that resource constraints have affected their ability to provide post-adoption services. Officials from the Council on Accreditation—the organization responsible for accrediting agencies for international adoptions—said some international adoption agencies have struggled to "
699,"maintain their businesses due to the decrease in the number of international adoptions overall (a decrease of 70 percent between fiscal years 2003 and 2014). They said while some larger agencies have been better able to provide services because they are financially stable, this can be a challenge for other agencies. Another limitation to accessing post-adoption services that many stakeholders expressed concern about was the cost of intensive services, which can be expensive for all families. Officials in 3 "
700,"of 7 selected states, 6 of 19 child welfare and adoption organizations, and 5 of the 15 adoption agencies we interviewed said services can be expensive, particularly intensive services such as mental health counseling and residential treatment. We have previously reported that the cost to support a youth in a residential setting can amount to thousands of dollars per month. In addition to cost, adoptive families may have challenges finding mental health providers that are “adoption competent”—that is, knowl"
701,"edgeable about adoption-related issues, according to officials from five selected states, seven child welfare and adoption organizations, and eight adoption agencies. These stakeholders said mental health providers who do not understand issues unique to adoptive families will likely be less effective in helping these families work through issues. For example, one official told us adoptive families need therapists who can distinguish between normal adolescent behavior and a child acting out due to grief and "
702,"loss resulting from his or her adoption. Several stakeholders also noted that families in rural areas may have even more difficulty accessing effective mental health providers. We reported in 2013 that a Florida behavioral health service provider had been advertising a child psychiatrist position for 5 years without success. In a 2011 report, we found that child psychiatrists and psychologists were among the most difficult specialist referrals to obtain for children in low-income families covered by Medicai"
703,"d and the Children’s Health Insurance Program, both of which can cover children adopted from foster care and internationally. Lastly, families may not know about available services from their child welfare or adoption agency, and therefore do not seek help when needed, according to officials from four selected states and five adoption agencies. For example, Virginia officials said families that did not adopt from foster care may not know about support services they can access through their local child welfa"
704,"re agency. Wisconsin officials also said they struggle to find sufficient resources to provide outreach to all adoptive parents about state resources. Officials from two selected states also raised concerns that families may not remember whether their adoption agency provides post-adoption services. They explained that some families may not need services for years after an adoption is final because issues may not arise until the child reaches adolescence. By that point, families may no longer have contact w"
705,"ith their adoption agency. Families in need of help may be reluctant to ask child welfare agencies for assistance, according to officials from three child welfare and adoption organizations and four adoption agencies. For example, these officials noted that there is a stigma associated with contacting child welfare agencies since those agencies are also generally responsible for investigating cases of child abuse. A few of these officials further noted that families, including those who adopted from foster "
706,"care and internationally, may fear that contacting an agency will prompt an investigation into how they care for all of their children. They also said families may be afraid that they will not be able to adopt again if they are involved with a child welfare agency. Officials in five of our seven selected states acknowledged the dilemma that families face if they contact child welfare agencies for services. In addition, officials in one selected state said parents cannot voluntarily relinquish custody of a c"
707,"hild in their state (e.g., for care or services) without being charged with child abandonment. Officials in all seven selected states said families who decide to relinquish custody to the state may be required to pay ongoing child support. Similarly, families who adopted internationally may also be hesitant to reach out to their adoption agency. Representatives from 9 of the 15 adoption agencies we interviewed told us that families may be ashamed or embarrassed to contact the agency to discuss problems. Rep"
708,"resentatives from one adoption agency explained that families have gone through a rigorous home study process to prove that they will provide a good home to an adopted child. Thus, they said these families may be reluctant to contact their agency and admit that that they are facing challenges in their adoptions. Because unregulated child custody transfers are an underground practice that happens outside the purview of the courts and the child welfare system, they are difficult to track, and no federal agenc"
709,"y keeps statistics on their occurrence. These transfers may involve an exchange of a power of attorney that may not be filed with or approved by a court of law, although it may be signed by both parties and notarized. State laws vary, but generally a parent may use a power of attorney to temporarily grant another person certain powers regarding their child’s care and physical custody, such as the authority to make medical and educational decisions. For example, a military service member may sign a power of "
710,"attorney to allow a family member or friend to take care of and make medical decisions for his or her child while he or she is deployed. However, because a power of attorney does not terminate the legal parent-child relationship, the adoptive parent still retains certain rights and responsibilities. For example, according to HHS, delegating responsibility for a child through a power of attorney does not insulate adoptive parents from state laws regarding imminent risk of serious harm. State laws determine a"
711,"ny time limits (e.g., 1 year) for grants of power of attorney, and also establish the procedures required to make such an arrangement effective. For example, officials in three of our seven selected states told us their state laws do not require power of attorney documents to be approved by a court, and officials in one selected state said their laws require court approval in certain circumstances. However, officials in three of these selected states said they were not aware of any mechanisms in their state"
712,"s to track expired power of attorney documents to determine if families are attempting to use them to permanently transfer custody. Unregulated transfers are also difficult to track because many adoptions are not monitored after the adoption is finalized. For those international adoptions subject to reporting requirements set by individual countries, reporting may occur for a limited time. For example, according to the State Department website, one country requires adoptive parents to provide information ab"
713,"out the adoption at certain time intervals for the first 2 years. Officials from the State Department and several adoption agencies we interviewed told us that while parents may sign a contract when they adopt a child saying they will report the required information to the adoption agency, parents may not comply with post-adoption reporting requirements, and agencies have little leverage to enforce compliance. In addition, officials in our seven selected states said their state does not specifically monitor"
714," whether adopted children remain with their families after the adoption is finalized. Our observations of forums on social media websites indicate that some parents have been using these venues to seek new homes for their children. We observed posts in five social media forums and found a total of 23 posts in which a person wrote that they were seeking a new family for their child. Among the 9 posts that included information on a child’s age, those ages ranged from 7 to 16. Generally, parents in these forum"
715,"s who said they wanted to transfer a child indicated that they were in distress or crisis, and most often said they were seeking a new home because of the child’s behavioral issues or severe mental illness. These children included those who were adopted from foster care and internationally. For example, one post asked for a new home for a 7-year- old boy who had been diagnosed with numerous mental illnesses, including Reactive Attachment Disorder, Oppositional Defiance Disorder, and autism, and who was phys"
716,"ically abusive to his siblings and family pets. Several posters responded with information about their family and location or said that they had sent the poster a private message. Another poster wrote that her son, who she adopted internationally, had been diagnosed with multiple mental illnesses and was currently hospitalized for psychiatric reasons, and she was seeking a new home for him. In addition, we found 40 cases in which a person posted that they wanted to adopt a child. In some cases, posters wrot"
717,"e that they had successfully completed a home study. In other cases it was not clear whether they had undergone a home study. For example, only a third of the posts we observed in one online forum referenced a home study—either that the person seeking to adopt had completed one or the person seeking a new home for the child required one. Some posters said they had adopted children already in the home, and some wrote they had adopted a previously adopted child, although it was unclear whether they had legall"
718,"y adopted the child or whether the child was transferred without court oversight. It is possible that conversations on the specifics of transferring a child were held either through private messages within the social media platform or by another means, such as email or phone. Because we did not investigate these posts further and because discussions between online participants can be continued privately, we were unable to determine whether a child was actually transferred to another family. Similarly, we we"
719,"re unable to determine, if such a transfer occurred, whether it was done through official means or an unregulated transfer. We identified 15 states in which laws were enacted, proposed legislation was introduced, or recent changes had been made to child welfare programs that were intended to safeguard children who may be subject to unregulated transfers. These included the seven states we selected for interviews as well as eight states recommended by representatives from child welfare and adoption organizat"
720,"ions because of legislative activity initiated in these states during the course of our review. Of these 15 states, 7 enacted legislation and 3 made changes to child welfare programs. In addition, legislators in 10 of the 15 states introduced proposed legislation that had not been enacted as of July 2015 (see table 3). These selected laws, proposed legislation, and other actions within the 15 states reflect a variety of approaches to addressing unregulated transfers. The most common approaches were to crimi"
721,"nalize unregulated transfers or actions that may lead to these transfers, and to restrict the advertising of children or potential homes for placement. Other approaches may deter unregulated transfers by requiring that parents or certain other individuals report cases in which custody of a child may have been transferred. Some approaches may help prevent transfers from occurring. These included revising requirements for preparing prospective parents for adoption and increasing outreach about services availa"
722,"ble to families after adopting (see table 4). The five states that enacted laws to criminalize unregulated transfers or actions that could lead to these transfers made the following changes: Arkansas and Louisiana enacted laws that define the practice of “re- homing” and impose criminal penalties for those engaging in it. The laws provide that those who commit the offense of re-homing, which each state defines differently but generally includes transferring physical custody of a child to a non-relative with"
723,"out court approval with the intent of avoiding permanent parental responsibility (or assisting in such a transfer), will be subject to a fine of up to $5,000 and imprisonment for up to 5 years. Similarly, Florida enacted a law establishing the crime of “unlawful desertion of a child,” which provides that a caregiver who deserts a child (leaves the child with a non-relative with the intent to not return and provide for the child’s care) under circumstances in which the caregiver knew or should have known tha"
724,"t the child would be exposed to unreasonable risk of harm commits a third degree felony. Maine also enacted a similar law, modifying its definition of “abandonment of a child.” This law provides that a person is guilty of child abandonment if they transfer physical custody of a child to a non-relative without court approval with the intent to avoid or divest themselves of permanent parental responsibility. The law specifies that violation of this provision constitutes different classes of crimes, depending "
725,"on the age of the child. Wisconsin enacted a law that placed parameters on parental delegations made through a power of attorney, and established criminal penalties for unauthorized transfers of children across state lines. This law provides that delegations to a non-relative of a child’s care and custody under a power of attorney may be effective for no longer than 1 year unless approved by a juvenile court, and those who violate this provision are subject to a fine of up to $10,000 and/or imprisonment for"
726," up to 9 months. In addition, the law states that any person who sends a child out of the state, brings a child into the state, or causes such actions to occur for the purpose of permanently transferring physical custody of the child to a non-relative is guilty of a misdemeanor. Six states enacted laws to restrict the advertising of children or potential homes for adoption or other permanent placement. Specifically, Arkansas, Colorado, Florida, Louisiana, Maine, and Wisconsin created or expanded prohibition"
727,"s on who can place such advertisements, limited the purposes for which these advertisements can be placed, restricted the public media that can be used (e.g., the internet), and/or provided penalties for violations. Officials from selected states, child welfare and adoption organizations, and adoption agencies we interviewed discussed some trade-offs and considerations in implementing these approaches to deterring unregulated transfers. For example, several stakeholders said a power of attorney can be used "
728,"for legitimate purposes, such as a military parent transferring custody of their child to a trusted friend while on deployment. They noted that placing additional conditions on power of attorney transfers can create a burden for these families. In addition, officials from three selected states and three child welfare and adoption organizations questioned how states could enforce the use of a power of attorney. Officials from one national organization specializing in adoption law said courts that may be invo"
729,"lved in approving power of attorney agreements have other priorities and may not have time to monitor these agreements. Several stakeholders also said families often go online to access adoption resources and peer support forums. They said states need to consider the information that these online forums provide to adoptive families when considering laws related to the internet. In addition to approaches that would deter unregulated transfers, 4 of the 15 states we reviewed enacted laws or made changes to ch"
730,ild welfare programs to improve post-adoption services for families. Specifically: Arkansas enacted a law that directed the state child welfare agency to adopt rules to ensure that post-adoptive services are provided to all parents who seek assistance to prevent their adoptions from being disrupted. Virginia enacted a law and made changes to its state child welfare programs to improve post-adoption services based on recommendations from a study it conducted on unregulated transfers. The law requires the sta
731,"te registrar to issue, along with new adoptive birth certificates, a list of available post-adoption services, and requires the state child welfare agency to provide a list of such services to the registrar and publish it on its website. In addition, Virginia officials said the state child welfare agency plans to modify the solicitation for its post-adoption services contracts to allow services to be provided by multiple regional providers rather than one statewide provider. Virginia officials said the inte"
732,"nt of this change is to increase access to services for families statewide. Illinois and New York also made changes to their child welfare programs to increase outreach specifically to new parents who adopted from foster care, although these states did not make statutory changes. Illinois developed a pilot project for agencies facilitating foster care adoptions to host celebrations and social events to build relationships with these families and connect them with other families. New York developed a brochur"
733,"e for adoption agencies to provide to new adoptive parents that includes information on unregulated transfers and possible sources of help with post-adoption needs. While many stakeholders we spoke with highlighted families’ challenges with accessing pre- and post-adoption services as key reasons for unregulated transfers, they also commented on possible challenges in implementing certain policy options to improve access to and availability of such services. For example, officials from nearly half of the ch"
734,"ild welfare and adoption organizations we spoke with said building a strong infrastructure for adoption services can be a lengthy and costly task. They said states have been trying to bolster services, but have had limited success. Given limited funding, officials from most selected states, child welfare and adoption organizations, and adoption agencies we interviewed expressed concern about the level of support for post- adoption services. Many of these stakeholders said families experiencing difficulties "
735,"in their adoptions need services, and unregulated transfers are a last resort for desperate families who feel they have no other option. They also stated that improving access to effective services may ultimately help all families meet the needs of their adopted children. Federal agencies have made some collaborative and individual efforts to address unregulated transfers, mainly by raising awareness of the need for improved pre- and post-adoption services and by sharing information with states (see table 5"
736,"). In some instances they have also collaborated with non-governmental organizations that have relationships with state child welfare and law enforcement agencies, such as the Association of Administrators of the Interstate Compact on the Placement of Children and the National Association of Attorneys General. As shown in table 5, the State Department established an interagency working group in October 2013 to develop a coordinated federal response to unregulated transfers. Other federal agency participants"
737," are USCIS, HHS, and Justice. With input from the group, the State Department began work to revise regulations regarding international pre-adoption training requirements. State Department officials said the revisions may potentially include an increased number of minimum required hours and additional required content, drawing from training curriculum used by child welfare agencies for prospective parents in foster care adoptions. In addition, the revisions may include required in-person components for train"
738,"ing. State Department officials said they plan to provide proposed revisions to the Office of Management and Budget by the end of 2015 for review, and the proposed regulations will be subject to a public comment period before being finalized. In addition, in February 2015, USCIS issued revised immigration applications and petitions which are used by certain families applying to adopt from certain countries. The revisions included a requirement that families disclose whether they have previously filed intern"
739,"ational adoption applications or petitions and the result of the filings (i.e., approval, denial, withdrawal). Additionally, the revisions require families to disclose if they have experienced a disruption or dissolution of an international adoption in the past. HHS has also taken a number of actions to help improve access to adoption services. For example, it issued a memorandum in May 2014 to states that encouraged them to promote services to all adoptive families and outlined various sources of available"
740," federal funds. The memo also shared information on how unregulated transfers may violate state laws and encouraged states to review their laws and policies. In addition, HHS awarded two cooperative agreements with 5-year project periods in October 2014 to national organizations to improve post-adoption services. The National Adoption Competency Mental Health Training Initiative aims to build a web-based training curriculum for child welfare professionals and mental health practitioners to meet the mental h"
741,"ealth needs of adopted children, develop a national certification process for those completing it, and evaluate its outcomes and effectiveness. The National Quality Improvement Center for Adoption/Guardianship Support and Preservation aims to develop evidence-based pre- and post-adoption interventions and services for prospective and current adoptive families. Interventions and services will be evaluated at six to eight selected sites (e.g., state, county, or tribal child welfare agencies). Both projects ar"
742,"e expected to be completed in September 2019. HHS officials also noted that information on pre-adoption requirements and post-adoption services, by state, is available on HHS’s Child Welfare Information Gateway, a website that provides information, resources, and tools on child welfare, child abuse and neglect, out-of-home care, adoption, and other topics. In addition, they said HHS has been involved in discussions with states regarding post-adoption services over the years. For example, HHS hosted a confer"
743,"ence on the needs of adopted children—including post-adoption services—in August 2012, and was involved in a forum on unregulated transfers and services for adoptive families in February 2014 through the National Association of State Adoption Programs, Inc. Because states are responsible for much of the work to improve adoption services, the interagency working group has collaborated with national organizations to share information with states. Specifically, Justice worked with the National Association of A"
744,"ttorneys General to gather information on existing state laws and pending legislative proposals to address unregulated transfers. Research fellows at the National Association compiled this information for all states. The organization also requested information from all state attorneys general offices, and received responses from six states and the District of Columbia. The organization completed this work in June 2015, and Justice officials said they are reviewing the study and will work with the interagenc"
745,"y working group to determine next steps, if any, to be taken. In addition, the Association of Administrators of the Interstate Compact on the Placement of Children is working to develop a national outreach campaign to raise awareness about unregulated transfers and provide information on alternatives to this practice. Officials from the Association said they are in the process of soliciting funds from private and non-profit organizations to support such a campaign. Despite these efforts, federal officials a"
746,"cknowledged that gaps in services for adoptive families remain, and determining how to provide them is a difficult task for public and private agencies working with these families. For example, HHS officials noted limitations to the federal government’s ability to support post-adoption services. They said that while all adopted children will need some level of support after an adoption is final, the main source of federal support—the Title IV-E Adoption Assistance program—is limited, and is generally availa"
747,"ble only to families who adopted eligible children from foster care. Consistent with our findings in previous reports, HHS officials said funds from other federal programs that states can use to support services for private adoptions, including international adoptions, are limited. Officials said families who cannot afford services on their own must often rely on services supported by state and local funding or those provided by private adoption agencies, and funds from these sources are also limited. HHS o"
748,"fficials told us that the administration included in its fiscal year 2016 budget request a legislative proposal that would provide an increase of $587 million over 10 years for pre- and post-adoption services. They said this funding would target services to families with children who may be subject to unregulated transfers as well as those at risk of entering foster care due to an adoption in crisis. Federal officials said they will continue to examine ways to address unregulated transfers. For example, the"
749," State Department has developed a charter to outline its goals and plans for future work. State Department officials said they will use this charter to facilitate future efforts with the interagency working group. We provided a draft of this report to the Secretaries of Health and Human Services, Homeland Security, and State and the Attorney General of the United States for review and comment. The Departments of Health and Human Services, Homeland Security, and State provided technical comments that were in"
750,"corporated, as appropriate. The Department of Justice had no comments. We are sending copies of this report to relevant congressional committees, the Secretaries of Health and Human Services, Homeland Security, and State, the Attorney General of the United States, and other interested parties. In addition, this report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7215 or brownke@gao.gov. Conta"
751,"ct points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made key contributions to this report are listed in appendix II. GAO examined (1) the reasons adoptive families consider unregulated child custody transfers, and services that exist to support these families before they take such an action; (2) what is known about the prevalence of these transfers; and (3) actions selected states and federal agencies have taken to help address"
752," such transfers. To address these objectives, we used a variety of methods. Specifically, we conducted interviews with 45 agencies and organizations, including officials from federal and selected state agencies, child welfare and adoption organizations, and adoption agencies, to acquire a range of perspectives on this topic; reviewed relevant federal laws and regulations, selected state laws, and federal and selected state policies; reviewed and analyzed documentation provided by officials we interviewed; c"
753,"onducted a search of related literature and reviewed relevant articles; and searched online forums on selected social media sites to find illustrative examples of families who may be considering unregulated transfers. Because children adopted domestically as infants and those in biological families may be less likely to have mental health issues due to trauma and institutionalization, and reports of unregulated transfers have primarily pertained to children adopted internationally or from foster care, our r"
754,"eport focuses on international and foster care adoptions. To understand why families consider unregulated child custody transfers, what training and services are available to adoptive families, and actions selected states and federal agencies have taken to help address such transfers, we conducted interviews with 45 agencies, states, and organizations, including federal officials, representatives from national child welfare and adoption organizations, officials from selected states, and representatives from"
755," adoption agencies. Federal officials we interviewed included those from the Department of State (State Department), the Department of Homeland Security’s U.S. Citizenship and Immigration Services (USCIS), the Department of Health and Human Services (HHS), and the Department of Justice (Justice). We interviewed representatives from 19 organizations that work on child welfare and adoption issues. The 19 organizations we interviewed were selected to represent a variety of views on adoption and child welfare- "
756,"related policy, training, and research. For example, these organizations specialized in certain aspects of adoption, including adoption law, home studies, pre-adoption training, and post-adoption services. We interviewed the following child welfare and adoption organizations and experts: American Academy of Adoption Attorneys; American Bar Association’s Center on Children and the Law; Association of Administrators of the Interstate Compact on the Placement of Children; Center for Adoption Policy; Center for"
757," Adoption Support and Education; Child Welfare League of America; Coalition for Children, Youth, and Families; Congressional Coalition on Adoption Institute; Council on Accreditation; the Donaldson Adoption Institute; Joint Council on International Children’s Services; Madeline Freundlich; Maureen Flatley; National Center for Missing and Exploited Children; National Center on Adoption and Permanency; National Conference of State Legislatures; North American Council on Adoptable Children; Spaulding for Child"
758,"ren; and Voice for Adoption. In addition, we interviewed officials from state child welfare agencies and other relevant offices in seven selected states: Colorado, Florida, Illinois, Louisiana, Ohio, Virginia, and Wisconsin. These states were chosen based on factors such as legislative activity related to unregulated transfers in the state, as identified by representatives from child welfare and adoption organizations during our initial interviews, and the state’s post-adoption programs. These states also p"
759,"rovided variety in numbers of adoptions in relation to the state’s population. Interviews with officials were conducted through site visits to Florida and Wisconsin, and phone calls to the remaining states. In the states selected, the team conducted interviews with officials from state child welfare agencies and other relevant offices, such as those from state attorney general offices, departments of justice, and adoption agency licensing offices. Finally, we interviewed representatives from 15 internationa"
760,"l and domestic adoption agencies. The adoption agencies we interviewed were selected from those either recommended by national organization representatives or those licensed or accredited in the states we visited in- person to achieve variation in agency size, including budget and staff and types of adoptions facilitated. For example, 11 of the 15 adoption agencies facilitate international adoptions. The remaining 4 agencies facilitate domestic adoptions only, such as through the child welfare system (throu"
761,"gh a contract with the state child welfare agency) or privately. In the report we refer to different types of organizations when reporting information from our interviews with the 7 selected states, 19 child welfare and adoption organizations, and 15 adoption agencies. References to “stakeholders” include responses from officials in all three of these groups. In our interviews with stakeholders, we used a semi-structured interview protocol that included open-ended questions about reasons that families may c"
762,"onsider unregulated transfers, types of services adoptive families may need to prevent them from resorting to these transfers, and types of services that are available to adoptive families. Information was volunteered by officials in each interview in response to these open- ended questions. Thus, the counts of organizations citing such responses vary. “All” stakeholders represents 41 “Most” stakeholders represents 21-40 “Many stakeholders” represents 10-20 “Several” stakeholders represents 4-9 “A few” stak"
763,"eholders represents 2-3 We reviewed relevant documents to corroborate information obtained in our interviews. To examine federal efforts related to unregulated transfers, we reviewed relevant documents obtained in our interviews with federal officials. We also reviewed relevant federal laws, regulations, and policies on agency roles and responsibilities as well as GAO criteria on internal controls. To examine selected state efforts related to unregulated transfers, we reviewed information on recently enacte"
764,"d laws, proposed legislation, and other documents provided by child welfare and other agency officials in our seven selected states. Through our interviews with representatives from child welfare and adoption organizations and others, we identified at least eight additional states that had initiated legislative activity related to unregulated transfer since we began our review: Arkansas, Maine, Maryland, Massachusetts, Nebraska, New York, North Carolina, and South Carolina. For these eight identified states"
765,", we also reviewed relevant laws, proposed legislation, and other documents provided by child welfare and other agency officials in these states. For proposed legislation, we reviewed only the version confirmed by the state officials. We did not do further research on the status of these proposals; therefore, additional changes may have been made that are not reflected in this report, and some proposed legislation included in the report may no longer be pending. We asked officials in the 15 selected and ide"
766,"ntified states to confirm whether their state had enacted a law, introduced proposed legislation, or took other relevant activity as of July 2015. We did not report on such activity after this date. Since we did not attempt to identify all activity related to unregulated transfers in all states, there may be other states with relevant legislative or other activity not included in our review. We conducted a search of literature related to unregulated child custody transfers in order to gather information abo"
767,"ut why families may consider these transfers, what policies exist to safeguard children who might be subject to such transfers, what training is required to adopt, and what services are available to adoptive families. While our search resulted in some literature on adoption dissolutions and disruptions as well as services for adoptive families, we were unable to locate academic literature regarding unregulated transfers. We searched online forums on selected social media sites to find illustrative examples "
768,"of families who may be considering unregulated child custody transfers. Using keywords such as “rehoming” and “adoption disruption,” we searched selected social media sites to locate online forums—such as groups and message boards—that parents might use to seek new homes for their children. For example, these forums were characterized on the sites as support groups for parents who wish to dissolve an adoption or whose children have behavioral issues. The results of our searches were not exhaustive as we wer"
769,"e unable to ascertain whether we identified most or all social media sites and forums with online activity that may relate to unregulated child custody transfers. We observed posts by participants in eight forums on two websites over a 15-month time period (January 1, 2014, through April 1, 2015). We analyzed posts on two of the eight forums that involved individuals who posted that they were seeking a new family for their child or who posted that they wanted to adopt a child. We did not find posts involvin"
770,"g individuals seeking a new family for their child in the remaining six forums. The online posts we identified did not provide sufficient information to determine whether the posters intended to pursue an unregulated transfer, or to pursue an adoption or other legal placement. Since we did not investigate individual cases, our approach did not allow us to determine whether the information posted by online participants was accurate. Moreover, because discussions between online participants can be continued p"
771,"rivately, we were unable to determine whether a child was actually transferred to another family and, if so, whether this was done through a court-approved process or through an unregulated transfer. One of the eight forums we observed was shut down in March 2015 by the social media site that hosted it. We conducted this performance audit from October 2014 to September 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obta"
772,"in sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact name above, the following staff members made key contributions to this report: Elizabeth Morrison, Assistant Director; Elizabeth Hartjes; Nhi Nguyen; and Amy Sweet. Also contributing to this report were: Susan Aschoff; Laurel"
773, Beedon; Maurice Belding; Sarah Cornetto; Sara Edmondson; Kirsten Lauber; Ashley McCall; Mimi Nguyen; Brynn Rovito; and Almeta Spencer.
774,"In fiscal year 2007, the Department of Veterans Affairs (VA) paid about $37.5 billion in disability compensation and pension benefits to more than 3.6 million veterans and their families. Through its disability compensation program, the VBA pays monthly benefits to veterans with service- connected disabilities (injuries or diseases incurred or aggravated while on active military duty). Monthly benefit amounts vary according to the severity of the disability. Through its pension benefit program, VBA pays mon"
775,"thly benefits to wartime veterans with low incomes who are either elderly or permanently and totally disabled for reasons not service- connected. In addition, VBA pays dependency and indemnity compensation to some deceased veterans’ spouses, children, and parents and to survivors of servicemembers who died while on active duty. When a veteran submits a benefits claim to any of VBA’s 57 regional offices, a Veterans Service Representative (VSR) is responsible for obtaining the relevant evidence to evaluate th"
776,"e claim. For disability compensation benefits, such evidence includes veterans’ military service records, medical examinations, and treatment records from VA medical facilities and private providers. Once a claim is developed (i.e., has all the necessary evidence), a Rating Veterans Service Representative (RVSR) evaluates the claim, determines whether the claimant is eligible for benefits, and assigns a disability rating based on degree of impairment. The rating determines the amount of benefits the veteran"
777," will receive. For the pension program, claims processing staff review the veteran’s military, financial, and other records to determine eligibility. Eligible veterans receive monthly pension benefit payments based on the difference between their countable income, as determined by VA, and the maximum pension amounts as updated annually by statute. In fiscal year 2007, VBA employed over 4,100 VSRs and about 1,800 RVSRs to administer the disability compensation and pension programs’ caseload of almost 3.8 mil"
778,"lion claims. In 2001 the VA Claims Processing Task Force noted that VSRs were responsible for understanding almost 11,000 separate benefit delivery tasks, such as tasks in claims establishment, claims development, public contacts, and appeals. To improve VBA’s workload controls, accuracy rates, and timeliness, the Task Force recommended that VA divide these tasks among a number of claims processing teams with defined functions. To that end, in fiscal year 2002, VBA developed the Claims Processing Improvemen"
779,"t model that created six claims processing teams, based on phases of the claims process. (See table 1.) According to one VA official, new claims processing staff generally begin as VSRs and typically have a probationary period of about one year. After their probationary period ends, staff can either continue to qualify to become senior VSRs or apply for RVSR positions. VSRs are also given the option to rotate to other VSR claim teams to gain a broader understanding of the claims process. VBA has established"
780," a standardized curriculum for training new VSRs and RVSRs on how to process claims, and it has an 80-hour annual training requirement for both new and experienced staff; however, it does not hold individual staff accountable for meeting this requirement. VBA has designed a uniform curriculum for training new VSRs and RVSRs that is implemented in three phases—initial orientation training, a 3-week training session referred to as centralized training, and comprehensive on- the-job and classroom training afte"
781,"r centralizing training. It also requires all staff to meet an annual 80-hour training requirement. To ensure that staff meet this requirement, each regional office must develop an annual training plan, which can contain a mix of training topics identified by VBA central office and by the regional office. However, individual staff members are not held accountable for meeting their training requirement. VBA has a highly structured, three-phased program for all new claims processors designed to deliver standa"
782,"rdized training, regardless of training location or individual instructors. (See fig. 1.) For example, each topic included in this training program contains a detailed lesson plan with review exercises, student handouts, and copies of slides used during the instructor’s presentation. Each phase in this program is designed to both introduce new material and reinforce material from the previous phase, according to a VBA official. According to VBA policy, the first phase of training for new VSRs and RVSRs is p"
783,"rerequisite training. New VSRs and RVSRs begin prerequisite training at their home regional office as soon as they begin working. Prerequisite training lays the foundation for future training by introducing new VSRs to topics such as the software applications used to process and track claims, medical terminology, the system for maintaining and filing a case folder, and the process for requesting medical records. Although VBA specifies the topics that must be covered during prerequisite training, regional of"
784,"fices can choose the format for the training and the time frame. New VSRs and RVSRs typically spend 2 to 3 weeks completing prerequisite training in their home office before they begin the second program phase, centralized training. During what is referred to as centralized training, new VSRs and RVSRs spend 3 weeks in intensive classroom training. Participants from multiple regional offices are typically brought together in centralized training sessions, which may occur at their home regional office, anoth"
785,"er regional office, or the Veterans Benefits Academy in Baltimore, Maryland. According to VBA officials in three of the four offices we visited, bringing together VSRs and RVSRS from different regional offices helps to promote networking opportunities, while VBA officials from two of these offices also stated that it provides a nationwide perspective on VBA. Centralized training provides an overview of the technical aspects of the VSR and RVSR positions. Training instructors should follow the prescribed sch"
786,"edule and curriculum dictating when and how material is taught. For example, for a particular topic, the instructor’s guide explains the length of the lesson, the instructional method, and the materials required; lays out the information that must be covered; and provides exercises to review the material. (See fig. 2 for a sample of an instructor’s guide from the centralized training curriculum.) Centralized training classes have at least three instructors, but the actual number can vary depending on the si"
787,"ze of the group. VBA’s goal is to maintain a minimum ratio of instructors to students. The first week of centralized training for VSRs focuses on key concepts, such as security, privacy and records management; terminology; and job tools, such as the policy manual and software applications. The final 2 weeks of training focus on the different roles and responsibilities of VSRs on the Pre-determination and Post-determination teams in processing claims. To practice processing different types of claims and proc"
788,"essing claims from start to finish, VSRs work on either real claims or hypothetical claims specifically designed for training. Centralized training for new RVSRs—many of whom have been promoted from the VSR position— focuses on topics such as systems of the human body, how to review medical records, and how to interpret a medical exam. According to staff in one site we visited, RVSRs new to VBA also take VSR centralized training or its equivalent to learn the overall procedures for processing claims. To acc"
789,"ommodate the influx of new staff it must train, in fiscal year 2007 VBA substantially increased the frequency of centralized training and is increasing student capacity at the Veterans Benefits Academy. During fiscal year 2007, VBA held 67 centralized training sessions for 1,458 new VSRs and RVSRs. Centralized training sessions were conducted at 26 different regional offices during fiscal year 2007, in addition to the Veterans Benefits Academy. By comparison, during fiscal year 2006, VBA held 27 centralized"
790," training sessions for 678 new claims processors. To implement centralized training, VBA relies on qualified regional office staff who have received training on how to be an instructor. According to VBA officials, centralized training instructors may be Senior VSRs, RVSRs, supervisors, or other staff identified by regional office managers as having the capability and the right personality to be effective instructors. Potential instructors have certain training requirements. First, they must complete the wee"
791,"k-long Instructor Development Course, which covers the ways different adults learn, the process for developing lesson plans, and the use of different training methods and media. During this course, participants are videotaped and given feedback on their presentation style. In addition, each time instructors teach a centralized training session, they are supposed to take the 2.5 day Challenge Curriculum Course, designed to update instructors on changes to the curriculum and general training issues. Between O"
792,"ctober 2006 and February 2008, about 250 VSRs and RVSRs from regional offices completed the Instructor Development Course, and VBA officials reported that, given the influx of new VSRs and RVSRs, they are increasing the number of times this course is offered in order to train more instructors. Instructors can teach centralized training sessions in their home office, another regional office, or the Veterans Benefits Academy. When new VSRs and RVSRs return to their home office after centralized training, they"
793," are required to begin their third phase of training, which is supposed to include on-the-job, classroom, and computer-based training, all conducted by and at their regional office. In the regional offices we visited, managers indicated that new VSRs and RVSRs typically take about 6 to 12 months after they return from centralized training to complete all the training requirements for new staff. During this final phase, new claims processing staff cover more advanced topics, building on what they learned in "
794,"centralized training. Under the supervision of experienced claims processors, they work on increasingly complex types of real claims. On-the-job training is supplemented in the offices we visited by regular classroom training that follows a required curriculum of courses developed by VBA’s Compensation and Pension Service, specifically for new VSRs and RVSRs. For example, new VSRs might complete a class in processing burial claims and then spend time actually processing such claims. The amount of time spent"
795," working on each type of claim varies from a couple of days to a few weeks, depending on the complexity of the claim. On-the-job training is also supposed to be supplemented with modules from the Training and Performance Support System (TPSS), an interactive on-line system that can be used by staff individually or in a group. TPSS modules provide detailed lessons, practice cases, and tests for VSRs and RVSRs. Modules for new VSRs cover topics such as burial benefits and medical terminology; RVSR modules cov"
796,"er topics such as the musculoskeletal system, general medical terminology, and introduction to post-traumatic stress disorder. A policy established by VBA’s Compensation and Pension Service requires both new and experienced VSRs and RVSRs to complete a minimum of 80 hours of technical training annually, double the number VBA requires of its employees in other technical positions. VBA officials said this higher training requirement for VSRs and RVSRs is justified because their jobs are particularly complex a"
797,"nd they must work with constantly changing policies and procedures. The 80-hour training requirement has two parts. At least 60 hours must come from a list of core technical training topics identified by the central office of the Compensation and Pension Service. For example, core topics for VSRs in fiscal year 2007 included establishing veteran status and asbestos claims development; topics for RVSRs included due process provisions and eye-vision issues. VBA specifies more core topics than are necessary to"
798," meet the 60-hour requirement, so regional offices can choose those topics most relevant to their needs. They can also choose the training method used to address each topic, such as classroom or TPSS training. (See app. II for the list of core technical training topics for fiscal year 2007.) Regional offices determine the training topics that are used to meet the remaining 20 hours, based on local needs and input. Regional offices may select topics from the list of core technical training topics or identify"
799," other topics on their own. The four regional offices we visited varied in the extent to which they utilized their discretion to choose topics outside the core technical training topics in fiscal year 2007. Two sites selected the required 60 hours of training from the core requirements and identified their own topics for the remaining 20 hours. In the other two sites, almost all the training provided to staff in fiscal year 2007 was based on topics from the list of core requirements. An official in one regi"
800,"onal office, for example, said that his office used its full 20 hours to provide training on new and emerging issues that are not covered by the core technical training topics, as well as training to address error prone areas. An official in another regional office said the core requirements satisfied staff training needs in fiscal year 2007, possibly because this regional office had a large proportion of new staff and the core topics are focused on the needs of new staff. Regional offices must develop trai"
801,"ning plans each year that indicate which courses will actually be provided to staff to enable them to meet the 80- hour training requirement. The training plan is a list of courses that the regional office plans to offer throughout the year, as well as the expected length and number and types of participants in each course. In the regional offices we visited, when managers develop their training plans, they solicit input from supervisors of VSRs and RVSRs and typically also consider national or local error "
802,"trend data. Regional offices must submit their plans to the VBA central office at the beginning of each fiscal year for review and feedback. Central office officials review the plans to determine whether (1) the regional office will deliver at least 60 hours of training on the required core topics, (2) the additional topics identified by the regional office are appropriate, and (3) staff in similar positions within an office receive the same level and type of training. According to central office officials,"
803," they provide feedback to the regional offices on their current plans as well as guidance on what topics to include in the next year’s training plans. Regional offices can adjust their training plans throughout the year to address shifting priorities and unexpected training needs. For example, a regional office may add or remove courses from the plan in response to changing trends in errors or policy changes resulting from legal decisions. (See app. III for excerpts from the fiscal year 2007 training plans "
804,"from the regional offices we visited.) While regional offices have discretion over the methods they use to provide training, the four offices we visited relied primarily on classroom training in fiscal year 2007. In each of these offices, at least 80 percent of the total fiscal year 2007 training hours completed by all claims processors was in the form of classroom instruction (see fig. 3). Officials in two of the regional offices we visited said they used lesson plans provided by the Compensation and Pensi"
805,"on Service and adapted these plans to the needs of their staff; one regional office developed its own courses. An official in one office said they sometimes invite guest speakers, and an official in another regional office said that classroom training is sometimes delivered as part of team meetings. The offices we visited generally made little use of other training methods. Only one office used TPSS for its training more than 1 percent of the time. Two offices used self-instruction—such as reading memos fro"
806,"m VBA central office—for about 10 percent of their training, and no office used videos for more than 1 percent of their training. The central office usually communicates immediate policy and regulatory changes through memos called Fast Letters, which may be discussed in team meetings or may just be read by staff individually. Because the agency has no policy outlining consequences for individual staff who do not complete their 80 hours of training per year, individual staff are not held accountable for meet"
807,"ing their annual training requirement, and at present, VBA central office lacks the ability to track training completed by individual staff members. According to VBA officials, however, the agency is in the process of implementing an automated system that should allow it to track the training each staff member completes. Officials reported that this system is expected to be implemented during fiscal year 2008. VBA officials reported that this system will be able to record the number of training hours and th"
808,"e courses completed for each individual, staff position, and regional office. One official said the central office and regional office supervisors will have the ability to monitor training completed by individual staff members, but that central office will likely not monitor the training completed by each individual staff member, even though it may monitor the training records for a sample of staff members. Furthermore, despite the absence of a VBA- wide tracking system, managers in two of the regional offi"
809,"ces we visited reported using locally developed tracking methods to determine the number of training hours their staff had completed. While individuals are not held accountable, VBA reported taking some steps to ensure that staff complete the required number of training hours. VBA central office periodically reviews the aggregated number of training hours completed at each regional office to determine whether the office is on track to meet the training requirement. According to a VBA official, managers in o"
810,"ffices where the staff is not on track to complete 80 hours of training during the year can be reprimanded by a higher-level manager, and if their staff do not meet the aggregate training hours at the end of the fiscal year, managers could face negative consequences in their performance assessments. VBA is taking steps to strategically plan its training for VSRs and RVSRs including the establishment of a training board to assess VBA’s training needs. VBA has also made some effort to evaluate its training fo"
811,"r new staff, but does not require regional offices to collect feedback from staff on any of the training they provide. Although some regional offices collect some training feedback, it is not shared with VBA central office. Both new and experienced staff we interviewed did, in fact, report some problems with their training. A number of new staff raised issues with how consistently their training curriculum was implemented. Experienced staff differed in their assessments of the VBA’s annual training requirem"
812,"ent, with some indicating they struggle to meet this requirement because of workload pressures or that training topics are sometimes redundant or not relevant to their position. VBA is taking steps to strategically plan its training for claims processors, in accordance with generally accepted practices identified by GAO. (See app. I for a detailed description of these generally accepted practices.) VBA has made an effort to align training with the agency’s mission and goals. According to VBA documents, in f"
813,"iscal year 2004 an Employee Training and Learning Board (board) was established to ensure that training decisions within the VBA are coordinated; support the agency’s strategic and business plans, goals and objectives; and are in accordance with the policy and vision of VBA. Some of the board’s responsibilities include establishing training priorities and reviewing regional office and annual training plans. VBA has identified the skills and competencies needed by VBA’s claims processing workforce. VBA devel"
814,"oped a decision tree and task analysis of the claims process, which GAO experts in the field of training told us made it possible to understand and map both the claims process and the decisions associated with it that supported the development of VBA’s training curriculum. VBA is taking steps to determine the appropriate level of investment in training and prioritize funding. According to VBA documents, some of the board’s responsibilities include developing annual training budget recommendations and identi"
815,"fying and recommending training initiatives to the Under Secretary of Benefits. VBA officials also reported developing several documents that made a business case for different aspects of VBA’s training, such as VA’s annual budget and the task analysis of the VSR and RVSR job positions. According to one VBA official, the agency identifies regulatory, statutory, and administrative changes as well as any legal or judicial decisions that affect how VBA does business and issues guidance letters, or Fast Letters"
816,", which can be sent out several times a year, to notify regional offices of these changes. Also, as a result of Congress authorizing an increase in its number of full-time employees and VBA’s succession planning efforts, VBA has increased the number of centralized training sessions for new staff and has also increased the number of Instructor Development Courses offered to potential centralized training instructors. As a result, VBA is taking steps to consider government reforms and initiatives to improve i"
817,"ts management and performance when planning its training. According to accepted practices, federal agencies should also evaluate their training programs and demonstrate how these efforts help employees, rather than just focusing on activities or processes (such as number of training participants or hours of training). VBA has made some efforts to evaluate its training for claims processors. During the 3-week centralized training session for new staff, VBA solicits daily feedback from participants using form"
818,"s that experts in the training field consider well- constructed and well-balanced. According to one GAO expert, the forms generally employ the correct principles to determine the effectiveness of the training and ascertain whether the instructor effectively presented the material (see fig. 4). VBA officials told us that they have used this feedback to improve centralized training for new staff. Management at one regional office cited the decision to separate training curricula for VSRs on Pre- determination"
819," teams and VSRs on Post-determination teams as an example of a change based on this feedback. Although VBA evaluates centralized training, it does not require regional offices to obtain feedback from participants on any of the training they provide to new and experienced staff. In a previous GAO report, VA staff told us that new training materials they develop are evaluated before being implemented. However, none of the regional offices we visited consistently collect feedback on the training they conduct. "
820,"Supervisors from three of the regional offices we visited told us that they collect feedback on some of the training their office conducts, but this feedback largely concerns the performance of the instructor. Participants are generally not asked for feedback on course content. Moreover, regional offices we visited that do, to some degree, collect feedback do not share this information with VBA. According to GAO experts in the training field, VBA’s training curriculum for new staff appears well designed. VB"
821,"A’s curriculum for new staff conforms to adult learning principles, carefully defining all pertinent terms and concepts, and providing abundant and realistic examples of claims work. GAO experts also determined that VBA’s training for those who teach the curriculum for new staff was well designed and would enable experienced claims processors to become competent trainers because they are coached on teaching theory and have multiple opportunities to practice their teaching skills and receive feedback. Many o"
822,"f the new staff at all four sites we visited reported that centralized training provided them with a good foundation of knowledge and prepared them for additional training conducted by their regional office. Also, regional office managers from three offices we visited told us that centralized training affords new staff the opportunity to network with other new staff at different regional offices, which imbues a sense of how their positions fit in the organization. However, some staff reported that VBA’s imp"
823,"lementation of their centralized training was not always consistent. A number of staff at three regional offices reported that during their centralized training the instructors sometimes taught different ways of performing the same procedures or disagreed on claim procedures. Regional office officials told us that while centralized training instructors attempt to teach consistently through the use of standardized training materials, certain procedures can be done differently in different regional offices wh"
824,"ile adhering to VBA policy. For example, regional offices may differ on what to include in veteran notification letters. VBA officials also told us that centralized training conducted at the regional offices may not be as consistent as centralized training conducted at the Veterans Benefits Academy. According to these officials, unlike the regional offices, the Veterans Benefits Academy has on-site training experts to guide and ensure that instructors are teaching the curriculum consistently. New staff also"
825," gave mixed assessments about how training was conducted at their home office after they returned from centralized training. While some staff at all of the regional offices we visited told us that the additional training better prepared them to perform their jobs, with on-the- job training identified as a useful learning tool, others told us that the training could not always be completed in a timely manner due to regional office priorities. Some management and staff at two of the regional offices we visite"
826,"d reported that, because of workload pressures, some of their RVSRs had to interrupt their training to perform VSR duties. Also, a few new staff indicated that VBA’s TPSS was somewhat difficult to use. Although TPSS was developed to provide consistent technical training designed to improve the accuracy of claims ratings, a number of staff at all of the regional offices we visited reported that TPSS was too theoretical. For example, some staff said it provided too much information and no practical exercises "
827,"in applying the knowledge. Some staff also noted that certain material in TPSS was out-of-date with policy changes such as how to order medical examinations. Some staff at three of the regional offices also reported that TPSS was not always useful in training staff, in part, because TPSS does not use real cases. Three of the regional offices reported using TPSS for less than 1 percent of their training and VSRs at one regional office were unaware of what TPSS was. At all of the regional offices we visited, "
828,"staff we spoke with generally noted that training enables them to keep up-to-date on changes in laws and regulations as well as provides opportunities for obtaining refresher training on claims procedures they perform infrequently. However, regional office staff we spoke with differed in their assessment of the 80- hour requirement. Some regional office staff said the number of training hours required was appropriate, while others suggested that VBA adopt a graduated approach, with the most experienced staf"
829,"f being required to complete fewer hours than new staff. VBA officials told us that, in 2007, the Compensation and Pension Service reviewed their annual training requirements and determined the 80-hour annual training requirement was appropriate. However, the officials we spoke with could not identify the criteria that were used to make these determinations. Furthermore, VBA management does not systematically collect feedback from staff evaluating the usefulness of the training they must receive to meet thi"
830,"s requirement. Consequently, when determining the appropriateness of the 80-hour requirement, VBA has not taken into account the views of staff to gauge the effect the requirement has on them. Experienced staff had mixed views on training provided by the regional office. Staff at three regional offices said the core technical training topics set by the Compensation and Pension Service are really designed for newer staff and do not change much from year to year, and therefore experienced staff end up repeati"
831,"ng courses. Also, a number of staff at all of the regional offices we visited told us some regional office training was not relevant for those with more experience. Conversely, other regional office staff note that although training topics may be the same from year to year, a person can learn something new each time the course is covered. Some VBA officials and regional office managers also noted that some repetition of courses is good for several reasons. Staff may not see a particular issue very often in "
832,"their day-to-day work and can benefit from refreshers. Also, regional office managers at one office told us that the core technical training topics could be modified to reflect changes in policy so that courses are less repetitive for experienced staff. Many experienced staff also reported having difficulty meeting the 80-hour annual training requirement due to workload pressures. Many of the experienced staff we spoke with, at each of the regional offices we visited, told us that there is a constant strugg"
833,"le between office production goals and training goals. For example, office production goals can affect the availability of the regional office’s instructors. A number of staff from one regional office noted that instructors were unable to spend time teaching because of their heavy workloads and because instructors’ training preparation hours do not count toward the 80-hour training requirement. Staff at another regional office told us that, due to workload pressures, staff may rush through training and may "
834,"not get as much out of it as they should. The elements used to evaluate individual VSRs’ and RVSRs’ performance appear to be generally aligned with VBA’s organizational performance measures, something prior GAO work has identified as a well-recognized practice for effective performance management systems (see app. I). Aligning individual and organizational performance measures helps staff see the connection between their daily work activities and their organization’s goals and the importance of their roles "
835,"and responsibilities in helping to achieve these goals. VSRs must be evaluated on four critical elements: quality, productivity, workload management, and customer service. RVSRs are evaluated on quality, productivity, and customer service. In addition, VBA central office requires regional offices to evaluate their staff on at least one non-critical element. The central office has provided a non-critical element called cooperation and organizational support, and although regional offices are not required to "
836,"use this particular element, all four offices we visited did so (see table 2). For each element, there are three defined levels of performance: exceptional, fully successful, or less than fully successful. Table 2 refers only to the fully successful level of performance for each element. Three critical elements in particular—quality, workload management, and productivity—are aligned with VBA’s organizational performance measures (see table 3). According to VA’s strategic plan, one key organizational perform"
837,"ance measure for VBA is overall accuracy in rating disability claims. This organizational measure is aligned with the quality element for VSRs and RVSRs, which is assessed by measuring the accuracy of their claims-processing work. An individual performance element designed to motivate staff to process claims accurately should, in turn, help VBA meet its overall accuracy goal. Two other key performance measures for VBA are the average number of days that open disability claims have been pending and the avera"
838,"ge number of days it takes to process disability claims. VSRs are evaluated on their workload management, a measure of whether they complete designated claims- related tasks within specific deadlines. Individual staff performance in this element is linked to the agency’s ability to manage its claims workload and process claims within goal time frames. Finally, a performance measure that VBA uses to evaluate the claims-processing divisions within its regional offices—and that, according to VBA, relates to th"
839,"e organization’s overall mission—is production, or the number of compensation and pension claims processed by each office in a given time period. Individual VSRs and RVSRs are evaluated on their productivity, i.e., the number of claims-related tasks they complete per day. Higher productivity by individual staff should result in more claims being processed by each regional office and by VBA overall. Providing objective performance information to individuals helps show progress in achieving organizational goa"
840,"ls and allows individuals to manage their performance during the year by identifying performance gaps and improvement opportunities. Regional offices are supposed to use the critical and non-critical performance elements to evaluate and provide feedback to their staff. Supervisors are required to provide at least one progress review to their VSRs and RVSRs each year, indicating how their performance on each element compares to the defined standards for fully successful performance. In the offices we visited"
841,", supervisors typically provide some feedback to staff on a monthly basis. For example, VSRs in the Atlanta regional office receive a memo on their performance each month showing their production in terms of average weighted actions per day, their accuracy percentage based on a review of a sample of cases, and how their performance compared to the minimum requirements for production and accuracy. If staff members fall below the fully successful level in a critical element at any time during the year, a perf"
842,ormance improvement plan must be implemented to help the staff member improve. Performance elements related to collaboration or teamwork can help reinforce behaviors and actions that support crosscutting goals and provide a consistent message to all employees about how they are expected to achieve results. VSR and RVSR performance related to customer service is evaluated partly based on whether any valid complaints have been received about a staff member’s interaction with their colleagues. And performance 
843,"related to the cooperation and organizational support element is based on whether staff members’ interaction with their colleagues is professional and constructive. Competencies, which define the skills and supporting behaviors that individuals are expected to exhibit to carry out their work effectively, can provide a fuller assessment of an individual’s performance. In addition to elements that are evaluated in purely quantitative terms, VBA uses a cooperation and organizational support element for VSRs an"
844,"d RVSRs that requires supervisors to assess whether their staff are exhibiting a number of behaviors related to performing well as a claims processor. Actively involving employees and stakeholders in developing the performance management system and providing ongoing training on the system helps increase their understanding and ownership of the organizational goals and objectives. For example, VA worked with the union representing claims processors to develop an agreement about its basic policies regarding p"
845,"erformance management. Also, VBA indicated that it planned to pilot revisions to how productivity is measured for VSRs in a few regional offices, partly so VSRs would have a chance to provide feedback on the changes. Clear differentiation between staff performance levels is also an accepted practice for effective performance management systems. Systems that do not result in meaningful distinctions between different levels of performance fail to give (1) employees the constructive feedback they need to impro"
846,"ve, and (2) managers the information they need to reward top performers and address performance issues. GAO has previously reported that, in order to provide meaningful distinctions in performance for experienced staff, agencies should use performance rating scales with at least three levels, and scales with four or five levels are preferable because they allow for even greater differentiation between performance levels. If staff members are concentrated in just one or two of multiple performance levels, ho"
847,"wever, the system may not be making meaningful distinctions in performance. VA’s performance appraisal system has the potential to clearly differentiate between staff performance levels. Each fiscal year, regional offices give their staff a rating on each critical and non-critical performance element using a three-point scale—exceptional, fully successful, or less than fully successful. Based on a VA-wide formula, the combination of ratings across these elements is converted into one of VA’s five overall pe"
848,"rformance levels: outstanding, excellent, fully successful, minimally satisfactory, and unsatisfactory (see fig. 5). Regional offices may award financial bonuses to staff on the basis of their end-of-year performance category. Prior to fiscal year 2006, VA used two performance levels—successful and unacceptable—to characterize each staff member’s overall performance. To better differentiate between the overall performance levels of staff, VA abandoned this pass-fail system in that year, choosing instead to "
849,"use a five-level scale. However, there is evidence to suggest that the performance management system for VSRs and RVSRs may not clearly or accurately differentiate among staff’s performance. VBA central office officials and managers in two of the four regional offices we visited raised concerns with VA’s formula for translating ratings on individual performance elements into an overall performance rating. These officials said that under this formula it is more difficult for staff to be placed in certain ove"
850,"rall performance categories than others, even if staff’s performance truly does fall within one of those categories. Indeed, at least 90 percent of all claims processors in the regional offices we visited were placed in either the outstanding or the fully successful category in fiscal year 2007. (Fig. 6 shows the distribution of overall performance ratings for claims processors in each office.) Central and regional office managers noted that, in particular, it is difficult for staff to receive an overall ra"
851,"ting of excellent. Managers in one office said there are staff whose performance is better than fully successful but not quite outstanding, but under the formula it is difficult for these staff to be placed in the excellent category as the managers feel they should be. An excellent rating requires exceptional ratings in all the critical elements and a fully successful rating in at least one non-critical element. However, according to staff we interviewed, virtually all staff who are exceptional in the criti"
852,"cal elements are also exceptional in all non-critical element(s), so they appropriately end up in the outstanding category. On the other hand, the overall rating for staff who receive a fully successful rating on just one of the critical elements—even if they are rated exceptional in all the other elements—drops down to fully successful. Managers in one regional office commented that the system would produce more accurate overall performance ratings if staff were given an overall rating of excellent when th"
853,"ey had, for example, exceptional ratings on three of five overall elements and fully successful ratings on the other two. An official in VA’s Office of Human Resources Management acknowledged that there may be an issue with the agency’s formula. Although neither VBA nor VA central office officials have examined the distribution of VSRs and RVSRs across the five overall performance ratings, VA indicated it is considering changes to the system designed to allow for greater differentiation in performance ratin"
854,"gs. For example, one possible change would be to use a five-point scale for rating individual elements—probably mirroring the five overall performance rating categories of outstanding, excellent, fully successful, minimally satisfactory, and unsatisfactory— rather than the current three-point scale. Under the proposed change, a staff member who was generally performing at the excellent but not outstanding level could get excellent ratings in all the elements and receive an overall rating of excellent. This "
855,"change must still be negotiated with several stakeholder groups, according to the VA official we interviewed. In many ways, VBA has developed a training program for its new staff that is consistent with accepted training practices in the federal government. However, because VBA does not centrally evaluate or collect feedback on training provided by its regional offices, it lacks the information needed to determine if training provided at regional offices is useful and what improvements, if any, may be neede"
856,"d. Ultimately, this information would help VBA determine if 80 hours of training annually is the right amount, particularly for its experienced staff, and whether experienced staff members are receiving training that is relevant for their positions. Identifying the right amount of training is crucial for the agency as it tries to address its claims backlog. An overly burdensome training requirement needlessly may take staff away from claims processing, while too little training could contribute to processin"
857,"g inaccuracies. Also, without collecting feedback on regional office training, VBA may not be aware of issues with the implementation of its TPSS, the on-line training tool designed to ensure consistency across offices in technical training. Setting aside the issue of how many hours of training should be required, VBA does not hold its staff accountable for fulfilling their training requirement. As a result, VBA is missing an opportunity to clearly convey to staff the importance of managing their time to me"
858,"et training requirements as well as production and accuracy goals. With the implementation of its new learning management system, VBA should soon have the ability to track training completed by individual staff members, making it possible to hold them accountable for meeting the training requirement. As with its training program for VSRs and RVSRs, the VA is not examining the performance management system for claims processors as closely as it should. VBA is generally using the right elements to evaluate it"
859,"s claims processors’ performance, and the performance appraisals have the potential to give managers information they can use to recognize and reward higher levels of performance. However, evidence suggests the formula used to place VSRs and RVSRs into overall performance categories may not clearly and accurately differentiate among staff’s performance levels. Absent additional examination of the distribution of claims processors among overall performance categories, VA lacks a clear picture of whether its "
860,"system is working as intended and whether any adjustments are needed. The Secretary of Veterans Affairs should direct VBA to: Collect and review feedback from staff on the training conducted at the if the 80-hour annual training requirement is appropriate for all VSRs and RVSRs; the extent to which regional offices provide training that is relevant to VSRs’ and RVSRs’ work, given varying levels of staff experience; and whether regional offices find the TPSS a useful learning tool and, if not, what adjustmen"
861,"ts are needed to make it more useful; and Use information from its new learning management system to hold individual VSRs and RVSRs accountable for completing whatever annual training requirement it determines is appropriate. The Secretary of Veterans Affairs should also examine the distribution of claims processing staff across overall performance categories to determine if its performance appraisal system clearly differentiates between overall performance levels, and if necessary adjust its system to ensu"
862,"re that it makes clear distinctions. We provided a draft of this report to the Secretary of Veterans Affairs for review and comment. In VA’s written comments (see app. IV), the agency agreed with our conclusions and concurred with our recommendations. For example, VBA plans to consult with regional office staff to evaluate its annual 80-hour training requirement and will examine if staff performance ratings clearly differentiate between overall performance levels. VA also provided technical comments that we"
863,"re incorporated as appropriate. We are sending copies of this report to the Secretary of Veterans Affairs, relevant congressional committees, and others who are interested. We will also provide copies to others on request. The report is also available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me on (202) 512-7215 if you or your staff have any questions about this report. Contact points for the Offices of Congressional Relations and Public Affairs may be found on the last page of t"
864,"his report. Key contributors are listed in appendix V. We were asked to determine: (1) What training is provided to new and experienced claims processors and how uniform is this training? (2) To what extent has the Veterans Benefits Administration (VBA) developed a strategic approach to planning training for claims processors and how well is their training designed, implemented, and evaluated? And (3) To what extent is the performance management system for claims processors consistent with generally accepte"
865,"d performance management practices in the public sector? To answer these questions, we reviewed documents and data from the central office of the Department of Veterans Affairs’ Veterans Benefits Administration (VBA) and interviewed VBA central office officials. We conducted site visits to and collected data from four VBA regional offices, and visited the Veterans Benefits Academy. We also interviewed officials from the American Federation of Government Employees, the labor union that represents Veterans Se"
866,"rvice Representatives (VSR) and Rating Veterans Service Representatives (RVSR). We compared VBA’s training and performance management systems to accepted human capital principles and criteria compiled by GAO. We conducted this performance audit from September 2007 through May 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusi"
867,"ons based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We conducted site visits to 4 of VBA’s 57 regional offices—Atlanta; Baltimore; Milwaukee; and Portland, Oregon. We judgmentally selected these offices to achieve some diversity in geographic location, number of staff, and claims processing accuracy rates, and what we report about these sites may not necessarily be representative of any other reg"
868,"ional offices or all regional offices (see fig. 7). During our site visits, we interviewed regional office managers, supervisors of VSRs and RVSRs, VSRs, and RVSRs about the training and performance management practices in their offices. The VSRs and RVSRs we interviewed at the four regional offices had varying levels of experience at VBA. Regional office managers selected the staff we interviewed. We also observed a demonstration of VBA’s on-line learning tool, the Training and Performance Support System ("
869,"TPSS), and collected data from the regional offices on, for example, the training they provided during fiscal year 2007. In conjunction with our visit to the Baltimore regional office, we also visited VBA’s Veterans Benefits Academy, where we observed classes for VSRs and RVSRs and interviewed the director of the Academy. To determine whether VBA’s training program is consistent with accepted training practices in the public sector, we relied partly on a guide developed by GAO that lays out principles that "
870,"federal agencies should follow to ensure their training is effective. This guide was developed in collaboration with government officials and experts in the private sector, academia, and nonprofit organizations; and in conjunction with a review of laws, regulations and literature on training and development issues, including previous GAO reports. The guide lays out the four broad components of the training and development process (see fig. 8). The guide also provides key questions for federal agencies to co"
871,"nsider in assessing their performance in each component. (See table 4 for a sample of these questions.) In addition, GAO training experts reviewed VBA materials, including training curricula, lesson plans, and course evaluation forms, to determine if these materials are consistent with accepted training practices. In assessing the performance management system for VSRs and RVSRs, we relied primarily on a set of accepted practices of effective public sector performance management systems that has been compil"
872,"ed by GAO. To identify these accepted practices, GAO reviewed its prior reports on performance management that drew on the experiences of public sector organizations both in the United States and abroad. For the purpose of this review, we focused on the six accepted practices most relevant for VBA’s claims-processing workforce (see table 5). Additional Issue Specific Lesson Plans are under development. (Lesson plans can be taken from the Centralized Training Curriculum found on the C&P Intranet Training Sit"
873,e. If used as provided they do not require C&P review and approval. These plans can and often should be modified to focus in on a particular narrow issue of training need. Modified lesson plans are to be submitted to C&P Service for review and approval at least 30 days prior to delivery of training. Any Challenge-oriented original lesson plan developed by Station personnel is to be submitted to C&P Service for review and approval at least 30 days prior to delivery of training.) C&P Service Broadcasts that m
874,ay be provided during the course of the FY may be substituted in place of any training scheduled on an hour by hour basis. 60 Hours of the required 80 Hours will be selected from the suggested topics above. The remaining 20 hours will be selected at the Stations discretion based upon their own individual quality review. (Training provided from the above topics can be focused on a particular aspect of the topic; i.e. Cold Injuries and Rating Hypertension from Cardiovascular issues could be separate classes) 
875,"Participation in Agency Advancement Programs (i.e., LEAD, LVA) does not substitute for Required training requirements. Additional Issue Specific Lesson Plans are under development. (Lesson plans can be taken from the Centralized Training Curriculum found on the C&P Intranet Training Site. If used as provided they do not require C&P review and approval. These plans can and often should be modified to focus in on a particular narrow issue of training need. Modified lesson plans are to be submitted to C&P Serv"
876,ice for review and approval at least 30 days prior to delivery of training. Any Challenge-oriented original lesson plan developed by Station personnel is to be submitted to C&P Service for review and approval at least 30 days prior to delivery of training.) C&P Service Broadcasts that may be provided during the course of the FY may be substituted in place of any training scheduled on an hour by hour basis. Drill Pay Waivers Pension Awards Processing & BDN Hospital Reductions Burial Benefits Death Pension Ac
877,crued Benefits Accrued Awards & the BDN Apportionments Special Monthly Pension Helpless Child Incompetency/Fiduciary Arrangements Claims Processing Auto Allowance and Adaptive Equipment Special Adapted Housing Special Home Adaptation Grants Incarcerated Veterans Processing Write Outs FOIA/Privacy Act Telephone & Interview Techniques Telephone Development IRIS Introduction to VACOLS Education Benefits Insurance Benefits National Cemetery VR&E Benefits Loan Guaranty Benefits General Benefits – FAQs Suicidal C
878,aller Guidance Non-Receipt of BDN Payments Mail Handling Income & Net Worth Determinations Bootcamp test and review of VSR Readiness Guide (2 HRS Required) Reference Material Training and Navigation (1 HR Required) Appeals and Ancillary Benefits Ready to Rate Development Customer Service FNOD Info and PMC Process Intro to Appeals Process DRO Selection Letter Income Adjustment Materials Income Adjustments 60 Hours of the required 80 Hours will be selected from the suggested topics above. The remaining 20 hou
879,"rs will be selected at the Stations discretion based upon their own individual quality review. Overview of VA Mission Reference Materials: Manual Training & WARMS C&P Website Claims Folder Maintenance Records Management POA/Service Organizations Compensation Original Compensation Claims Non-Original Compensation Claims VA Form 21-526, App. For Compensation or Pension Establishing Veteran Status Claims Recognition Duty to Assist Selecting the Correct Worksheet for VA Exams Issue Specific Claim Development As"
880,bestos Claim Development Herbicide Claim Development POW Claim Development Radiation Claim Development PTSD Claim Development Undiagnosed Illness Claim Development Dependency Contested Claims Deemed Valid and Common-law Marriage Continuous Cohabitation Pension Intro. To Disability Pension Overview of SHARE (SSA) Administrative Decision Process Character of Discharge Line of Duty – Willful Misconduct Claims Development Workload Management Utilizing WIPP DEA Training (req. added 4/06) Intro to Ratings Paragra
881,ph 29 & 30 Ratings Ratings & the BDN BDN 301 Interface Video PCGL Award Letters PCGL Dependents & the BDN Compensation Offsets Drill Pay Waivers Star Reporter Pension Awards Processing & the BDN Hospital Reductions Burial Benefits Disallowance Processing DIC Benefits Death Pension Accrued Benefits Accrued Awards & the BDN Apportionment Special Monthly Pension Helpless Child Incompetency/Fiduciary Arrangements Claims Processing Automobile Allowance and Adaptive Equipment Specially Adapted Housing and Special
882, Home Adaptation Grants Incarceration Processing Computer Write Outs DEA Training (req. added 4/06) Public Contact Team Training: FOIA/Privacy Act Communication Skills Telephone Development Inquiry Routing and Information System (IRIS) Intro to VACOLS Other VBA Business Lines Customer Service Insurance Education (2 hrs) Intro to Appeals Process VACOLS http://cptraining.vba.va.gov/ C&P_Training/vsr/VSR_ Curriculum.htm#att http://cptraining.vba.va.gov/ C&P_Training/vsr/VSR_ Curriculum.htm#iam. Each training p
883,"lan we reviewed contained the same informational categories, some of which were what courses were offered by the regional office, whether or not the course was conducted, and how many employees completed the training. Although the fiscal year 2007 training plans we reviewed include data on whether and when the course was actually completed, the initial training plans submitted at the beginning of the fiscal year of course do not have this information. The lists provided below include the first 25 courses li"
884,"sted on each plan alphabetically, a small sample of the courses that the regional offices reported they completed for the fiscal year. Daniel Bertoni (202) 512-7215 bertonid@gao.gov. In addition to the contact named above, Clarita Mrena, Assistant Director; Lorin Obler, Analyst-in-Charge; Carolyn S. Blocker; and David Forgosh made major contributions to this report; Margaret Braley, Peter Del Toro, Chris Dionis, Janice Latimer, and Carol Willett provided guidance; Walter Vance assisted with study design; Ch"
885,"arles Willson helped draft the report; and Roger Thomas provided legal advice. Veterans’ Benefits: Improved Management Would Enhance VA’s Pension Program. GAO-08-112. Washington, D.C.: February 14, 2008. Veterans’ Disability Benefits: Claims Processing Challenges Persist, while VA Continues to Take Steps to Address Them. GAO-08-473T. Washington, D.C.: February 14, 2008. Disabled Veterans’ Employment: Additional Planning, Monitoring, and Data Collection Efforts Would Improve Assistance. GAO-07-1020. Washingt"
886,"on, D.C.: September 12, 2007. Veterans’ Benefits: Improvements Needed in the Reporting and Use of Data on the Accuracy of Disability Claims Decisions. GAO-03-1045. Washington, D.C.: September 30, 2003. Human Capital: A Guide for Assessing Strategic Training and Development Efforts in the Federal Government. GAO-03-893G. Washington, D.C.: July 2003. Results-Oriented Cultures: Creating a Clear Linkage between Individual Performance and Organizational Success. GAO-03-488. Washington D.C.: March 14, 2003. Major"
887," Management Challenges and Program Risks: Department of Veterans Affairs. GAO-03-110. Washington, D.C.: January 1, 2003. Veterans’ Benefits: Claims Processing Timeliness Performance Measures Could Be Improved. GAO-03-282. Washington, D.C.: December 19, 2002. Veterans’ Benefits: Quality Assurance for Disability Claims and Appeals Processing Can Be Further Improved. GAO-02-806. Washington, D.C.: August 16, 2002. Veterans’ Benefits: Training for Claims Processors Needs Evaluation. GAO-01-601. Washington, D.C.:"
888," May 31, 2001. Veterans Benefits Claims: Further Improvements Needed in Claims- Processing Accuracy. GAO/HEHS-99-35. Washington, D.C.: March 1, 1999."
889,"Under TRICARE, beneficiaries may obtain health care through either the direct care system of military treatment facilities or the purchased care system of civilian providers and hospitals, including SCHs. SCHs were exempted from TRICARE’s reimbursement rules for hospitals until revised rules were implemented in January 2014. SCHs serve communities that rely on them for inpatient care, and they include hospitals and regional medical centers ranging in size from 9 to 598 beds. The intent of the SCH designatio"
890,"n is to maintain access to needed health services for Medicare beneficiaries by providing financial assistance to hospitals that are geographically isolated. A hospital may generally qualify for SCH status by showing that because of factors such as isolated location, weather conditions, travel conditions, or absence of other like hospitals, it is the sole source of inpatient hospital services reasonably available in a geographic area. In 2014, 459 hospitals were designated as SCHs under the Medicare program"
891,". A hospital that qualifies as an SCH under the Centers for Medicare & Medicaid Services’s (CMS) Medicare regulations is also considered an SCH under TRICARE. Specifically, a hospital paid under the Medicare Acute Care Hospital IPPS is eligible for classification as an SCH if it meets one of the following criteria established by CMS: The hospital is at least 35 miles from other like hospitals; The hospital is rural, between 25 and 35 miles from other like hospitals, and meets one of the following criteria: "
892,"No more than 25 percent of hospital inpatients or no more than 25 percent of the Medicare inpatients in the hospital’s service area are admitted to other like hospitals within a 35-mile radius of the hospital or, if larger, within its service area; The hospital has fewer than 50 beds and would meet the 25 percent criterion except that some beneficiaries or residents were forced to seek specialized care outside of the service area due to the unavailability of necessary specialty services at the hospital; or "
893,"Because of local topography or periods of prolonged severe weather conditions, the other like hospitals are inaccessible for at least 30 days in each 2 out of 3 years. The hospital is rural and located between 15 and 25 miles from other like hospitals, but because of local topography or periods of prolonged severe weather conditions, the other like hospitals are inaccessible for at least 30 days in each of 2 out of 3 years; or The hospital is rural and because of distance, posted speed limits, and predictab"
894,"le weather conditions, the travel time between the hospital and the nearest like hospital is at least 45 minutes. Under the TRICARE program, beneficiaries can obtain care either from providers at military treatment facilities or from civilian providers. DHA contracts with three regional managed care support contractors to develop networks of civilian providers in their respective regions, including SCHs, to serve TRICARE beneficiaries in geographic areas called Prime Service Areas. Prime Service Areas are g"
895,"eographically defined by a set of 5-digit zip codes, usually within an approximate 40-mile radius of a military treatment facility. These civilian provider networks are required to meet specific access standards for certain types of TRICARE beneficiaries, such as travel times or wait times for appointments. However, these access standards do not apply to inpatient care. Since 1987, DHA has reimbursed hospitals for claims using the agency’s DRG-based payment system, which was modeled after Medicare’s system."
896," Under this system, claims are priced using an annual standard amount and a weighted value for each DRG. For example, in fiscal year 2014, the TRICARE annual standard amount was approximately $5,500.00. Payment weights are assigned to each DRG based on the average resources used to treat patients. For example, in fiscal year 2014, a lung transplant had a weight of 8.6099, which would be multiplied by the annual standard payment amount ($5,500.00) for a reimbursement of $47,354.45. TRICARE’s DRG-based paymen"
897,"t system differs from Medicare’s DRG-based payment system in that each program has different annual standard amounts and different DRG weights due to differences in the characteristics of their beneficiary populations. For example, Medicare’s population, which is generally older and less healthy than TRICARE’s population, may require more resources and may require longer inpatient lengths of stay. Also, some services, notably obstetric and pediatric services, are nearly absent from Medicare, but are a much "
898,"larger component of TRICARE’s services. SCHs were exempted from DHA’s DRG-based payment system because they had special payment provisions under Medicare that allowed for payments based on historical costs as well as certain types of adjustments, such as additional payments for significant volume decreases defined as a more than 5 percent decrease in total inpatient discharges as compared to the immediately preceding cost reporting period. Instead, DHA generally reimbursed SCHs based on their billed charges"
899," for inpatient care provided to TRICARE beneficiaries. However, distinctions were made among providers based on network status. Specifically, nonnetwork SCHs were reimbursed for their billed charges, and network hospitals were reimbursed based on their billed charges less any discounts that they negotiated with the managed care support contractors. Under its revised reimbursement rules for SCHs, DHA’s methodology for TRICARE approximates the rules for Medicare for these hospitals. Specifically, both program"
900,"s reimburse SCHs using the greater of either a cost-based amount or the allowed amount under a DRG-based payment system. However, each program takes a different approach in implementing these methods. Medicare reimburses each SCH based on which of the following methods yields the greatest aggregate payment for that hospital: (1) the updated hospital-specific rate based on cost per discharge from fiscal year 1982, (2) the updated hospital-specific rate based on cost per discharge from fiscal year 1987, (3) t"
901,"he updated hospital-specific rate based on cost per discharge from fiscal year 1996, (4) the updated hospital-specific rate based on cost per discharge from fiscal year 2006, or (5) the IPPS hospital-specific DRG rate payment. Medicare’s reimbursement rules also include payment adjustments that SCHs may receive under special programs or circumstances, such as adjustments to SCHs that experience significant volume decreases. Beginning January 1, 2014, TRICARE began reimbursing SCHs based upon the greater of "
902,"(1) the SCH’s Medicare cost-to-charge ratio, or (2) TRICARE’s DRG-based payment system. The Medicare cost-to-charge ratio that TRICARE uses is calculated for each hospital by CMS and is distinct from the historical hospital-specific rates based on the cost per discharge that Medicare uses to reimburse SCHs. Under TRICARE’s revised rules for SCHs, the cost-to-charge ratio will be multiplied by each hospital’s billed charges to determine its reimbursement amount. Also, at the end of each year, DHA calculates "
903,"the aggregate amount that each SCH would have been reimbursed under TRICARE’s DRG-based payment system, which it uses to reimburse other hospitals that provide inpatient care to TRICARE beneficiaries. If an SCH’s aggregate reimbursement would have been more under this system than it would have using the Medicare cost-to-charge ratio, DHA pays the SCH the difference. TRICARE’s revised reimbursement rules also include payment adjustments that SCHs may receive under special circumstances, although the specific"
904," TRICARE adjustments differ from those available under Medicare. For example, effective with the revised reimbursement rules, SCHs may qualify for a General Temporary Military Contingency Payment Adjustment if they meet certain criteria, including serving a disproportionate share of active duty servicemembers and their dependents—10 percent or more of the SCH’s total admissions. At the time of our review, DHA officials did not have an estimate of the number of SCHs that would qualify for this adjustment. Un"
905,"der TRICARE’s revised rules, some SCHs—which were previously reimbursed at up to 100 percent of their billed charges—will eventually be reimbursed at 30 to 50 percent of their billed charges. In order to minimize sudden significant reimbursement reductions on SCHs, DHA’s revised rules include a transition period to the new reimbursement levels for most SCHs. Eligible SCHs are reimbursed using an individually derived base-year ratio that is reduced annually until it matches the SCH’s Medicare cost-to-charge "
906,"ratio that CMS has calculated for each hospital. For each hospital designated as an SCH during fiscal year 2012, DHA calculated a base-year ratio of their allowed-to-billed charges using fiscal year 2012 TRICARE claims data. Based on these calculations, each SCH fell into one of two categories: (1) SCHs with base-year ratios higher than their Medicare cost-to-charge ratios, or (2) SCHs with base- year ratios lower than, or equal to, their Medicare cost-to-charge ratios. Most SCHs fell into the first categor"
907,"y with base-year ratios higher than their Medicare cost-to-charge ratios (339 or 74 percent), which qualified them for a transition period. For these SCHs, their base-year ratios are reduced annually based on their network participation status, and their modified ratios are multiplied by their billed charges beginning January 1, 2014. Specifically, a nonnetwork SCH has no more than a 15 percentage point reduction each year, while a network SCH has no more than a 10 percentage point reduction as its reimburs"
908,"ement level declines to its respective Medicare cost-to-charge ratio. The length of the transition period differs for each SCH and is determined by the difference between its base-year ratio and its Medicare cost-to-charge ratio, and its network status. Figure 1 shows an example of the transition for a network SCH with a 95 percent base-year ratio that is transitioning to a Medicare cost- to-charge ratio of 40 percent. As a network provider, the SCH’s base-year ratio would be reduced by 10 percentage points"
909," to 85 percent during the first year of implementation of the revised rules and would continue to be reduced until its reimbursement ratio matches the SCH’s Medicare ratio 5 years later. Twenty-four percent (111 of 459) of the hospitals that were designated as SCHs during fiscal year 2012 with base-year ratios less than or equal to their Medicare cost-to-charge ratios did not qualify for a transition period because either their reimbursement increased to their Medicare cost-to- charge ratio, or they continu"
910,"ed to be reimbursed at their Medicare cost-to- charge ratio. Similarly, about 2 percent (9 of 459) of the hospitals that were not designated as SCH in fiscal year 2012 also did not qualify for a transition period. Instead, these SCHs are now reimbursed using their Medicare cost-to-charge ratio in accordance with TRICARE’s revised reimbursement rules. Once an SCH reaches its Medicare cost-to-charge ratio, TRICARE reimburses labor, delivery, and nursery care services at 130 percent of this ratio. This rule is"
911," based on DHA’s assessment that Medicare’s ratio does not accurately reflect the costs for these services. According to TRICARE’s fiscal year 2013 claims data, 120 SCHs (approximately 30 percent of all SCHs) were already reimbursed using rates that were at or below their Medicare cost-to-charge ratios. Because most SCHs have just completed the first year of a multi-year transition, it is too early to determine the full effect of the revised reimbursement rules on SCHs, including any effect on TRICARE benefi"
912,"ciaries’ ability to obtain care at these hospitals. Nonetheless, early indications show that TRICARE beneficiaries have not experienced problems accessing inpatient care at these facilities. For fiscal year 2013, we found that overall TRICARE reimbursements for SCHs averaged less than 1 percent of their net patient revenue, with TRICARE beneficiaries making up just over 1 percent of their total discharges. We also found that the majority of SCHs—58 percent (265 of 459)—had fewer than 20 TRICARE admissions d"
913,"uring this time while 10 percent (44 of 459) had 100 or more TRICARE admissions. As a result, the impact of TRICARE’s revised reimbursement rules may likely be small for most SCHs. Figure 2 illustrates a breakdown of the 459 SCHs by their fiscal year 2013 TRICARE admissions. DHA officials reported that they do not think access to inpatient care at SCHs will be an issue because hospitals that participate in the Medicare program are required to participate in the TRICARE program and serve its beneficiaries. O"
914,"fficials from the 10 SCHs we identified as having the highest number of TRICARE admissions, the highest reimbursement amounts, or both, told us that they provide care to all patients, including TRICARE beneficiaries—although some of them were not familiar with this requirement. TRICARE reimbursement for these SCHs ranged from about 2 to 12 percent of their net patient revenue, and TRICARE beneficiaries accounted for about 1 to 27 percent of their total discharges. See table 1 for TRICARE percentages of net "
915,"patient revenue and total discharges for each of these SCHs. However, TRICARE beneficiaries’ access to care at SCHs could be affected if these hospitals reduced or eliminated their inpatient services. The SCH officials we spoke with told us that they had not reduced the inpatient services available at their hospitals as a result of TRICARE’s revised reimbursement rules. However, officials at two SCHs did express concerns about future difficulties maintaining their current level of operations as they face fu"
916,"rther reductions in reimbursements not only from TRICARE, but also from other sources, such as Medicare and Medicaid. These officials said that they are concerned about their facilities’ long-term survival. Given the current environment of decreasing reimbursements, some SCHs we interviewed reported taking proactive steps, such as eliminating equipment maintenance contracts, to help offset the reimbursement reductions. Officials from one facility we interviewed told us that they are considering an option to"
917, partner with another SCH as a way to increase efficiency. TRICARE beneficiaries’ demand for inpatient care at SCHs also may be affected by the availability of inpatient care from their respective military installation. We found that 24 of the 44 SCHs we identified as having 100 or more TRICARE admissions in fiscal year 2013—about half—were within 40 miles of a military installation that only had an outpatient clinic. (See appendix II for a list of the 44 SCHs and their proximity to military hospitals and c
918,"linics). As a result, servicemembers and their dependents in those locations may be more reliant on a nearby SCH for their inpatient care. We found that TRICARE inpatient admissions for these 24 facilities ranged from 101 to 2,178 in fiscal year 2013, and 6 of them were among the 10 SCHs that we interviewed because they had the highest number of TRICARE admissions, the highest reimbursement amounts, or both. Officials from these 6 SCHs told us that nearby TRICARE beneficiaries tend to rely on their faciliti"
919,"es for certain types of inpatient services, such as labor and delivery. See figure 3 for additional information about SCHs with 100 or more TRICARE admissions and their proximity to military hospitals and clinics. We also found that 12 of the 44 SCHs with 100 or more admissions were located fewer than 40 miles from a military hospital. TRICARE admissions for these facilities ranged from 117 to 2,364 in fiscal year 2013. Three of these SCHs—which are located near Naval hospitals in North Carolina and South C"
920,"arolina—were among the 10 SCHs with the highest number of TRICARE admissions or the highest numbers of both admissions and reimbursement that we interviewed. An official with Naval Hospital Camp Lejeune (North Carolina) told us the hospital relies on local SCHs because it is either unable to meet their beneficiaries’ demand for certain services, such as obstetric care, or because the SCHs offer services not available at the Naval hospital, such as some cardiac care. Naval Hospital Beaufort (South Carolina) "
921,"provides limited inpatient services, and according to an official there, most of that hospital’s beneficiaries obtain inpatient care at the local SCH, including intensive care, all pediatric care, maternity and newborn care, and certain types of specialty care not provided at the Naval hospital (neurology, cardiology, and gastroenterology). We also interviewed officials at two additional military hospitals—Naval Hospital Lemoore (California) and Naval Hospital Oak Harbor (Washington)—that had eliminated all"
922," or most of their inpatient care and were within 40 miles of an SCH. These officials told us that they rely more on other hospitals that are closer to their installations than the SCHs. For example, an official with Naval Hospital Lemoore told us that Lemoore currently has a resource sharing agreement with another hospital, which is closer to them than the nearby SCH. This agreement allows military providers with privileges to deliver babies for TRICARE beneficiaries at that facility. Officials from Naval H"
923,ospital Oak Harbor told us that their hospital tends to utilize three smaller facilities closer to it than the SCH depending on the type of service needed. DHA and managed care support contractor officials told us that they have not heard of concerns or issues with beneficiary access at SCHs resulting from the revised reimbursement rules. DHA officials reported that they do not think access to inpatient care at SCHs will be an issue because hospitals that participate in the Medicare program are required to 
924,"participate in the TRICARE program and serve its beneficiaries. DHA officials told us they track access issues pertaining to inpatient care at SCHs through concerns or complaints communicated to them through the TRICARE Regional Offices or directly from beneficiaries. As of February 2015, these officials told us they have not received any such complaints. They noted that they are looking at ways to measure changes in access to care at these facilities, possibly by comparing the number of discharges from one"
925," year to the next. Although their plans are under development, officials stated that they will likely focus on the 44 SCHs that had 100 or more TRICARE admissions. Officials from DHA’s TRICARE Regional Offices and the managed care support contractors also told us that they have not received complaints or heard of issues from beneficiaries about their ability to access inpatient care at SCHs. In addition, officials from national health care associations and military beneficiary coalition groups that we spoke"
926," with also reported that they have not heard any concerns about access to care at SCHs resulting from TRICARE’s revised reimbursement rules. We provided a draft of this report to DOD for comment. DOD responded that it agreed with the report’s findings, and its comments are reprinted in appendix III. DOD also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Defense and appropriate congressional committees. In addition, the report will"
927," be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or draperd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix IV. We obtained TRICARE claims data on the number of admissions and reimbursement amounts for each sole community hospital (SCH) for fiscal year 201"
928,"3. We used these data to select the eight SCHs with the highest number of TRICARE admissions and the eight SCHs with the highest reimbursement amounts. Due to overlap, the number of unique SCHs we selected totaled 10. We interviewed officials at those hospitals about the change in TRICARE reimbursement rules and any resulting effect on access to care. Sole community hospital (SCH) 8 SCHs that were 40 miles or more from a military outpatient clinic or hospital Fiscal Year (FY) 2013 TRICARE admissions 40 mile"
929,"s from a military outpatient clinic(s) military hospital(s) Sole community hospital (SCH) 12 SCHs that were less than 40 miles from a military hospital or a hospital and an outpatient clinic Fiscal Year (FY) 2013 TRICARE admissions outpatient clinic(s) military hospital(s) Debra A. Draper, Director, (202) 512-7114 or draperd@gao.gov. In addition to the contact name above, Bonnie Anderson, Assistant Director; Jennie Apter; Jackie Hamilton; Natalie Herzog; Giselle Hicks; Sylvia Diaz Jones; and Eric Wedum made"
930, key contributions to this report.
931,"Although VA has been authorized to collect third-party health insurance payments since 1986, it was not allowed to use these funds to supplement its medical care appropriations until enactment of the Balanced Budget Act of 1997. Part of VA’s 1997 strategic plan was to increase health insurance payments and other collections to help fund an increased health care workload. The potential for increased workload occurred in part because the Veterans’ Health Care Eligibility Reform Act of 1996 authorized VA to pr"
932,"ovide certain medical care services not previously available to higher-income veterans or those without service-connected disabilities. VA expected that the majority of the costs of their care would be covered by collections from third-party payments, copayments, and deductibles. These veterans increased from about 4 percent of all veterans treated in fiscal year 1996 to about a quarter of VA’s total patient workload in fiscal year 2002. VA can bill insurers for treatment of conditions that are not a result"
933," of injuries or illnesses incurred or aggravated during military service. However, VA cannot bill them for health care conditions that result from military service, nor is it generally authorized to collect from Medicare or Medicaid, or from health maintenance organizations when VA is not a participating provider. To collect from health insurers, VA uses five related processes to manage the information needed to bill and collect. The patient intake process involves gathering insurance information and verify"
934,"ing that information with the insurer. The medical documentation process involves properly documenting the health care provided to patients by physicians and other health care providers. The coding process involves assigning correct codes for the diagnoses and medical procedures based on the documentation. Next, the billing process creates and sends bills to insurers based on the insurance and coding information. Finally, the accounts receivable process includes processing payments from insurers and followi"
935,"ng up with insurers on outstanding or denied bills. In September 1999, VA adopted a fee schedule, called “reasonable charges.” Reasonable charges are itemized fees based on diagnoses and procedures. This schedule allows VA to more accurately bill for the care provided. However, by making these changes, VA created additional bill- processing demands—particularly in the areas of documenting care, coding that care, and processing bills per episode of care. First, VA must accurately assign medical diagnoses and"
936," procedure codes to set appropriate charges, a task that requires coders to search through medical documentation and various databases to identify all billable care. Second, VA must be prepared to provide an insurer supporting medical documentation for the itemized charges. Third, in contrast to a single bill for all the services provided during an episode of care under the previous fee schedule, under reasonable charges VA must prepare a separate bill for each provider involved in the care and an additiona"
937,"l bill if a hospital facility charge applies. For fiscal year 2002, VA collected $687 million in insurance payments, up 32 percent compared to the $521 million collected during fiscal year 2001. Collections through the first half of fiscal year 2003 total $386 million in third-party payments. The increased collections in fiscal year 2002 reflected that VA processed a higher volume of bills than it did in the prior fiscal year. VA processed and received payments for over 50 percent more bills in fiscal year "
938,"2002 than in fiscal year 2001. VA’s collections grew at a lower percentage rate than the number of paid bills because the average payment per paid bill dropped 18 percent compared to the prior fiscal year. Average payments dropped primarily because a rising proportion of VA’s paid bills were for outpatient care rather than inpatient care. Since the charges for outpatient care were much lower on average, the payment amounts were typically lower as well. Although VA anticipated that the shift to reasonable ch"
939,"arges in 1999 would yield higher collections, collections had dropped in fiscal year 2000. VA attributed that drop to its being unprepared to bill under reasonable charges, particularly because of its lack of proficiency in developing medical documentation and coding to appropriately support a bill. As a result, VA reported that many VA medical centers developed billing backlogs after initially suspending billing for some care. As shown in figure 1, VA’s third-party collections increased in fiscal year 2001"
940,"—reversing fiscal year 2000’s drop in collections—and increased again in fiscal year 2002. After initially being unprepared in fiscal year 2000 to bill reasonable charges, VA began improving its implementation of the processes necessary to bill and increase its collections. By the end of fiscal year 2001, VA had submitted 37 percent more bills to insurers than in fiscal year 2000. VA submitted even more in fiscal year 2002, as over 8 million bills—a 54 percent increase over the number in fiscal year 2001—we"
941,"re submitted to insurers. Managers we spoke with in three networks—Network 2 (Albany), Network 9 (Nashville), and Network 22 (Long Beach)—mainly attributed the increased billings to reductions in the billing backlogs. Networks 2 (Albany) and 9 (Nashville) reduced backlogs, in part by hiring more staff, contracting for staff, or using overtime to process bills and accounts receivable. Network 2 (Albany), for instance, managed an increased billing volume through mandatory overtime. Managers we interviewed in "
942,"all three networks noted better medical documentation provided by physicians to support billing. In Network 22 (Long Beach) and Network 9 (Nashville), revenue managers reported that coders were getting better at identifying all professional services that can be billed under reasonable charges. In addition, the revenue manager in Network 2 (Albany) said that billers’ productivity had risen from 700 to 2,500 bills per month over a 3-year period, as a result of gradually increasing the network’s productivity s"
943,"tandards and streamlining their jobs to focus solely on billing. VA officials cited other reasons for the increased number of bills submitted to insurers. An increased number of patients with billable insurance was one reason for the increased billing. In addition, a May 2001 change in the reasonable-charges fee schedule for medical evaluations allowed separate bills for facility charges and professional service charges, a change that contributed to the higher volume of bills in fiscal year 2002. Studies ha"
944,"ve suggested that operational problems—missed billing opportunities, billing backlogs, and inadequate pursuit of accounts receivable—limited VA’s collections in the years following the implementation of reasonable charges. For example, a study completed last year estimated that 23.8 percent of VA patients in fiscal year 2001 had billable care, but VA actually billed for the care of only 18.3 percent of patients. This finding suggests that VA could have billed for 30 percent more patients than it actually bi"
945,"lled. Further, after examining activities in fiscal years 2000 and 2001, a VA Inspector General report estimated that VA could have collected over $500 million more than it did. About 73 percent of this uncollected amount was attributed to a backlog of unbilled medical care; most of the rest was attributed to insufficient pursuit of delinquent bills. Another study, examining only professional-service charges in a single network, estimated that $4.1 million out of $4.7 million of potential collections was un"
946,"billed for fiscal year 2001. Of that unbilled amount, 63 percent was estimated to be unbillable primarily because of insufficient documentation. In addition, the study found that coders often missed services that should have been coded for billing. According to a CBO official, VA could increase collections by working on operational problems. These problems included unpaid accounts receivable and missed billing opportunities due to insufficient identification of insured patients, inadequate documentation to "
947,"support billing, and coding problems that result in unidentified care. From April through June 2002, three network revenue managers told us about backlogs and processing issues that persisted into fiscal year 2002. For example, although Network 9 (Nashville) had above average increases in collections for both inpatient and outpatient care, it still had coding backlogs in four of six medical centers. According to Network 9’s (Nashville) revenue manager, eliminating the backlogs for outpatient care would incr"
948,"ease collections by an estimated $4 million, or 9 percent, for fiscal year 2002. Additional increases might come from coding all inpatient professional services, but the revenue manager did not have an estimate because the extent to which coders are capturing all billable services was unknown. Moreover, although all three networks reported that physicians’ documentation for billing was improving, they also reported a continuing need to improve physicians’ documentation. In addition, Network 22 (Long Beach) "
949,"reported that its accounts receivable staff had difficulties keeping up with the increased volume of bills because it had not hired additional staff members or contracted help on accounts receivable. As a result of these operational limitations, VA lacks a reliable estimate of uncollected dollars, and therefore does not have the basis to assess its systemwide operational effectiveness. For example, some uncollected dollars result from billing backlogs and billable care missed in coding. In addition, VA does"
950," not know the net impact of actual third-party collections on supplementing its annual appropriation for medical care. For example, CBO relies on reported cost data from central office and field staff directly involved in billing and collection functions. However, these costs do not include all costs incurred by VA in the generation of revenue. According to a CBO official, VA does not include in its collections cost the investments it has made in information technology or resources used in the identificatio"
951,"n of other health insurance during the enrollment process. VA continues to implement its 2001 Improvement Plan, which is designed to increase collections by improving and standardizing VA’s collections processes. The plan’s 24 actions are to address known operational problems affecting revenue performance. These problems include unidentified insurance for some patients, insufficient documentation for billing, coding staff shortages, gaps in the automated capture of billing data, and insufficient pursuit of "
952,"accounts receivable. The plan also addresses uneven performance across collection sites. The plan seeks increased collections through standardization of policy and processes in the context of decentralized management, in which VA’s 21 network directors and their respective medical center directors have responsibility for the collections process. Since management is decentralized, collections procedures can vary across sites. For example, sites’ procedures can specify a different number of days waited until "
953,"first contacting insurers about unpaid bills and can vary on whether to contact by letter, telephone, or both. The plan intends to create greater process standardization, in part, by requiring certain collections processes, such as the use of electronic medical records by all networks to provide coders better access to documentation and legible records. When fully implemented, the plan’s actions are intended to improve collections by reducing operational problems, such as missed billing opportunities. For e"
954,"xample, two of the plan’s actions—requiring patient contacts to gather insurance information prior to scheduled appointments and electronically linking VA to major insurers to identify patients’ insurance—are intended to increase VA’s awareness of its patients who have other health insurance. VA has implemented some of the improvement plan’s 24 actions, which were scheduled for completion at various times through 2003, but is behind the plan’s original schedule. The plan had scheduled 15 of the 24 actions f"
955,"or completion through May 25, 2002, but as of that date VA had only completed 8 of the actions. Information obtained from CBO in April 2003 indicates that 10 are complete and 7 are scheduled for implementation by the end of 2003. Implementation of the remaining actions will begin in 2004 as part of a financial system pilot with full implementation expected in 2005 or 2006. (Appendix I lists the actions and those VA reports as completed through April 28, 2003.) In May 2002, VHA established its CBO to undersc"
956,"ore the importance of revenue, patient eligibility, and enrollment and to give strategic focus to improving these functions. Officials in the office told us that they have developed a new approach for improving third-party collections that can help increase revenue collections by further revising processes and providing a new business focus on collections. For example, the CBO’s strategy incorporates improvements to the electronic transmission of bills and initiation of a system to receive and process third"
957,"-party payments electronically. CBO’s new approach also encompasses initiatives beyond the improvement plan, such as the one in the Under Secretary for Health’s May 2002 memorandum that directed all facilities to refer accounts receivable older than 60 days to a collection agency, unless a facility can document a better in-house process. According to the Deputy Chief Business Officer, the use of collection agencies has shown some signs of success—with outstanding accounts receivables dropping from $1,378 mi"
958,"llion to $1,317 million from the end of May to the end of July 2002, a reduction of about $61 million or 4 percent. CBO is in the process of acquiring a standardized Patient Financial Services System (PFSS) that could be shared across VA. VA’s goal with PFSS is to implement a commercial off-the-shelf health care billing and accounts receivable software system. Under PFSS, a unique record will be established for each veteran. Patient information will be standardized— including veteran insurance data, which w"
959,"ill be collected, managed, and verified. Receipts of health care products and services will be added to the patient records as they are provided or dispensed. And PFSS will automatically extract needed data for billing, with the majority of billings sent to payers without manual intervention. After the system is acquired, VA will conduct a demonstration project in Network 10 (Cincinnati). According to the Deputy Chief Business Officer, in May 2003 VA anticipates awarding a contract for the development and i"
960,"mplementation of PFSS. CBO’s plan is to install this automated financial system in other facilities and networks if it is successfully implemented in the pilot site. CBO is taking action on a number of other initiatives to improve collections, including the following: Planning and developing software upgrades to facilitate the health care service review process and electronically receive and respond to requests from insurers for additional documentation. Establishing the Health Revenue Center to centralize "
961,"preregistration, insurance identification and verification, and accounts receivable activities. For example, during a preregistration pilot in Network 11 (Ann Arbor), the Health Revenue Center made over 246,000 preregistration telephone calls to patients to verify their insurance information. According to VA, over 23,000 insurance policies were identified, resulting in $4.8 million in collections. Assessing its performance based on private sector performance metrics, including measuring the pace of collecti"
962,"ons relative to the amount of accounts receivable. As VA faces increased demand for medical care, particularly from higher- income veterans, third-party collections for nonservice-connected conditions remain an important source of revenue to supplement VA’s appropriations. VA has been improving its billing and collecting under a reasonable-charges fee schedule it established in 1999, but VA has not completed its efforts to address problems in collections operations. In this regard, fully implementing the 20"
963,"01 Improvement Plan could help VA maximize future collections by addressing problems such as missed billing opportunities. CBO’s initiatives could further enhance collections by identifying root causes of problems in collections operations, providing a focused approach to addressing the root causes, establishing performance measures, and holding responsible parties accountable for achieving the performance standards. Our work and VA’s continuing initiatives to improve collections indicate that VA has not co"
964,"llected all third-party payments to which it is entitled. In this regard, it is important that VA develop a reliable estimate of uncollected dollars. VA also does not have a complete measure of its full collections costs. Consequently, VA cannot determine how effectively it supplements its medical care appropriation with third-party collections. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or other members of the subcommittee may have. For further informati"
965,"on regarding this testimony, please contact Cynthia A. Bascetta at (202) 512-7101. Michael T. Blair, Jr. and Michael Tropauer also contributed to this statement. Certain actions are mandated in the plan, that is, are required, but these actions are not legal or regulatory mandates. One action item was cancelled but its intended improvements will be incorporated into an automated financial system initiative. VA designated the electronic billing project, shown here as “17a,” as completed. However, this indica"
966,"ted only partial completion of action 17, which includes an additional project. VA Health Care: Third Party Collections Rising as VA Continues to Address Problems in Its Collections Operations. GAO-03-145. Washington, D.C.: January 31, 2003. VA Health Care: VA Has Not Sufficiently Explored Alternatives for Optimizing Third-Party Collections. GAO-01-1157T. Washington, D.C.: September 20, 2001. VA Health Care: Third-Party Charges Based on Sound Methodology; Implementation Challenges Remain. GAO/HEHS-99-124. W"
967,"ashington, D.C.: June 11, 1999. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately."
968,"Under the TVA Act of 1933 (TVA Act), as amended, TVA is not subject to most of the regulatory and oversight requirements that commercial electric utilities must satisfy. The Act vests all authority to run and operate TVA in its three-member board of directors. Legislation also limits competition between TVA and other utilities. The TVA Act was amended in 1959 to establish what is commonly referred to as the TVA “fence,” which prohibits TVA, with some exceptions, from entering into contracts to sell power ou"
969,"tside the service area that TVA and its distributors were serving on July 1, 1957. In addition, the Energy Policy Act of 1992 (EPAct) provides TVA with certain protections from competition, called the “anti-cherry picking” provisions. Under EPAct, TVA is exempt from having to allow other utilities to use its transmission lines to transmit (“wheel”) power to customers within TVA’s service area. This legislative framework generally insulates TVA from direct wholesale competition. As a result, TVA remains in a"
970," position similar to that of a regulated utility monopoly. EPAct’s requirement that utilities use their transmission lines to transmit wholesale electricity for other utilities has enabled wholesale customers to obtain electricity from a variety of competing suppliers, thus increasing wholesale competition in the electric utility industry across the United States. In addition, restructuring efforts in many states have created competition at the retail level. If, as expected, retail restructuring continues t"
971,"o occur on a state-by-state basis over the next several years, then industrial, commercial, and, ultimately, residential consumers will be able to purchase their power from one of several competitors rather than from one utility monopoly. Since EPAct exempts TVA from having to transmit power from other utilities to customers within its territory, TVA has not been directly affected by the ongoing restructuring of the electric utility industry to the same extent as other utilities. However, if the Congress we"
972,"re to eliminate TVA’s exemption from the wheeling provision of EPAct, its customers would have the option of purchasing their power from other sources after their contracts with TVA expire. Under the Clinton administration’s proposal in April 1999 to promote retail competition in the electric power industry, which TVA supported, TVA’s exemption from the wheeling provision of EPAct would have been eliminated after January 1, 2003. If this or a similar proposal is enacted, TVA may be required to use its trans"
973,"mission lines to transmit the power of other utilities for consumption within its service territory. A balancing factor is that recent proposals would have also removed the statutory restrictions that prevent TVA from selling wholesale power outside its service territory. Because of these ongoing restructuring efforts, TVA management, like many industry experts, expects that in the future TVA may lose its legislative protections from competition. TVA’s management recognized the need to act to better positio"
974,"n TVA to compete in an era of increasing competition and, in July 1997, issued a 10-year business plan with that goal in mind. TVA established a 10-year horizon because a majority of its long- term contracts with distributors could begin expiring at that time, and TVA could be facing greater competitive pressures by 2007. The plan contained three strategic objectives: reduce TVA’s cost of power in order to be in a position to offer competitively priced power by 2007, increase financial flexibility by reduci"
975,"ng fixed costs, and build customer allegiance. To help meet the first two strategic objectives noted above, one of the key goals of TVA’s 10-year plan was to reduce debt from its 1997 levels by about one-half, to about $13.2 billion. In addition, while not specifically discussed in the published plan, TVA planned to reduce the balance (i.e., recover the costs through rates) of its deferred assets from about $8.5 billion to $500 million, which TVA estimated to be the net realizable value of its deferred nucl"
976,"ear units. TVA planned to generate cash that could be used to reduce debt by increasing rates beginning in 1998, reducing expenses, and limiting capital expenditures; these actions would increase its financial flexibility and future competitiveness. TVA’s plan to reduce debt and recover the costs of deferred assets while it is still legislatively protected from competition was intended to help position TVA to achieve its ultimate goal of offering competitively priced power by 2007. In a competitive market, "
977,"if TVA’s power were priced above market because of high debt service costs and the recovery through rates of the costs of its deferred assets, it would be in danger of losing customers. Losing customers could result in stranded costs if TVA is unable to sell the capacity released by the departing customers to other customers for at least the same price. Stranded costs, as discussed later, are costs that are uneconomical to recover in a competitive environment due to regulatory changes. For each of the three"
978," objectives addressed in this report, you asked us to answer specific questions. Regarding debt and deferred assets, you asked us to determine what progress TVA has made in achieving the goals of its 10-year business plan for reducing debt and deferred assets, and to what extent TVA has used the additional revenues generated from its 1998 rate increase to reduce debt and deferred assets. Regarding TVA’s financial condition, you asked us to compare TVA’s financial condition, including debt and fixed cost rat"
979,"ios, to neighboring investor-owned utilities (IOUs). Finally, regarding stranded costs, you asked us to (1) explain the link between TVA’s debt and its potential stranded costs, (2) determine whether TVA has calculated potential stranded costs for any of its distributors, and if so, determine the methodology it used, and (3) determine the options for recovering any potential stranded costs at TVA. We evaluated the progress TVA has made in achieving the debt reduction and recovery of deferred assets goals of"
980," its 10-year plan, and determined the extent to which TVA is using revenue from its 1998 rate increase to reduce debt and recover the cost of its deferred assets, by interviewing TVA and Congressional Budget Office (CBO) officials; reviewing and analyzing various TVA reports and documents, including annual reports, audited financial statements, the original 10-year business plan and proposed revisions to it; and reviewing supporting documentation (analytical spreadsheets, etc.) and assumptions underlying TV"
981,"A’s 10-year plan. To determine TVA’s financial condition, we analyzed TVA’s debt and fixed costs, and then compared TVA to its likely competitors. To accomplish this, we obtained financial data for TVA and its likely competitors from their audited financial statements; computed and compared key financial ratios for TVA and its likely competitors; analyzed data on the future market price of power; interviewed TVA officials about their efforts to position themselves competitively, including their efforts to r"
982,"educe debt, recover the cost of their deferred assets, and mitigate and/or recover stranded costs; and reviewed IOU annual reports to determine what steps the IOUs are taking to financially position themselves for competition. To assess TVA’s potential stranded costs, we interviewed industry experts at the Federal Energy Regulatory Commission (FERC), Edison Electric Institute (EEI), and CBO on the options other utilities have pursued to recover stranded costs; reviewed Energy Information Administration (EIA"
983,") documents on stranded cost recovery at the state level; questioned TVA officials on TVA’s plans for calculating and recovering potential stranded costs; and analyzed TVA’s contracts to determine whether TVA has contractually relieved its customers of any obligation to pay for any stranded costs. Also, to determine the link between TVA’s debt and its potential stranded costs, we analyzed the interrelationship between debt reduction and stranded cost mitigation. Additional information on our scope and metho"
984,"dology is in appendix I. We conducted our review from April 2000 through January 2001 in accordance with generally accepted government auditing standards. To the extent practical, we used audited financial statement data in performing our analyses, or reconciled the data we used to audited financial statements; however, we were not able to do so in all cases and we did not verify the accuracy of all the data we obtained and used in our analyses. In addition, we based information on debt reduction, deferred "
985,"asset recovery, and the future market price of power on TVA’s planned revisions to its key goals and assumptions at the time of our review. We requested written comments from TVA on a draft of this report. TVA provided both technical comments, which we have incorporated, as appropriate and written comments, which are reproduced in appendix III. In April 1999, we reported that capital expenditures not accounted for in the 1997 plan would negatively impact TVA’s ability to achieve its plans to reduce debt and"
986," recover the cost of deferred assets by 2007. At that time, TVA’s fiscal year 2000 federal budget request acknowledged that TVA would not achieve its goal of reducing outstanding debt by about half until 2009, 2 years later than originally planned. TVA’s goal in its original plan was to reduce debt to about $13.2 billion. Since April 1999, TVA has fallen further behind in meeting its debt reduction goal. TVA now has a target of reducing debt to $19.6 billion by 2007; it no longer is projecting a target for "
987,"debt reduction beyond 2007. For fiscal years 1998 through 2000, TVA reduced its debt by about $1.4 billion. However, TVA’s debt reduction shortfall also totaled about $1.4 billion, which resulted from greater than anticipated capital expenditures and annual operating and other expenses and lower revenues than projected in 1997. These same factors will hamper TVA’s debt reduction efforts over the last 7 years of the plan. In addition, although TVA reduced deferred assets to the extent planned for the first 3"
988," years of the plan, it is revising the amount of deferred assets it plans to recover through 2007 downward. TVA now plans to reduce the balance of its deferred assets to about $3.9 billion by September 30, 2007, compared to its original goal of $500 million. To achieve the overall debt reduction goal in the original 10-year plan, TVA established annual debt reduction goals. In the 1997 plan, the annual debt reduction goals ranged from $476 million in 1998 to $2 billion in 2007. TVA has made progress in redu"
989,"cing debt, and in fact, exceeded its target goal in the first year of the plan. However, TVA fell far short in the second and third years. Through the first 3 years of the 10-year plan, TVA reduced debt by about $1.4 billion, but its debt reduction shortfall also totaled about $1.4 billion. In addition, TVA is now planning to issue a revised plan that would significantly reduce the goals for 2001 through 2007. Figure 1 compares the annual debt reduction goals contained in TVA’s July 1997 10-year plan to TVA"
990,"’s actual debt reduction for fiscal years 1998 through 2000 and to TVA’s proposed revisions to its annual debt reduction goals for fiscal years 2001 through 2007. In its presidential budget submission for fiscal year 2000, TVA acknowledged that it would not achieve its goal of reducing debt by about one-half by 2007. Instead, TVA said it would not meet the debt reduction goal until 2009, 2 years later than the goal in its original 10-year plan. TVA is in the process of revising its goal for reducing outstan"
991,"ding debt again. TVA officials now estimate that its outstanding debt by September 30, 2007, will be between $18 billion and $24 billion, with a target of about $19.6 billion, or about $6.4 billion higher than TVA envisioned when it issued the 1997 plan. TVA is not projecting a target reduction goal beyond 2007. Figure 2 compares the annual outstanding debt goals contained in TVA’s July 1997 10-year plan to TVA’s actual debt outstanding for fiscal years 1998 through 2000 and to TVA’s proposed revisions to a"
992,"nnual goals for fiscal years 2001 through 2007. TVA officials attribute the $1.4 billion debt reduction shortfall over the first 3 years to four factors. The first factor is greater than anticipated cash expenditures for new generating capacity. For fiscal years 1998 through 2000, TVA spent $436 million more than planned to purchase new peaking generator units. The 1997 plan assumed that TVA would meet future increases in demand for power by purchasing power from other utilities, which would have used less "
993,"cash through 2007 than purchasing the peaking units. TVA officials believe that its capital expenditures for new generating capacity will have two positive effects. First, they believe the new generating capacity will ultimately reduce TVA’s cost of power, even though the increased capital expenditures will use cash that could have been used to reduce debt. Second, they believe the new generating capacity will enhance system reliability by providing a dependable source of power. The second factor to which T"
994,"VA officials attribute the debt reduction shortfall over the first 3 years of the plan is greater than anticipated capital expenditures requiring cash for environmental controls to meet Clean Air Act requirements. For fiscal years 1998 through 2000, TVA spent $276 million more than planned on environmental controls. Meanwhile, over the 3-year period, TVA spent about $221 million less than planned on other types of capital items. The net effect of increased spending on new generating capacity and environment"
995,"al controls and decreased spending on other types of capital items is that TVA’s capital expenditures have exceeded the planned amount. TVA had forecast about $1.7 billion in capital expenditures over that 3-year period; its actual capital expenditures were almost $500 million more (about $2.2 billion). Under current plans, TVA expects its major capital costs for new generating capacity and environmental controls to be completed by 2004. Figure 3 compares the annual capital expenditure goals contained in TV"
996,"A’s July 1997 10-year plan to TVA’s actual capital expenditures for fiscal years 1998 through 2000 and to TVA’s proposed revisions to annual goals for fiscal years 2001 through 2007. The third factor to which TVA officials attribute the debt reduction shortfall over the first 3 years of the plan is a net increase in annual expenses requiring cash that could have been used for debt reduction. For fiscal years 1998 through 2000, TVA’s operating and maintenance expenses, and sales, general, and administrative "
997,"expenses were greater than anticipated. This increase in annual expenses was partially offset by a reduction in fuel and purchased power expense and interest expense. The net effect was that annual expenses totaled about $122 million more than planned. The fourth factor to which TVA officials attribute the debt reduction shortfall over the first 3 years of the plan is less revenue than originally anticipated. According to TVA officials, the revenue shortfall was caused primarily by mild winters that lessene"
998,"d demand for electricity. The revenue shortfall for fiscal years 1998 through 2000 totaled about $725 million. Our analysis confirms that the above four factors were the primary ones that hampered TVA’s debt reduction efforts for fiscal years 1998 through 2000. These factors are also projected to limit TVA’s ability to reduce debt in fiscal years 2001 through 2007. Over this 7-year period, the primary factors limiting TVA’s debt reduction efforts are that annual revenue is expected to be lower, and capital "
999,"expenditures and cash expenses are expected to be higher. This reduces the amount of cash that would have been available to repay debt. TVA now anticipates that its revenue will be about $2.2 billion lower, and its capital expenditures and cash expenses—at about $1.6 billion and $2.5 billion, respectively—will be higher than planned in 1997. Table 1 shows our analysis of the factors affecting cash available to reduce debt from 1998 through 2007. In developing its 10-year plan, TVA planned to use the additio"
1000,"nal revenue from its 1998 rate increase to reduce its debt. TVA officials attribute about an additional $1.24 billion in revenue over the first 3 years of the plan to the rate increase. During this period, TVA has reduced its outstanding debt by more than a comparable amount—about $1.4 billion. A key element of TVA’s plan was not only to reduce the cost of its power by reducing its debt and the corresponding interest expense, but also to recover a substantial portion of the costs of its deferred assets. By "
1001,"increasing operating revenues and reducing interest and other expenses to generate cash flow that could be used to reduce debt, TVA would have the opportunity to use revenues in excess of expenses to recover a portion of the costs of its deferred assets. However, as noted previously, the proposed revision to the plan contains additional operating and other expenses over the remainder of the 10-year period, which, absent any future rate increases, will decrease the amount of revenue available to recover defe"
1002,"rred assets. TVA has also added about $600 million in deferred assets, some of which will have to be recovered in the future. Although TVA recovered the costs of deferred assets to the extent planned over the first 3 years of the plan, it is reducing its overall deferred asset recovery goals through 2007. TVA has a significant amount of unrecovered capital costs associated with three uncompleted and nonproducing deferred nuclear units—about $6.3 billion as of September 30, 2000. At that time, TVA’s investme"
1003,"nt in its deferred nuclear units represented about 26 percent of the cost of TVA’s total undepreciated generating property, plant, and equipment. The deferred units do not generate power, and TVA has chosen not to begin to recover their costs through rates. In contrast, the unrecovered costs of TVA’s operating nuclear plants, which produced about 31 percent of TVA’s power in 2000, represented about 45 percent of the cost of TVA’s total undepreciated generating assets as of September 30, 2000. At the time TV"
1004,"A issued the original 10-year business plan, the unrecovered balance of TVA’s deferred assets, including both its nuclear units and other deferred assets, was about $8.5 billion. TVA recovered the cost of deferred assets to the extent planned for over the first 3 years of the plan. Through September 30, 2000, $1.1 billion in other deferred assets had been recovered through rates, but recovery of the cost of the deferred nuclear units had not begun. However, since the original plan was issued, TVA has also a"
1005,"dded about $600 million in other deferred assets, some of which will have to be recovered in the future; its current total is about $8 billion. TVA’s overall plan for recovering the costs of its deferred assets through 2007 is being reduced significantly. TVA now plans to reduce the balance of its deferred assets, including both its nuclear units and other deferred assets, to about $3.9 billion; this represents much less deferred asset recovery than TVA’s original estimate of $500 million. Figure 4 compares"
1006, the annual estimated remaining balances of deferred assets (both the deferred nuclear units and other deferred assets) contained in TVA’s July 1997 10-year plan to TVA’s actual deferred asset balances as of the end of fiscal years 1998 through 2000 and to TVA’s estimated balances for fiscal years 2001 through 2007. Not reducing debt and recovering deferred assets to the extent planned by 2007 while still legislatively protected from competition could diminish TVA’s future competitive prospects. Specificall
1007,"y, not meeting these goals could cause the price of its future power to be above market, if TVA’s debt service costs remain relatively high at the time it is required to compete and if TVA is at the same time attempting to recover the costs of its deferred assets through rates. Assuming that TVA’s outstanding debt balance is $19.6 billion as of September 30, 2007, and its weighted average interest rate remains about 6.5 percent, we estimate that TVA’s interest expense in the year 2008 will be about $1.27 bi"
1008,"llion, about $416 million higher than if debt were reduced to $13.2 billion. As we stated in our April 1999 report, the more progress TVA makes in addressing these issues while it has legislative protections, the greater its prospects for being competitive if it loses those protections in the future. Although reducing debt and the amount of deferred asset costs that have not yet been recovered are important to TVA as it prepares for competition, TVA’s future competitiveness will be based to a large degree o"
1009,"n market conditions and how TVA will be restructured if and when TVA loses its legislative protections. Of particular importance is the uncertainty of the future market price of power. In our 1999 assessment of TVA’s 10-year plan, we found that TVA’s projection of the future market price of wholesale power in 2007 was somewhat lower than the projections of leading industry experts. This lower projection prompted TVA to be aggressive in its planning to reduce costs to position itself to offer competitively p"
1010,"riced power by 2007. TVA and other industry experts are continuing to revise their projections of the future market price of power in 2007. TVA’s projection is a load-shaped forecast—i.e., its projection is based specifically on how TVA’s load varies during different hours of the day and different days of the week. TVA officials told us that higher projections are warranted now than when it prepared its plan in 1997 primarily due to projected increases in the price of natural gas, but also due to a combinat"
1011,"ion of other factors, including the extreme volatility of spot prices (in the summer months), increasing power demands beyond what they expected 3 years ago, shortages (or at least, shrinking surpluses) of both generating and transmission capacity, and a better understanding of the increased costs of complying with environmental regulations that are likely to take effect between now and 2007. TVA has stated that the impact of these factors can be seen in higher current trading prices, higher forward prices "
1012,"being offered by suppliers, higher long-term contract prices, and higher energy prices. TVA officials are now forecasting a market price of power in 2007 in the range of 4.0 to 5.0 cents per kilowatthour (kWh), which would be sufficient to cover its projected costs of about 3.8 to 3.9 cents per kWh in 2007. An analysis by Salomon Smith Barney, which extends through 2004, supports TVA’s position that market indicators suggest that the future market price of power will be higher during this part of the plan p"
1013,"eriod. Not all industry experts agree with TVA’s belief that the price of natural gas will necessarily drive electricity prices higher. For example, the Energy Information Administration (EIA) projects a downward price trend (in current dollars) between now and 2007 in the region in which TVA operates, in part due to declining coal prices that EIA projects would more than offset increasing gas prices. EIA also projects that nuclear fuel prices will remain stable. However, when projecting future prices by ge"
1014,"ographic region, EIA and other industry experts generally forecast the future market price of power on an average yearly price that includes all peaks and valleys. Such average yearly price forecasts are not directly comparable to TVA’s load-shaped forecast. Differing forecasts by various industry experts underscore the uncertainty of predicting the future market price of power. The higher actual market prices are, the better positioned TVA will be to generate revenue that could be used to pay down debt and"
1015," recover costs, including the costs of deferred assets. However, by increasing its projections for the future market price of power, TVA assumes it can accommodate a higher debt level than originally planned. Because of the uncertainly surrounding whether TVA’s projections of higher market prices in 2007 are accurate, TVA’s higher debt projections increase the risk that it will not be able to generate the revenue needed to recover all costs or offer competitively priced power at that time. In a competitive "
1016,"environment, these assumptions could increase the federal government’s risk of loss due to its financial involvement with TVA. A key objective of TVA’s 1997 plan was to alter its cost structure from a rigid, high fixed-to-variable cost relationship to a cost structure with more financial flexibility that is better able to adjust to a more volatile marketplace. However, while TVA has made positive steps, its financial flexibility remains below that of likely competitors, largely because its debt remains rela"
1017,"tively high. Another key objective of TVA’s 1997 plan was to reduce its cost of power. One of the components of the cost of power is the recovery of the costs of its capital assets. Similar to improvements in flexibility, while TVA has made some progress in recovering the costs of its capital assets, financial indicators show that TVA has recovered fewer of these costs than its likely competitors. In 1995 we reported that one option available for TVA to improve its financial condition was to raise rates whi"
1018,"le it is still legislatively protected from competition and use the proceeds to reduce its debt. In 1998, TVA implemented its first rate increase in 10 years. For the previous 10 years, TVA had chosen to keep rates as low as possible rather than generate additional revenue that could have been used to reduce debt. Revenue from TVA’s 1998 rate increase has reduced debt (and corresponding interest expense) and recovered some of the costs of deferred assets over the first 3 years of its 10-year plan. From Sept"
1019,"ember 30, 1997, through September 30, 2000, TVA reduced its debt from about $27.4 billion to about $26.0 billion. This debt reduction, along with the refinancing of debt at lower interest rates, enabled TVA to reduce its annual interest expense from about $2.0 billion in fiscal year 1997 to about $1.7 billion in fiscal year 2000. In addition, TVA has recovered about $1.1 billion of its deferred assets through rates. While not reducing debt and recovering the costs of deferred assets to the extent anticipate"
1020,"d in its original plan, these actions are important because they are a step toward giving TVA more financial flexibility to adjust its rates in a competitive environment. To assess the progress TVA has made in achieving its key objective of altering its cost structure from a rigid, high fixed-to-variable cost relationship to a cost structure with more financial flexibility, and to put TVA’s financial condition in perspective, we compared TVA to likely competitors in terms of (1) total financing costs, (2) f"
1021,"ixed financing costs, and (3) net cash generated from operations as a percentage of expenditures for property, plant, and equipment and common stock dividends. These ratios are indicators of TVA’s flexibility to withstand competitive or financial challenges. To assess TVA’s financing costs compared to these competitors, we computed the total financing costs to revenue ratio, which is the percentage of an entity’s operating revenue that is needed to cover all of its financing costs. A lower percentage indica"
1022,"tes greater flexibility to respond to financial or competitive challenges. Financing costs for TVA, which consist of the interest expense on its outstanding debt and payments made to the federal government as returns on past appropriations, are fixed costs in the short term that must be paid even in times of financial or competitive difficulty. In contrast, for the IOUs, financing costs include preferred and common stock dividends in addition to interest expense, because part of the IOUs’ capital is derived"
1023," from preferred and common stock and dividends represent the cost of this equity capital. Figure 5 shows that TVA’s total financing costs, although improved since 1994, remain high when compared to those of likely competitors. Next, we computed the fixed financing costs to revenue ratio, which indicates the percentage of operating revenues needed to cover the fixed portion of the financing costs. For this ratio, we excluded the common stock dividends paid by IOUs because these are not contractual obligation"
1024,"s that must be paid. They can be reduced—or even suspended in extreme cases—to allow an entity to respond to financial or competitive challenges. As with the total financing costs to revenue ratio, the lower the percentage of the fixed financing costs to revenue, the greater the financial flexibility of the entity. Figure 6 shows that, while TVA has made progress since 1994, its fixed financing costs remain high compared to those of likely competitors. For example, for fiscal year 1999, 28 cents of every re"
1025,"venue dollar earned by TVA went to pay for fixed financing costs compared to about 9 cents on average for its likely competitors. Another key indicator of financial flexibility is the ratio of net cash from operations (i.e., cash in excess of operating and interest expenses) to expenditures for property, plant, and equipment (PP&E) and common stock dividends. This net cash in effect represents the amount available for management’s discretionary use. A percentage of 100 would indicate sufficient net cash pro"
1026,"vided by operations to pay for 100 percent of annual PP&E expenditures and common stock dividends. By necessity, utilities that are unable to pay for capital expenditures from net cash are forced to pay for them through retained earnings or by borrowing funds or issuing stock. Issuing debt to cover capital expenditures increases a utility’s cost of power by requiring annual interest payments, and issuing stock could also increase the cost of power through the payment of dividends. Since TVA does not pay div"
1027,"idends, its ratio only includes expenditures for PP&E. A higher percentage indicates greater flexibility. Because of increased revenue from TVA’s recent rate increase, a significant reduction in annual capital expenditures for its nuclear power program, and cost control measures that reduced certain expenses, TVA’s ratio has improved significantly and now compares favorably to those of likely competitors. Figure 7 illustrates the improvement TVA has made to date compared to likely competitors. Electricity p"
1028,"roviders, including TVA, generally recover their capital costs once the capital assets have been placed in service by spreading these costs over future periods for recovery through rates. This way, customers “pay” for the capital assets over time as the assets provide benefits. When a decision is made not to complete a capital asset, it becomes “abandoned.” Accounting standards require that abandoned assets be classified as regulatory assets and amortized into operating expense; therefore, they would be inc"
1029,"luded in rates over time. Thus, even though abandoned assets are nonproductive, the costs may still be recovered. TVA’s three uncompleted deferred nuclear power units have not been classified as abandoned, even though no construction work has been done in the last 12 to 15 years. In 1995 and 1997, we reported that TVA should classify them as regulatory assets and begin to recover the costs immediately. However, TVA continues to assert that there is a possibility the units will be completed in the future and"
1030," has not classified them as regulatory assets and begun to recover their costs. As of September 30, 2000, the deferred cost of the three uncompleted nuclear generating units was about $6.3 billion. If TVA is required to compete with other electricity providers, depending on the market price of power and TVA’s cost of providing power, recovery of these deferred assets could be difficult. Effective for 1999, TVA began emphasizing the accelerated recovery of certain of its other deferred assets in its planning"
1031," and adopted accounting policies that would enable it to recover more of these costs earlier. However, as the following analysis indicates, TVA’s continued deferral of the $6.3 billion related to the three nuclear units would hinder its ability to compete in a restructured environment, if TVA tries to recover the costs through rates. This would increase the risk of loss to the federal government from its financial involvement in TVA. The extent to which the costs of deferred capital assets have not been rec"
1032,"overed by TVA compared to its likely competitors can be shown by two analyses. The first analysis compares the amount of capital assets that have not yet begun to be taken into rates to gross PP&E. For TVA, this consists of construction work in progress (CWIP) and the costs of the deferred nuclear units; for the other entities this consists of CWIP only. A lower ratio indicates fewer capital costs to be recovered through future rates, and therefore more flexibility to adjust rates to meet future competition"
1033,". TVA’s ratio improved—dropping by more than half—when it brought two nuclear plants on line in 1996 and began to recover their costs. However, as figure 8 shows, the portion of TVA’s capital assets that has not yet begun to be taken into rates remains significantly higher than that of likely competitors. This is due largely to the deferral of TVA’s three uncompleted nuclear units. For example, about 19 percent of the total cost of TVA’s PP&E as of September 30, 1999, was not in rates, while the highest per"
1034,centage for TVA’s likely competitors was only 10 percent. A second way to analyze the extent to which capital costs have been recovered through rates is to compare accumulated depreciation/amortization to gross PP&E. A higher ratio indicates that a greater percentage of the cost of PP&E has been recovered through rates. A utility that has already recovered a greater portion of its capital costs could be in a better financial condition going into an increasingly competitive environment because it would not h
1035,"ave to include those costs in future rates. TVA has also made progress in this area since 1994, as have, in general, its likely competitors. However, figure 9 shows that as of September 30, 1999, TVA had recovered a substantially smaller portion of its capital costs than most of its likely competitors, again, largely due to the deferred nuclear units. When considering its financing costs and unrecovered deferred assets, TVA’s financial condition compares unfavorably to its likely competitors. Although TVA’s"
1036," ratio of net cash from operations to expenditures for PP&E and common stock dividends is better than its likely competitors, this advantage is negated by TVA’s relatively higher financing costs, including fixed financing costs, and relatively higher deferred asset costs. These factors reduce TVA’s financial flexibility to respond to future financial or competitive pressures, a key objective of TVA’s 10-year plan. Bond analysts with experience rating TVA’s bonds confirmed our assessment by stating that if f"
1037,"orced to compete today, TVA’s financial condition would pose a serious challenge. The analysts further stated that their Aaa rating of TVA bonds is based on TVA’s ties to the federal government and the belief that any restructuring legislation would give TVA sufficient time to prepare for competition. According to the analysts, their bond rating of TVA was not based on the same financial criteria applied to the other entities rated. When assessing the progress TVA has made in achieving the key objectives of"
1038," its 1997 plan, TVA’s financial condition remains unfavorable compared to its likely competitors in the current environment. However, TVA also has certain competitive advantages. Specifically, it remains its own regulator; is not subject to antitrust laws and regulations; enjoys a high bond rating, and associated lower interest costs, based on its ties to the federal government; is a government entity that is not required to generate the level of net income that would be needed by a private corporation to p"
1039,"rovide an expected rate of return; is not required to pay federal and state income taxes and various local taxes, but is required to make payments in lieu of taxes to state and local governments equal to 5 percent of gross revenue from sales of power in areas where its power operations are conducted; in addition, TVA’s distributors are also required to pay various state and local taxes; and has relatively more low-cost hydroelectric power than neighboring utilities. Although TVA enjoys these competitive adv"
1040,"antages, its high debt and unrecovered costs would present challenges in a competitive environment. However, it is not possible to predict TVA’s future competitive position. In addition to uncertainties over the future market price of power, TVA’s future competitive position will be affected by a number of issues, including the specific requirements of any legislation that might remove TVA’s legislative protections, including whether it would be able to retain some or all of the competitive advantages descr"
1041,"ibed previously; actions being taken by TVA to prepare for competition in relation to those being taken by TVA’s competitors; the amount of time before TVA might lose its protections from competition and is required to compete with other utilities—the longer TVA is legislatively protected from competition, the longer it will have to reduce its debt and related financing costs and recover deferred costs through rates; the extent to which TVA would write off all or a portion of the cost of its deferred nuclea"
1042,"r units to retained earnings should it go from a regulated to a restructured, competitive environment. To the extent retained earnings is sufficient to cover the cost of the write-offs, any costs written off directly to retained earnings would not have to be recovered through future rates; and total cost of delivering power in relation to likely competitors, generation capacity and mix, transmission capability, and geographic location. Stranded costs can generally be defined as costs that become uneconomica"
1043,"l to recover through rates when a utility moves from a regulated to a competitive environment. Stranded costs arise in competitive markets as a result of uneconomic assets, the costs of which are not recoverable at market rates. There are two commonly used methods for calculating stranded costs, and various mechanisms have been used to recover them in the states that have restructured their electricity markets. TVA’s potential for stranded costs arises mainly from its uneconomic assets—primarily its three n"
1044,onproducing nuclear units with unrecovered costs totaling about $6.3 billion—and the fixed costs associated with its high debt. The mechanism(s) that would be available to TVA to recover stranded costs would determine which customer group would pay for them. Stranded costs occur when a utility moves from a regulated to a competitive environment and is unable to recover certain costs because the market price of power will not allow it to generate revenue at a level sufficient to recover these costs. Such cos
1045,"ts result from past decisions that were considered prudent when they were made, and the costs would have been recoverable in a cost-based, regulated environment. However, in a competitive environment, recovery of these costs would force a utility’s price above market, and it consequently could not recover them by charging market-based rates. As discussed below and in appendix II, states that have restructured their electricity markets have addressed the issue of mitigating and recovering potential stranded "
1046,"costs in various ways. Stranded costs can be the result of, among other things: investment in generation assets that may not be able to produce competitively priced power in a restructured environment, even though the investments were considered prudent at the time they were made; power purchase contracts made in anticipation of future needs that would become uneconomical should market prices for power in a competitive market become lower; regulatory assets, such as deferred income taxes that regulators wou"
1047,"ld have eventually allowed utilities to collect but may not be recoverable in a competitive market; future decommissioning costs for nuclear facilities; and social programs where public utility commissions mandated spending for programs such as demand side management−such costs would typically be capitalized and amortized in a regulated environment, but, since the costs are not part of generating power, the market price for electricity under competition may not allow recovery of them. Two methods are common"
1048,"ly used to calculate the amount of allowable stranded costs—the FERC “revenues lost” methodology and the “asset-by- asset approach.” FERC has jurisdiction over stranded cost recovery related to wholesale power sales and power transmission and uses the revenues lost method in determining allowable stranded costs for these activities. If legislation is enacted providing for TVA to compete in a restructured environment, TVA would likely fall under FERC jurisdiction for stranded cost recovery for its wholesale "
1049,"customers. TVA’s wholesale sales to its 158 distributors were about $6 billion in fiscal year 2000, or about 88 percent of TVA’s total operating revenues. Under the FERC methodology, whether a utility’s plants are nonproducing or productive is immaterial to the stranded cost calculation, as long as the costs associated with the plants are included in rates at the time a customer departs TVA’s system. According to FERC officials, stranded cost recovery assumes the costs are already in the rate base; if not, "
1050,"FERC officials told us they would likely not consider them in a stranded cost recovery claim. The three deferred nuclear units, with costs of about $6.3 billion as of September 30, 2000, that TVA has not yet begun recovering, are a primary reason for TVA’s potential exposure to stranded costs. However, TVA’s projections through 2007, using its current power rates, show that by the end of 2007 the costs will have been reduced to about $3.8 billion. Depending on the timing of any restructuring legislation aff"
1051,"ecting TVA and assuming that FERC would have jurisdiction over TVA, it is unclear whether FERC would consider these costs to be in TVA’s rate base and, thus, allow TVA to include some or all of these costs in a stranded cost recovery claim. In the past when TVA calculated its stranded costs, it used the FERC “revenues lost” methodology. When the 4-County Electric Power Association (near Columbus, Mississippi) and the city of Bristol, Virginia, threatened to find other sources of power, TVA used the FERC met"
1052,"hodology to calculate stranded costs, and TVA officials told us that they would continue to use the FERC methodology to calculate stranded costs in the future. TVA’s calculations of stranded costs for the 4-County Electric Power Association ranged from $57 million to $133 million. The 4-County Electric Power Association ultimately decided not to leave the TVA system and therefore no stranded costs were assessed. In contrast, Bristol did leave the TVA system. TVA again calculated stranded costs using the FER"
1053,"C methodology and initially attempted to assess Bristol for $54 million for stranded costs. However, TVA and the city of Bristol ultimately negotiated a settlement that included an agreement under which Bristol would not be assessed for stranded costs, but would purchase transmission and certain ancillary services from TVA. According to a FERC official, under the revenues lost method, when a customer leaves a utility’s system, stranded costs are calculated by first taking the revenue stream that the utility"
1054," could have expected to recover if the customer had not left, then subtracting the competitive market value of the electricity capacity released by the departing customer (that the utility will sell to other customers), then multiplying the result by the length of time the utility could have reasonably expected to continue to serve the departing customer. Figure 10 illustrates TVA’s potential application of the FERC methodology. The second commonly used method to calculate stranded costs is the “asset-by-as"
1055,"set” or “bottoms up” approach. This method has been used by the states when they restructure their retail markets. In this method, the market value of a utility’s generating assets is determined and compared to the amount at which those assets are currently recorded on the utility’s books (book value). The difference would be reflected on the income statement as a gain or loss and recorded in the retained earnings of the organization. If the total book value of a utility’s generating assets exceeds their to"
1056,"tal market value, the utility would have stranded costs equal to the difference between book and market values. Because TVA is a unique self-regulator that crosses state borders and is not currently subject to FERC regulation, it is unclear what entity would have jurisdiction over any stranded cost recovery at the retail level. Sales to TVA’s direct service industrial customers and other nondistributors, which we consider retail sales because they are sales to final users, were about $0.7 billion in fiscal "
1057,"year 2000, or about 10.4 percent of TVA’s total operating revenues. In the states that have restructured their electricity markets, there have been five commonly used mechanisms to recover stranded costs. Depending on the approval of state regulators, utilities have the following options; the choice of option affects which customer group pays. Exit fees − fees charged to departing customers, either via a lump sum or over a set number of years. Competitive transition charge (or competitive transition assessm"
1058,"ent) − either (1) a one time charge applied to all customers at the time the state initiates restructuring, or (2) charges based on kilowatthour (kWh) usage, usually charged to remaining customers over a set number of years. Wires charge (also called transmission surcharge) − a predetermined surcharge that is not based on kWh usage, which is added to remaining customers’ power bills during a set period of time; sometimes considered a subset of competitive transition charges. Rate freeze or cap − regulators "
1059,"set a cap on the total amount a utility can charge; however, under the cap, the regulator would allow the utility to recover stranded costs by charging higher prices for the two components of the market that are still regulated (distribution and transmission). The cap is usually frozen for the estimated length of time needed to recover the stranded costs. Remaining customers bear the burden. Write off to retained earnings − In the case where a utility moves from a regulated to a competitive environment and "
1060,"has assets whose book value is in excess of market value, it would mark its assets to market value, and recognize any excess of book value over market value as a loss on the income statement, which would flow through to retained earnings. Retained earnings represent cumulative net profit from past operations that can be used to benefit either stockholders or current and future customers, by keeping profits in the company for future use. In addition, the change to a competitive environment, with overvalued a"
1061,"ssets, could result in stranded costs. However, the legislation that caused the change to a competitive environment could give utilities the option of recovering the amount of overvalued assets over time, rather than charging all the cost to retained earnings immediately. Writing off the costs of the overvalued assets to retained earnings immediately would mitigate potential stranded costs and eliminate the need to recover the cost of these assets from future ratepayers, making a utility’s power rates poten"
1062,"tially more competitive. TVA continues to operate similar to a regulated monopoly because of its legislative protections from competition. Since regulatory changes requiring TVA to compete with other electricity providers have not been made, TVA does not currently have stranded costs. However, as discussed previously, TVA has uneconomic assets—primarily its three nonproducing nuclear units with unrecovered costs totaling about $6.3 billion that do not generate revenue. In 1998, TVA estimated the net realiza"
1063,"ble value of these assets to be about $500 million. TVA has not made a final decision on whether to abandon these three units or complete them and place them into service. If it abandons them, under current accounting standards, This action would require approval of TVA’s Board. If its retained earnings are not sufficient to cover any losses arising from revaluation of these units, TVA could find itself with stranded costs if legislation were enacted that would require TVA to compete with other electricity "
1064,"providers before it completes these units and brings them into operation. TVA’s ability to recover costs that could ultimately become stranded is compounded by TVA’s high debt and corresponding financing costs. FASB 90 would apply because TVA remains in a regulated environment. restructuring legislation would have required these contracts to be renegotiated; however, it is possible that this clause will remain in effect. Thus, if TVA enters a competitive environment with stranded costs, it may be unable to "
1065,"collect them from certain departing customers after 2007, and the burden for recovering these costs may fall on remaining customers or retained earnings from prior customers. According to TVA officials, if TVA were unable to collect any stranded costs from departing customers under its contracts, remaining customers would bear the burden of stranded cost recovery. To the extent stranded cost recovery is spread among remaining customers, it would become more difficult for TVA to price its power competitively"
1066,". A key element of TVA’s 10-year business plan is to reduce its cost of power. TVA planned to accomplish this by reducing expenses, limiting capital expenditures, and instituting a rate increase in 1998 to increase the cash flow available to pay down debt. Reducing debt, in turn, reduces the corresponding annual interest expense. By reducing interest expense, TVA frees up cash that can be used to further reduce debt. In addition, these actions increase the portion of revenue that would be available to recov"
1067,"er the costs of its deferred assets. To the extent that TVA reduces costs, it will be able to offer more competitively priced power and its distributors will be less likely to leave TVA’s system for alternate suppliers. At the wholesale level, under current FERC rules, if its distributors do not leave, TVA does not have the option of recovering stranded costs. If its distributors decide to leave, TVA would have potential stranded costs if TVA is either unable to sell the power released by the departing dist"
1068,"ributor or is forced to sell the power that would have been purchased by the departing distributor for lower rates. Figure 11 illustrates the link between debt reduction and stranded costs. This circular relationship is key to understanding how TVA’s 10-year plan links to potential stranded costs. In its original 10-year plan, a key element of TVA’s plan was to reduce its cost of power by cutting its debt in half by September 30, 2007. By reducing debt, TVA would also reduce future interest expense, which w"
1069,"ould free up additional cash that could be used to further reduce debt. However, not explained in the published plan was how the revenue generated from its 1998 rate increase would give TVA the opportunity to recover the cost of its deferred assets. By increasing revenue and reducing expenses, TVA would free up revenue that could be used to recover the cost of its deferred assets and cash that could be used to pay down debt. As discussed previously, TVA estimates the additional revenue from the rate increas"
1070,"e over the first 3 years of the plan to be about $1.24 billion. TVA had the option to use that revenue for any authorized purpose, such as adding any excess revenue to retained earnings, accelerating depreciation, or amortizing its deferred assets, including writing down its deferred nuclear units. TVA planned to first amortize some of its other deferred assets before writing down its deferred nuclear units. To accomplish this, TVA’s Board of Directors approved a resolution to begin accelerating amortizatio"
1071,"n of these other deferred assets. This means that in any given year in which TVA has revenue sufficient to meet all of its legal requirements to recover all costs and comply with all laws and regulations regarding revenue levels, any excess revenue can be used to accelerate the write-down of a portion of the costs of its deferred assets; this would result in TVA recovering these costs over time. In relation to its deferred nuclear units, TVA’s original plan was to recover all but $500 million of these $6.3 "
1072,"billion costs by September 30, 2007, at which time TVA officials believed it could be subject to a competitive environment through legislative changes and expiring customer contracts. Its proposed revision to the 10-year plan now calls for a balance of about $3.8 billion by 2007, or about $3.3 billion more than originally planned. To the extent TVA recovers the costs of the deferred nuclear units before such time as the Congress may remove its legislative protections, it would no longer have to recover thes"
1073,"e costs through future rates, potentially making its power more competitive, and giving it more flexibility to operate in a competitive environment. And, as noted above, if TVA is able to offer competitively priced power by 2007, its distributors would be less likely to leave and TVA would be less likely to have stranded costs. If TVA were to lose its legislative protections today, its high level of debt and corresponding high financing costs would be a competitive challenge. This competitive challenge woul"
1074,"d be even greater if it were at the same time attempting to recover costs of deferred assets through rates. Despite having reduced its debt and deferred assets over the past 3 years, TVA still compares unfavorably to its likely competitors in these regards. In addition, TVA is revising its goals for reducing debt and deferred assets downward significantly. Whether or not the deferred assets will contribute to stranded costs that are recoverable from customers depends on the specific requirements of any legi"
1075,"slation that might remove TVA’s legislative protections and TVA’s ability to retain its current competitive advantages in a restructured environment. In addition, the longer that TVA has to prepare for competition, the longer it will have to reduce debt and recover the costs of its deferred assets and position itself more competitively. Ultimately, TVA’s ability to be competitive will depend on the future market price of power, which cannot be predicted with any certainty. TVA, in a letter from its Chief Fi"
1076,"nancial Officer, disagreed with our findings in three areas—the future market price of electricity, TVA’s financial condition compared to other utilities, and the relationship between TVA’s deferred assets and potential stranded costs. TVA’s comments are reproduced in appendix III and discussed below. In addition, TVA officials provided technical comments on the draft report, which we have incorporated as appropriate. TVA also took the opportunity to comment, in a section called “Looking Back,” on progress "
1077,"it has made since issuing its 10-year plan in 1997, including reducing debt and recovering the costs of certain deferred assets, and its goals and strategies for the future. We discuss these comments at the end of this section. Market Prices for Electricity TVA agreed that the future market price of electricity is a key factor in assessing the likelihood of success in a competitive environment and that the price cannot be predicted with any certainty, but disagreed on the general direction of prices. TVA an"
1078,"d its consultants are projecting higher future market prices. As evidence of projected increases in market prices, TVA cites higher trading prices, higher “forward” prices offered by suppliers, higher long-term contract price offerings, and higher prices for fuel sources such as natural gas. Our report discusses TVA’s views in this regard; however, we underscore the uncertainty of projections of the future price of power by citing a knowledgeable source that projects lower prices. In the draft we provided t"
1079,"o TVA for comment, we included point estimates from various sources for the future market price of power. Considering TVA’s comments, we agree that point estimates imply more certainty about future prices than we intended or is warranted. As a result, we revised our report by removing those estimates. However, to underscore the uncertainty of future market prices, we have included the Energy Information Administration’s (EIA) projection of a downward trend in the future market price of power in the region i"
1080,"n which TVA operates. EIA’s analysis was based in part on a projected decline in coal prices that, according to EIA, would more than offset projected increases in gas prices. EIA is also projecting that nuclear fuel prices will remain steady. We believe these are relevant points to consider since, in the year 2000, TVA’s power generation fuel mix was about 63 percent coal, 31 percent nuclear, 6 percent hydropower (which has no fuel cost), and less than 1 percent natural gas. Our main point is that the futur"
1081,"e market price of power “cannot be predicted with any certainty.” TVA cites prices for electricity and natural gas for December 2000 as an example of market direction and volatility to support their projection of future higher prices. We agree that the market has shown volatility at certain times. In fact, this volatility strengthens our view that future prices are uncertain. In addition, according to data from the National Oceanic and Atmospheric Administration, in the entire region in which TVA markets po"
1082,"wer, December 2000 was one of the 10 coolest periods on record over the last 106 years. We would not predict the future on the basis of such an anomaly. TVA commented that it appreciated our recognition of its progress in improving its financial condition, but objected to our findings that TVA’s financial condition compares unfavorably to likely competitors. In particular, TVA questioned our choice of financial ratios in comparing it to other utilities. TVA noted that most of our ratios ignore total cost an"
1083,"d merely reflect the differences between the capital structure of TVA and that of IOUs. We disagree with TVA in this regard. Our choice of ratios was appropriate because they result in meaningful information regarding the relative financial conditions of the entities. To assess the financial condition of the entities, we selected two types of ratios. The first type indicates an entity’s financial flexibility to successfully respond to competitive and financial challenges. In this regard, we compared TVA to "
1084,"other utilities in terms of (1) total financing costs, (2) fixed financing costs, and (3) the ability of an entity to pay for capital expenditures and common stock dividends from net cash generated from operations. Each of these ratios is an indicator of an entity’s ability to withstand stressful financial conditions. Interest costs are particularly important to consider because they are fixed costs that must be paid even in times of competitive or financial pressures. Contrary to TVA’s comment letter, we r"
1085,"ecognize the differences between TVA’s financial structure and those of IOUs and accounted for those differences in performing our analyses. As our report notes, TVA’s financing (except for internally generated cash, as with all entities we assessed) is obtained by issuing debt, while IOUs also have the option of equity financing. The requirement that TVA obtain financing only by issuing debt could be considered a competitive disadvantage because of the corresponding fixed financing costs which affect TVA’s"
1086," financial flexibility. The ratio of total financing cost to revenue compares TVA interest costs, as a percent of revenue, to the IOUs’ costs of (1) interest, (2) preferred stock dividends, and (3) common stock dividends as a percent of revenue. The ratio of fixed financing costs to revenue compares TVA interest costs, as a percent of revenue, to the fixed portion of the IOUs’ financing costs (i.e., their interest costs and preferred stock dividends) as a percent of revenue. These analyses appropriately adj"
1087,"ust for the different financing structures of the entities in assessing financing costs, and assessing the extent to which entities have fixed costs that limit their financial flexibility is a valid means by which to consider their respective financial conditions. The second type of financial ratio we used indicates the extent to which capital costs, including the costs of deferred assets, have been recovered. In this regard, we compared TVA to other utilities in terms of the (1) portion of capital assets t"
1088,"hat has not begun to be included in rates and (2) the portion of gross property, plant, and equipment that has already been recovered. These indicators are important because a high level of unrecovered capital costs could compound an entity’s challenges as it enters a competitive market. In the case of TVA, if it enters a competitive environment with the relatively high debt service costs it now carries, its ability to price its power competitively could be jeopardized, thus increasing its potential for str"
1089,"anded costs. Our report notes that TVA’s competitive challenges would be even greater if it were at the same time attempting to recover the costs of deferred assets through rates. We disagree with TVA’s statement that a single statistic—the residential price of electricity in TVA’s region—best reflects TVA’s competitiveness. While we agree that selling price is a function of cost, we note that TVA has a large amount of unrecovered costs. Since TVA remains in a regulated environment, with the ability to set "
1090,"its own rates and to recover or defer recovering the costs of some of its capital assets, this single statistic does not provide a complete picture of TVA’s costs nor its ability to operate in a competitive environment. In addition, TVA’s current cost of delivering power does not provide a complete picture of the competitive environment TVA would likely be subject to if its legislative protections and the benefits of being a wholly owned government corporation were removed. We also disagree with TVA’s state"
1091,"ment that our ratios are distorted because they do not recognize the uniqueness of TVA’s business compared to others. According to TVA, a distortion results when TVA, which has predominantly wholesale sales, is compared to other entities that have predominantly retail sales. However, these other entities also sell at wholesale and would be competing with TVA at that level. Regardless, an entity’s fixed costs and portion of capital assets that have not been recovered are relevant and important considerations"
1092," as one considers an entity’s prospects in a competitive market, be it wholesale or retail. We also note that, in its comment letter, TVA compared its total production costs to those of the 50 largest power producers in the United States, which for the most part are providers of retail power, but objected to our comparing TVA to some of the same utilities. TVA states “the report is misleading when it implies that the historical accounting value of any particular set of assets determines the potential for st"
1093,"randed costs,” and that it is the net market value of all assets combined that is germane to the determination of stranded costs, and only if their amortization drives total cost above market. While we do not disagree with TVA’s interpretation of stranded costs, we do disagree that historical accounting value plays no part in determining stranded costs. Historical accounting value, less accumulated depreciation and/or amortization, shows the amount of remaining capital costs to be recovered in the future. I"
1094,"f TVA is attempting to recover more of these costs than other utilities in a competitive market and, as a result, its rates are above market, it could have stranded costs. TVA also implies that we consider its deferred assets to be a proxy for stranded costs. On the contrary, our report clearly states that TVA could have stranded costs if it were unable to recover all its costs when selling power at or below market rates. In addition, we state that TVA’s potential for stranded costs relates to its high debt"
1095," and deferred assets, which as of September 30, 2000, totaled about $26 billion and $8 billion, respectively. Recovery of these costs could drive the price of TVA’s power above market, leading to stranded costs. This is consistent with TVA’s definition of stranded costs. Our report reaches no conclusion on whether TVA will have stranded costs; it merely points out that if TVA is unable to price its power competitively because it is attempting to recover costs it incurred in the past, it could have potential"
1096," stranded costs, depending on market conditions at the time. As noted above, due to the uncertainty of the future market price of power, we also do not conclude on whether TVA will be competitive in the future. TVA notes that it has made progress in reducing debt, and corresponding interest expense, and recovering the costs of deferred assets since it released its 1997 plan. For example, by the end of fiscal year 2001, TVA expects to have reduced its debt by about $2.2 billion and its annual interest expens"
1097,"e by about $300 million, and expects to have recovered about $2 billion in costs associated with its deferred assets. While we agree that TVA is moving in the right direction, TVA’s current proposed revisions to its 10-year plan project significantly less progress than envisioned in 1997 and these changes are not without consequence. As our report states, TVA’s current revisions to the plan estimate that debt outstanding at the end of fiscal year 2007 will be about $19.6 billion versus the $13.2 level antic"
1098,"ipated when TVA issued its 1997 plan. TVA notes that since issuing the plan in 1997, it changed its strategy by investing cash in new generating capacity that otherwise would have been used for debt reduction. However, in our report we correctly point out that, while TVA has made this change, the cash it has invested in new capacity is far less than its debt reduction shortfall. TVA’s current projections show its debt reduction through 2007 being about $6.4 billion less than planned in 1997, and its investm"
1099,"ent in new generating capacity about $1.3 billion more. As a consequence of this debt reduction shortfall, we estimate that TVA’s interest expense in 2008 will be about $416 million greater than if it had reduced debt to $13.2 billion. In the 1997 plan, one of TVA’s key stated objectives was to “alter its cost structure from its currently rigid, high fixed-to-variable cost relationship to a structure that is more flexible and better able to adjust to a volatile marketplace.” TVA’s 1997 plan further stated t"
1100,"hat interest expense is the cost component that, more than any other, challenges TVA’s ability to provide power at projected market rates in the future. This situation continues to be true today. However, as we state in our report, ultimately, TVA’s ability to be competitive will depend on the future market price of power, which cannot be predicted with any certainty. To the extent TVA is able to improve the financial ratios set out in our report, the better positioned it will be to deal with this future un"
1101,"certainty. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this letter until 7 days from its date. At that time, we will send copies of this report to appropriate House and Senate Committees; interested Members of Congress; Craven Crowell, Chairman, TVA’s Board of Directors; The Honorable Spencer Abraham, Secretary of Energy; The Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget; and other interested parties. The "
1102,"letter will also be available on GAO’s home page at http://www.gao.gov. We will also make copies available to others upon request. Please call me at (202) 512-9508 if you or your staffs have any questions. Major contributors to this report are listed in appendix IV. We were asked to answer specific questions regarding TVA’s (1) debt and deferred assets, (2) financial condition, (3) potential stranded costs, and (4) bond rating and its impact on TVA’s interest costs. As agreed with your offices, this report "
1103,"addresses the first three questions. We plan to issue a separate report to address the fourth question. Specifically, for each of these three areas, you asked us to determine: 1. Debt and deferred assets The progress TVA has made in achieving the goals of its 10-year business plan for reducing debt and deferred assets. The extent to which TVA has used the additional revenues generated from its 1998 rate increase to reduce debt and deferred and regulatory assets. How TVA’s financial condition, including debt"
1104," and fixed cost ratios, compares to neighboring investor-owned utilities (IOUs). The link between TVA’s debt and its potential stranded costs. Whether TVA has calculated potential stranded costs for any of its distributors, and if so, what methodology they used. TVA’s options for recovering any potential stranded costs. To identify the progress TVA has made in achieving the goals of its 10-year business plan for reducing debt and deferred assets, we reviewed GAO’s prior report on TVA’s 10-year Business Plan"
1105,"; interviewed TVA and Congressional Budget Office (CBO) officials; reviewed and analyzed various TVA reports and documents, including annual reports, audited financial statements, TVA’s 10-year business plan, and proposed updates to the plan; and analyzed supporting documentation (analytical spreadsheets, etc.) and assumptions underlying TVA’s 10-year plan and proposed updates to the plan. To identify the extent to which TVA has used the additional revenues generated from its 1998 rate increase to reduce de"
1106,"bt and deferred and regulatory assets, we obtained an estimate from TVA of the amount of additional revenue generated from its 1998 rate increase; analyzed sales and revenue data in the supporting schedules to the proposed revision to the 10-year plan to determine whether TVA’s estimate was reasonable; and compared the estimate of the amount of additional revenue generated from the 1998 rate increase to the reduction in debt and deferred assets over the first 3 years of the plan. To determine how TVA’s fina"
1107,"ncial condition, including debt and fixed ratios, compares to its likely competitors, we reviewed prior GAO reports on TVA that analyzed its financial determined likely competitors by analyzing prior GAO reports and other reports by industry experts; obtained and analyzed financial data from the audited financial statements of TVA, seven IOUs, and one independent power producer; computed and compared key financial ratios for TVA and the other eight reviewed the annual reports of the eight entities to determ"
1108,"ine what steps they have taken to financially prepare themselves for competition; interviewed TVA officials about their efforts to position themselves competitively, including their efforts to reduce debt, recover the costs of their capital assets, and recover stranded costs, and analyzed data on the future market price of power. The ratios we used in our comparison were computed as follows: The ratio of financing costs to revenue was calculated by dividing financing costs by operating revenue for the fisca"
1109,"l year. The financing costs include interest expense on short-term and long-term debt, payments on appropriations (TVA only), and preferred and common stock dividends (IOUs only). Note that preferred and common stock dividends were included in the IOUs’ financing costs to reflect the difference in the capital structure of these entities and TVA. The ratio of fixed financing costs to revenue was calculated by dividing financing costs less common stock dividends by operating revenue for the fiscal year. Commo"
1110,"n stock dividends were excluded from the IOUs’ financing costs because, since they are not contractual obligations that must be paid, they are not fixed costs. The ratio of net cash from operations to expenditures for PP&E and common stock dividends was calculated by dividing net cash from operations by expenditures for PP&E and common stock dividends for the fiscal year. Net cash from operations represents the cash received from customers minus the cash paid for operating expenses. Thus, net cash from oper"
1111,"ations represents the cash available for expenditures for PP&E, common stock dividends (IOUs only), and other investing and financing transactions. Again, we included common stock dividends in the IOUs ratios to reflect the difference in cash flow requirements for these entities and TVA. Preferred stock dividends were not included because they come out of operating revenues and thus are already reflected in the net cash figure. Because these data were not available for all entities, we excluded the effect o"
1112,"f capital assets acquired through acquisition. The ratio of accumulated depreciation and amortization to gross PP&E was calculated by dividing accumulated depreciation and amortization by gross PP&E at fiscal year-end. The ratio of deferred assets to gross PP&E was calculated by dividing deferred assets by gross PP&E at fiscal year-end. Deferred assets include construction in progress and for TVA only, its deferred nuclear units. Deferred nuclear units are included for TVA because TVA treats them as constru"
1113,"ction in progress (i.e., not depreciated). For comparison purposes, we selected the major IOUs that border on TVA’s service area because industry experts told us that due to the high cost of transmitting electricity, TVA’s competition would most likely come from IOUs located close to its service area. However, to represent the changing structure of the electricity industry, we included one large independent power producer. We did not include any publicly owned utilities in our analysis because the publicly "
1114,"owned utilities that provide electricity in the states served by our IOU comparison group generally only distribute but do not generate electricity. The IOUs used in our comparisons include (1) American Electric Power, (2) Carolina Power & Light, (3) Dominion Resources, (4) Duke Power, (5) Entergy, (6) LG&E Energy Corporation, and (7) Southern Company. The independent power producer was AES Corporation. To obtain information on various issues facing utilities in a restructuring industry, we reviewed documen"
1115,"ts from the Energy Information Administration (EIA) and the annual reports of TVA and the IOUs. We also spoke with the organization that represents TVA’s distributors to understand their concerns about TVA’s future competitiveness. In addition, we contacted financial analysts to identify the criteria they use to evaluate the financial condition of electric utilities. To identify the link between TVA’s debt and its potential stranded costs, we interviewed industry experts at the Federal Energy Regulatory Com"
1116,"mission, Edison Electric Institute (EEI), and CBO on the options other utilities have pursued to recover stranded costs; reviewed EIA documents pertaining to how stranded costs have been dealt with in the states that have restructured; questioned TVA officials on TVA’s plans for mitigating, calculating, and recovering potential stranded costs; and analyzed TVA’s contracts to determine whether TVA has contractually relieved its customers of any obligation to pay for stranded costs. To determine whether TVA h"
1117,"as calculated stranded costs that could potentially be assessed against it distributors, and if so, the methodology used, we questioned TVA officials on whether they had calculated potential stranded costs for any of its distributors and obtained information on the methodology TVA used to calculate potential stranded costs for the two distributors who informed TVA of their intent to leave its system. To identify the options for recovering any potential stranded costs at TVA, we obtained and analyzed informa"
1118,"tion from EIA, EEI, and CBO regarding the mechanisms for stranded cost recovery that have been used in states that have restructured their electricity industries and interviewed FERC officials and reviewed FERC documents pertaining to stranded cost recovery. We conducted our review from April 2000 through January 2001 in accordance with generally accepted government auditing standards. To the extent practical, we used audited financial statement data in performing our analyses, or reconciled the data we use"
1119,"d to audited financial statements; however, we were not able to do so in all cases and we did not verify the accuracy of all the data we obtained and used in our analyses. Information on TVA’s debt reduction, deferred asset recovery and projection of the future market price of power was based on TVA’s anticipated changes to the 10-year plan at the time of our review. During the course of our work, we contacted the following organizations. Congressional Budget Office, Department of Energy’s Energy Informatio"
1120,"n Administration, Federal Energy Regulatory Commission, Office of Management and Budget, and Tennessee Valley Authority. Moody’s Investors Service, New York, New York, and Standard & Poor’s, New York, New York. Tennessee Valley Public Power Association, Chattanooga, Tennessee. Federal Accounting Standards Advisory Board, Washington, D.C., Edison Electric Institute, Washington, D.C., and Standard & Poor’s DRI, Lexington, Massachusetts. In the states that have restructured their electricity industries, there "
1121,"have been three commonly used mechanisms to mitigate stranded costs. These mitigation measures can be employed either before or during restructuring. Depending on the approval of state regulators, utilities have the following options: Securitization − Under securitization, state restructuring legislation authorizes a utility to receive the right to a stream of income from ratepayers, such as a competitive transition charge. The utility turns over that right to a state bank for cash, thus effectively refinan"
1122,"cing present debt and trading a regulated income stream for a lump sum of money. The state bank issues debt (i.e., sells bonds) secured by future customer payments or the competitive transition charge on customers' bills. The benefits from securitization stem from lower financing costs − the state bonds generally are free from state tax and have a higher rating than the utility, thus reducing interest expense. Therefore, the customer surcharge required to pay off the bonds is less than the charge that would"
1123," be necessary to produce the same amount of money had the utility issued the bonds itself. Mitigation before restructuring − With this option, regulators allow a utility to take steps to reduce potential stranded costs before full restructuring is implemented, including allowing accelerated depreciation. To the extent a utility is permitted to mitigate potential stranded costs, customers benefit. Mandatory asset divestiture − Requiring a utility to divest itself of generating assets produces revenue that ca"
1124,"n be used to recover potential stranded costs, potentially benefiting all customers. When a utility sells its assets, it can use the cash to reduce debt. At the same time, it no longer has to recover the cost of those assets, making its power potentially more competitive. However, it also must now purchase power and is thereby subject to market risk. In addition, proceeds from the sale are assumed to cover the book value of the asset; if not, potential stranded costs remain. Also, asset divestiture affects "
1125,"stockholders; to the extent a utility receives cash in excess of book value, stockholders benefit. In addition to the individual named above, Richard Cambosos, Jeff Jacobson, Joseph D. Kile, Mary Merrill, Donald R. Neff, Patricia B. Petersen, and Maria Zacharias made key contributions to this report. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, "
1126,"also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past"
1127," 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: fraudnet@gao.gov 1-800-424-5454 (automated answering system)"
1128,"The federal government buys a myriad of goods and services from contractors. Federal agency acquisitions must be conducted in accordance with a set of statutes and regulations designed to accomplish several objectives, including full and open competition and various social and economic goals, such as encouraging small business participation. In the late 1980s and early 1990s, some became convinced that the federal procurement system had become complex, unwieldy, and overwrought with tension between the basi"
1129,"c goals of efficiency and fairness because of a proliferation of requirements governing almost every aspect of the acquisition process. In this environment, there were concerns about the government's ability to take full advantage of the opportunities offered by the commercial marketplace. In response to these concerns, Congress enacted two major pieces of reform legislation, FASA and Clinger-Cohen, aimed at creating a more efficient and responsive federal acquisition system. Concerns remain about whether t"
1130,"he changes brought about by acquisition reform during the 1990s have come at the expense of placing small business at a disadvantage. The federal procurement process underwent many legislative and administrative changes during the 1990s, some of which have the potential to affect the ability of small businesses to obtain federal contracts. Other changes occurred during this time, such as reductions in the amount the government spent on goods and services and the size of its acquisition workforce, which agen"
1131,"cy officials believe have also encouraged procurement streamlining. These changes included the use of certain contract vehicles, such as MACs. In addition, reforms have modified the dollar range of contracts that are reserved for small businesses and encouraged the use of purchase cards, which are similar to corporate credit cards, for the use of certain purchases. Some organizations that represent small businesses are concerned that these changes could potentially erode the ability of small businesses to r"
1132,"eceive federal contracts. At the same time that acquisition reform legislation was enacted, other factors changed how much the federal government bought as well as the way it buys goods and services. During the 1990s, the federal government decreased the amount spent on goods and services and downsized the acquisition workforce. The total amount of goods and services that the government purchased, including those bought with purchase cards, declined by about 7 percent from an inflation-adjusted $224 billion"
1133," in fiscal year 1993 to $209 billion in fiscal year 1999. Consequently, all businesses had to compete for a reduced total of federal contract expenditures. Figure 2 shows the trend in total federal procurement expenditures during this period. Federal agencies also reduced their acquisition workforce personnel from 165,739 in fiscal year 1990 to 128,649 in fiscal year 1998, or approximately 22 percent, during this time, with many of these reductions taking place at the Department of Defense (DOD). According "
1134,"to agency officials, contracting officials have sought ways to streamline procurement practices within the applicable statutes and regulations partly as a result of these workforce reductions; this includes the use of previously authorized contracting vehicles such as blanket purchase agreements (BPA), indefinite-delivery indefinite-quantity (IDIQ) contracts, and GSA federal supply schedule contracts. Appendix I provides a description of these contract vehicles. Contract bundling is an acquisition practice "
1135,"that received a lot of attention in the 1990s and is often associated with but, in fact, is not actually contained in acquisition reform legislation enacted during this period. Federal agencies combine existing contracts into fewer contracts as a means of streamlining as well as reducing procurement and contract administration costs, a practice generally referred to as “contract consolidation.” A subset of consolidated contracts is “bundled contracts” that the Small Business Reauthorization Act of 1997 defi"
1136,"nes as the consolidation of two or more procurement requirements for goods or services previously provided or performed under separate, smaller contracts into a solicitation of offers for a single contract that is likely to be unsuitable for award to a small business concern due to the diversity, size, or specialized nature of the elements of the the aggregate dollar value of the anticipated award; the geographic dispersion of contract performance sites; or any combination of these three criteria. This act "
1137,"requires each federal agency, to the maximum extent practicable, to (1) promote participation of small businesses by structuring its contracting requirements to facilitate competition by and among small businesses and (2) avoid the unnecessary and unjustified bundling of contracts that are likely to be unsuitable for small business participation as prime contractors. Federal policy has also encouraged the use of governmentwide commercial purchase cards for micropurchases. The purchase card, issued to a broa"
1138,"d range of authorized agency personnel to acquire and pay for goods and services, is similar in nature to a corporate credit card and is the preferred method for purchases of $2,500 or less. Some organizations that represent small businesses believe that the purchase card makes it easier for government personnel to make purchases from sources other than small businesses because that may be more convenient for the purchaser. Small businesses, as a group, have received the legislatively mandated goal for fede"
1139,"ral contract expenditures each fiscal year from 1993 to 1999. Between fiscal years 1993 and 1997, when the legislative goal was at least 20 percent, small businesses received between 24 and 25 percent of total federal contract expenditures. In both fiscal years 1998 and 1999, when the goal increased to 23 percent, small businesses received 23 percent of total federal contract expenditures. Focusing on expenditures for new contracts worth over $25,000, our analysis shows that small businesses have received b"
1140,"etween 25 and 28 percent of these expenditures during this period. In addition, focusing on the various categories of goods and services that the federal government purchases, small businesses received a higher share in fiscal year 1999 of expenditures in new contracts for most categories of goods and services than they did in fiscal year 1993. Several contract vehicles accounted for about one quarter of all governmentwide expenditures for contracts over $25,000 in fiscal year 1999, and small businesses rec"
1141,"eived between 26 and 55 percent of expenditures for these contract vehicles in that year. We could not determine the amount or impact of contract bundling or the impact of the increased use of government purchase cards on small businesses. Although FASA requires that contracts over $2,500 up to $100,000 generally be reserved exclusively for small businesses, we could not determine the amount of expenditures for these contracts because, in some cases, information is reported to FPDC on contracts together wit"
1142,"h modifications. SBA and FPDC data indicate that federal agencies, as a whole, have met their annual governmentwide small business procurement goal from fiscal years 1993 to 1999. This legislative goal increased from at least 20 percent of total federal contract expenditures to 23 percent effective fiscal year 1998. Between fiscal years 1993 and 1997, when the legislative goal was at least 20 percent, small businesses received between 24 and 25 percent of total federal contract expenditures. In fiscal years"
1143," 1998 and 1999, when the legislative goal increased to 23 percent, small businesses received 23 percent of total federal contract expenditures. Figure 3 shows the share of total federal contract expenditures going to small businesses for this period. Under the Small Business Act, SBA has authority to prescribe a method to measure the participation of small businesses in federal procurement. In calculating the actual achievement of small business procurement goals for individual federal agencies, SBA exclude"
1144,"s certain categories of procurements from the base, or denominator. SBA has identified several categories of procurements that are excluded from the base because SBA officials believe that small businesses do not have a reasonable opportunity to compete for them, including (1) foreign military sales; (2) procurement awarded and performed outside the United States; (3) purchases from mandatory sources of supplies as listed in the Federal Acquisition Regulation; and (4) purchases for specific programs from th"
1145,"e Departments of State, Transportation, and the Treasury. SBA's Office of Advocacy disagrees with SBA's approach of excluding categories of procurements in establishing the base. Adding back the categories of procurement that SBA excluded, the Office of Advocacy reported that small businesses received about 21 percent of total federal procurement in fiscal year 1998 (rather than the 23 percent that SBA reported) and that, therefore, the governmentwide goal for small business procurement was not met in fisca"
1146,"l year 1998. Some organizations that represent small businesses have expressed concerns that small businesses are at a disadvantage when competing for new federal contracts. Therefore, we analyzed the share of expenditures for new contracts going to small businesses. These data do not include modifications to existing contracts, which account for approximately half of all governmentwide procurement expenditures during this time. Our analysis of FPDS data of new contract expenditures shows that small busines"
1147,"ses have received between 25 and 28 percent of such expenditures for contracts worth more than $25,000 between fiscal years 1993 and 1999. Figure 4 shows the results of our analysis. In calculating the share of total expenditures on new contracts going to small businesses from fiscal years 1993 to 1999, we used FPDC data on expenditures for new contracts worth more than $25,000 and did not exclude the types of expenditures that SBA excludes to calculate the small business procurement goal. As noted in figur"
1148,"e 2, the federal government has been spending less money on goods and services since fiscal year 1993. The only categories of goods and services that experienced increases in governmentwide purchases on new contracts worth more than $25,000 between fiscal years 1993 and 1999 were real property and other services. Despite this overall decline in contract purchases, small businesses received a higher share in fiscal year 1999 than in fiscal year 1993 of expenditures on new contracts worth $25,000 or more than"
1149," for 5 of the 8 categories of goods and services of government procurement: equipment, research and development, architect and engineering, automatic data processing services, and other services. Figure 5 shows governmentwide trends for purchases under new contracts of goods and services worth more than $25,000 and the share of these purchases going to small businesses. We analyzed FPDS data on the governmentwide use of certain contract vehicles for contracts over $25,000, including those that became popula"
1150,"r during the 1990s. We found that these vehicles represent a small but growing share of federal procurement expenditures. Because FPDS only captures data for some of these contract vehicles, we had to limit our analysis to MACs, IDIQs, BPAs, and GSA schedules. Expenditures for the four types of contract vehicles we analyzed represented 25 percent of federal procurement expenditures on contracts over $25,000 in fiscal year 1999, compared with 16 percent in fiscal year 1994. Small businesses received 32 perce"
1151,"nt of expenditures for these contract vehicles in fiscal year 1999 compared with 24 percent in fiscal year 1994. For each of the four types of contract vehicles in our analysis, the share of expenditures going to small businesses was between 26 and 55 percent in fiscal year 1999, depending on the type of contract vehicle. For example, expenditures going to small businesses for MACs increased from $524 million in fiscal year 1994, or 8 percent of all expenditures for MACs, to $2 billion in fiscal year 1999, "
1152,"or 26 percent of all expenditures for MACs. Expenditures going to small businesses for IDIQs from fiscal years 1994 to 1999 remained relatively stable, near $7 billion. The percentage of total expenditures for IDIQs going to small businesses increased from 24 percent of total expenditures for IDIQs in fiscal year 1994 to 28 percent in 1999. The small business share of GSA schedules increased from 27 percent in fiscal year 1994 to 36 percent in fiscal year 1999, from $523 million to $3 billion. Finally, the "
1153,"small business share of BPAs fell from 97 percent in fiscal year 1994 to about 55 percent in fiscal year 1999, although the expenditures increased for small businesses from about $141 million in fiscal year 1994 to about $2 billion in fiscal year 1999. In conducting a review of contract bundling in 2000, we found that there are only limited governmentwide data on the extent of contract bundling and its actual effect on small businesses. Federal agencies do not currently report information on contract bundli"
1154,"ng to FPDC; therefore, FPDC does not have data on this topic. Our review of consolidated contracts worth $12.4 billion at 3 procurement centers showed that the number of contractors and the contract dollars were generally reduced due to consolidation as agencies sought to streamline procurement and reduce its associated administrative costs. SBA determined that the consolidation of the contracts we reviewed did not necessarily constitute bundling. In fact, 2 of the largest consolidated contracts involved on"
1155,"ly large businesses and the remaining 11 consolidated contracts were awarded to small businesses. We analyzed the total amount of governmentwide purchase-card expenditures for fiscal years 1993 to 1999 and found that in fiscal year 1999 such expenditures totaled $10 billion, or about 5 percent, of all federal procurement purchases. As figure 6 shows, these purchases have steadily increased since 1993, when the total amount bought with purchase cards was $527 million. These data include expenditures for all "
1156,"purchase-card transactions, both under and over $2,500. FASA permits purchases for goods or services up to $2,500 from any qualified suppliers. Since FPDS does not collect detailed data on purchase- card expenditures, we could not determine what share of such governmentwide expenditures are going to small businesses. We requested comments on a draft of this report from the Administrator of SBA, the Director of OMB, and the Administrator of GSA. SBA's Chief Operating Officer provided written comments in conc"
1157,"urrence with our report. She pointed out that preliminary data for fiscal year 2000 show that federal agencies are finding it more difficult to meet the legislative goal of ensuring that 23 percent of the value of federal prime contracts go to small businesses. We did not include data for fiscal year 2000 in our review because these data are preliminary. Another area of concern was that since detailed data on purchase-card expenditures are not included in the FPDS database, trend analyses of these expenditu"
1158,"res were not included in our report. As we note in our report, purchase-card expenditures have increased, but data are not available to determine the share of these purchases going to small businesses. In addition, SBA's Chief Operating Officer made several technical comments that we have reflected in this report, as appropriate. Officials from GSA's Offices of Enterprise Development and Governmentwide Policy provided technical comments that we have addressed in this report, as appropriate. OMB had no comme"
1159,"nts on our draft report. The comments we received from SBA are in appendix III. To identify procurement changes that could affect small business contractors, we reviewed FASA, the Clinger-Cohen Act, the Small Business Reauthorization Act of 1997, and the Federal Acquisition Regulation. We also identified other changes that occurred during the 1990s that might have an effect on small businesses by interviewing agency officials and representatives of industry associations, and by reviewing agency documents. W"
1160,"e met with officials from GSA, SBA, OMB's Office of Federal Procurement Policy (OFPP), and the Procurement Executives Council. We also met with representatives of the U.S. Chamber of Commerce, Small Business Legislative Council, and Independent Office Products and Furniture Dealers Association. To determine the trends in federal procurement from small businesses, we analyzed data from the Federal Procurement Data Center's (FPDC) Federal Procurement Report for fiscal years 1993 through 1999 and other data we"
1161," requested from FPDC and SBA for those same years. FPDC administers the Federal Procurement Data System (FPDS) within GSA. Since FPDC relies on federal agencies to report their procurement information, these data are only as reliable, accurate, and complete as the agencies report. In 1998, FPDC conducted an accuracy audit and reported that the average rate of accurate reporting in the FPDS database was 96 percent. Our analyses focused on total contract expenditures for federal procurement and the percentage"
1162," of expenditures going to small businesses for new contracts and for certain contract vehicles. Unless otherwise noted, all expenditures were adjusted for inflation and represent constant fiscal year 1999 dollars. We conducted our review between March and October 2000 in accordance with generally accepted government auditing standards. A detailed discussion of our objectives, scope, and methodology is presented in appendix II. As agreed with your office, unless you publicly announce its contents earlier, we"
1163," plan no further distribution of this report for 30 days. At that point, copies of this report will be sent to appropriate congressional committees and other interested Members of Congress; the Administrator of the Small Business Administration; the Administrator of the General Services Administration; the Director of the Office of Management and Budget; and other interested parties. We will also make copies available to others on request. Staff acknowledgements are listed in appendix IV. If you or your sta"
1164,"ff have any questions about this report, please contact me at (202) 512-8984 or Hilary Sullivan at (214) 777-5652. Indefinite-Delivery, Indefinite-Quantity Contract: This type of contract provides for an indefinite quantity, within stated limits, of goods or services during a fixed period of time. Agencies place separate task or delivery orders for individual requirements that specify the quantity and delivery terms associated with each order. The Federal Acquisition Regulation (FAR) expresses a preference "
1165,"for multiple awards of these contracts, which allows orders to be placed using a streamlined, commercial style selection process where consideration is limited to the contract awardees. The competition between the multiple awardees is designed to encourage better prices and responses than if the agency were negotiating with a single contractor. Contractors are to be afforded a fair opportunity to be considered for award of task and delivery orders but cannot generally protest the award of such orders. Indef"
1166,"inite-delivery, indefinite-quantity contracts include GWACs and GSA federal supply schedule contracts. Federal Supply Schedules: Under the schedule program, GSA enters into indefinite-delivery, indefinite-quantity contracts with commercial firms to provide commercial goods and services governmentwide at stated prices for given periods of time. Authorized buyers at agencies place separate orders for individual requirements that specify the quantity and delivery terms associated with each order, and the contr"
1167,"actor delivers products or services directly to the agency. The program is designed to provide federal agencies with a simplified process for obtaining millions of commonly used commercial supplies and services at prices associated with volume buying. The program consists of single award schedules with one supplier and multiple award schedules, in which GSA awards contracts to multiple companies supplying comparable services and products, often at varying prices. When agency requirements are to be satisfied"
1168," through the use of multiple award schedules, the small business provisions (such as the exclusive reservation for small businesses for contracts over $2,500 up to $100,000) of the FAR do not apply. Blanket Purchase Agreement: A simplified method of filling anticipated repetitive needs for supplies or services by establishing “charge accounts” with qualified sources of supply, and may include federal supply schedule contractors. Under such an agreement, the contractor and the agency agree to contract clause"
1169,"s applying to future orders between the parties during its term. Future orders would incorporate, by reference or attachment, clauses covering purchase limitations, authorized individuals, itemized lists of supplies or services furnished, date of delivery or shipments, billing procedures, and discounts. Under the FAR, the existence of a blanket purchase agreement does not justify purchasing from only one source or avoiding small business preferences. Our objectives were to identify (1) provisions in acquisi"
1170,"tion reform legislation enacted in the 1990s and other changes in procurement taking place during this time that could affect small business contractors and (2) trends that might indicate possible shifts in the ability of small businesses to obtain federal contracts in the 1990s. To achieve our first objective, we analyzed several pieces of legislation enacted in the 1990s, federal acquisition regulations, governmentwide procurement data, and interviewed federal officials at several agencies. We examined th"
1171,"e Federal Acquisition Streamlining Act of 1994 (FASA), the Clinger-Cohen Act of 1996, the Small Business Reauthorization Act of 1997, and the Federal Acquisition Regulation. We analyzed governmentwide procurement data reported by GSA's Federal Procurement Data Center (FPDC) and data on the governmentwide acquisition workforce reported by GSA's Federal Acquisition Institute in its Report on the Federal Acquisition Workforce for fiscal years 1991 and 1998. We interviewed officials at GSA, OFPP, SBA, and the P"
1172,"rocurement Executives Council. We also interviewed representatives of the U.S. Chamber of Commerce, Small Business Legislative Council, and Independent Office Products and Furniture Dealers Association. To achieve our second objective, we gathered governmentwide data on federal procurement from FPDC and SBA for fiscal years 1993 through 1999. We could not determine the direct impact of legislative changes and other trends on small businesses because of the numerous concurrent factors and the insufficiency o"
1173,"f governmentwide data to directly measure the effect of these changes on small business contractors. Federal agencies report procurement data to FPDC in two categories, (1) contract awards of $25,000 or less each and (2) contract awards greater than $25,000. Each agency reports summary data on contracts worth $25,000 or less to FPDC and includes information such as type of contractor and procurement methods. Agencies report greater detail on each individual contract over $25,000 or more, including type of c"
1174,"ontract action, type of contractor, and product or service purchased. We analyzed aggregate data reported in FPDC's Federal Procurement Report for each of the years. We requested additional data from FPDC for contracts over $25,000 to include information on expenditures going to small businesses for new contracts; total expenditures going to small businesses, including for new contracts and contract modifications, for specific contract vehicles; and expenditures going to small businesses for new contracts f"
1175,"or all products and services. The data on new contracts that FPDC provided includes expenditures on original contract actions, as opposed to expenditures on modifications to existing contracts. FPDC categorizes all federal contract expenditures into eight broad categories of products and services. According to FPDC officials, FPDS is updated constantly as federal agencies report updated procurement information. The data we received from FPDC are as of July 2000. In addition, we analyzed the summary informat"
1176,"ion on government purchase- card transactions from the Federal Procurement Report for each year. We also collected data from SBA and FPDC on the achievement of the governmentwide federal procurement goal for small businesses. The SBA data on the achievement of this goal for fiscal years 1993 through 1997 are from The State of Small Business. Because the most recent version The State of Small Business was published in fiscal year 1997, we used FPDC data published in its annual Federal Procurement Report on t"
1177,"he achievement of the legislative goal for fiscal years 1998 and 1999. As indicated earlier, SBA began using FPDS data to calculate the achievement of the small business legislative goal as of fiscal year 1998. Although FASA requires that contracts over $2,500 up to $100,000 be exclusively reserved for small businesses, we could not determine the amount of expenditures or share going to small businesses for these contracts because, in some cases, information is reported to FPDC on contracts commingled with "
1178,"modifications. Unless otherwise noted, we adjusted all dollar amounts using a gross domestic product price index from the Bureau of Economic Analysis using fiscal year 1999 as the base year. We did not independently verify FPDC or SBA data. FPDC relies on agencies to report their procurement information. Therefore, data are only as reliable, accurate, and complete as the agencies report. In 1998, however, FPDC conducted an accuracy audit of some of its data elements and reported that the average rate of acc"
1179,"urate reporting in the FPDS database was 96 percent. We performed our work at SBA headquarters, OFPP, and GSA headquarters. We conducted our review between March and October 2000 in accordance with generally accepted government auditing standards. Jason Bair, William Chatlos, James Higgins, Maria Santos, Adam Vodraska, and Wendy Wilson made key contributions to this report. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the S"
1180,"uperintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimo"
1181,"ny. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: fraudnet@gao.gov 1-800-424-5454 (automated answering system)"
1182,"In June 1997, we reported on the results of our interviews with state WIC officials in 8 states that had unspent federal funds in fiscal year 1995 and 2 states that did not have unspent funds that year. These state officials identified a variety of reasons for having unspent federal WIC funds that were returned to the U.S. Department of Agriculture’s (USDA) Food and Nutrition Service (FNS) for reallocation. In fiscal year 1996, the states returned about $121.6 million, or about 3.3 percent, of that year’s $"
1183,"3.7 billion WIC grant for reallocation to the states in the next fiscal year. Some of the reasons cited by the WIC directors for not spending all available funds related to the structure of the WIC program. For example, the federal grant is the only source of funds for the program in most states. Some of these states prohibit agency expenditures that exceed their available funding. As a result, WIC directors reported that they must be cautious not to overspend their WIC grant. Because WIC grants made to som"
1184,"e states are so large, even a low underspending rate can result in millions of returned grant dollars. For example, in fiscal year 1995, California returned almost $16 million in unspent WIC funds, which represented about 3 percent of its $528 million federal grant. Unlike California, New York State had no unspent grant funds in fiscal year 1995. New York was one of 12 states that supplemented its federal WIC grant with state funds that year and hence did not have to be as cautious in protecting against ove"
1185,"rspending its federal grant. Overall, the group of states that supplemented their WIC grants in fiscal year 1995 returned a smaller percentage of their combined WIC funds than did the states that did not supplement their federal grants. States also had unspent federal funds because the use of vouchers to distribute benefits made it difficult for states to determine program costs until the vouchers were redeemed and processed. Two features of the voucher distribution method can contribute to the states’ diff"
1186,"iculty in determining program costs. First, some portion of the benefits issued as vouchers may not be used, thereby reducing projected food costs. Participants may not purchase all of the food items specified on the voucher or not redeem the voucher at all. Second, because of the time it takes to process vouchers, states may find after the end of the fiscal year that their actual food costs were lower than projected. For example, most states do not know the cost of the vouchers issued for August and Septem"
1187,"ber benefits until after the fiscal year ends because program regulations require states to give participants 30 days to use a voucher and retailers 60 days after receiving the voucher to submit it for payment. The difficulty in projecting food costs in a timely manner can be exacerbated in some states that issue participants 3 months of vouchers at a time to reduce crowded clinic conditions. In such states, vouchers for August benefits could be provided as early as June but not submitted for payment until "
1188,"the end of October. Other reasons for states having unspent WIC funds related to specific circumstances that affect program operations within individual states. For example, in Texas the installation of a new computer system used to certify WIC eligibility and issue WIC food vouchers contributed to the state’s having unspent funds of about $6.8 million in fiscal year 1996. According to the state WIC director, the computer installation temporarily reduced the amount of time that clinic staff had to certify a"
1189,"nd serve new clients because they had to spend time instead learning new software and operating procedures. As a result, they were unable to certify and serve a number of eligible individuals and did not spend the associated grant funds. In Florida, a hiring freeze contributed to the state’s having unspent funds of about $7.7 million in fiscal year 1995. According to the state WIC director, although federal WIC funds were available to increase the number of WIC staff at the state and local agency level, sta"
1190,"te programs were under a hiring freeze that affected all programs, including WIC. The hiring freeze hindered the state’s ability to hire the staff needed to serve the program’s expanding caseload. Having unspent federal WIC funds did not necessarily indicate a lack of need for program benefits. WIC directors in some states with fiscal year 1995 unspent funds reported that more eligible individuals could have been served by WIC had it not been for the reasons related to the program’s structure and/or state-s"
1191,"pecific situations or circumstances. On the basis of our nationwide survey of randomly selected local WIC agencies, we reported in October 1997 that these agencies have implemented a variety of strategies to increase the accessibility of their clinics for working women. The most frequently cited strategies—used by every agency—are scheduling appointments instead of taking participants on a first-come, first-served basis and allowing other persons to pick up participants’ WIC vouchers. Scheduling appointment"
1192,"s reduces participants’ waiting time at the clinic and makes more efficient use of the agency staff’s time. Allowing other persons, such as baby-sitters and family members, to pick up the food vouchers for participants can reduce the number of visits to the clinic by working women. Another strategy to increase participation by working women used by almost 90 percent of local agencies was issuing food vouchers for 2 or 3 months. As California state officials pointed out, issuing vouchers every 2 months, inst"
1193,"ead of monthly, to participants who are not at medical risk reduces the number of visits to the clinic. Three-fourths of the local WIC agencies had some provision for lunch hour appointments, which allows some working women to take care of their visit during their lunch break. Other actions to increase WIC participation by working women included reducing the time spent at clinic visits. We estimated that about 66 percent of local WIC agencies have taken steps to expedite clinic visits for working women. For"
1194," example, a local agency in New York State allows working women who must return to work to go ahead of others in the clinic. The director of a local WIC agency in Pennsylvania allows working women to send in their paperwork before they visit, thereby reducing the time spent at the clinic. The Kansas state WIC agency generally requires women to participate in the program in the county where they reside, but it will allow working women to participate in the county where they work when it is more convenient fo"
1195,"r them. Other strategies adopted by some local WIC agencies include mailing vouchers to working women under special circumstances, thereby eliminating the need for them to visit the clinic (about 60 percent of local agencies); offering extended clinic hours of operation beyond the routine workday (about 20 percent of local agencies offer early morning hours); and locating clinics at or near work sites, including various military installations (about 5 percent of local agencies). Our survey found that about "
1196,"76 percent of the local WIC agency directors believed that their clinics are reasonably accessible for working women. In reaching this conclusion, the directors considered their clinic’s hours of operation, the amount of time that participants wait for service, and the ease with which participants are able to get appointments. Despite the widespread use of strategies to increase accessibility, 9 percent of WIC directors believe accessibility is still a problem for working women. In our discussions with thes"
1197,"e directors, the most frequently cited reason for rating accessibility as moderately or very difficult was the inability to operate during evenings or on Saturday because of lack of staff, staff’s resistance to working schedules beyond the routine workday, and/or the lack of safety in the area around the clinic after dark or on weekends. Our survey also identified several factors not directly related to the accessibility of clinic services that serve to limit participation by working women. The factors most"
1198," frequently cited related to how working women view the program. Specifically, directors reported that some working women do not participate because they (1) lose interest in the program’s benefits as their income increases, (2) perceive a stigma attached to receiving WIC benefits, or (3) think the program is limited to those women who do not work. With respect to the first issue, 65 percent of the directors reported that working women lose interest in WIC benefits as their income rises. For example, one ag"
1199,"ency director reported that women gain a sense of pride when their income rises and they no longer want to participate in the program. Concerning the second issue, the stigma some women associate with WIC—how their participation in the program makes them appear to their friends and co-workers—is another significant factor limiting participation, according to about 57 percent of the local agency directors. Another aspect of the perceived stigma associated with WIC participation is related to the so-called “g"
1200,"rocery store experience.” The use of WIC vouchers to purchase food in grocery stores can cause confusion and delays for both the participant-shopper and the store clerk at the check-out counter. For example, Texas requires its WIC participants to buy the cheapest brand of milk, evaporated milk, and cheese available in the store. Texas also requires participants to buy the lowest-cost 46-ounce fluid or 12-ounce frozen fruit juices from an approved list of types (orange, grapefruit, orange/grapefruit, purple "
1201,"grape, pineapple, orange/pineapple, and apple) and/or specific brands. In comparing the cost of WIC-approved items, participants must also consider such things as weekly store specials and cost per ounce in order to purchase the lowest-priced items. While these restrictions may lower the dollar amount that the state pays for WIC foods, it may also make food selections more confusing for participants. According to Texas WIC officials, participants and cashiers often have difficulty determining which products"
1202," have the lowest price. Consequently, a delay in the check-out process may result in unwanted attention for the WIC participant. Finally, more than half of the directors indicated that a major factor limiting participation is that working women are not aware that they are eligible to participate in WIC. Furthermore, local agency officials in California and Texas said that WIC participants who were not working when they entered the program but who later go to work often assume that they are then no longer el"
1203,"igible for WIC and therefore drop out of the program. In September 1997, we reported that the states have used a variety of initiatives to control WIC costs. According to the WIC agency directors in the 50 states and the District of Columbia we surveyed, two practices in particular are saving millions of dollars. These two practices are (1) contracting with manufacturers to obtain rebates on WIC foods in addition to infant formula and (2) limiting authorized food selections by, for example, requiring partic"
1204,"ipants to select brands of foods that have the lowest cost. With respect to rebates, nine state agencies received $6.2 million in rebates in fiscal year 1996 through individual or multistate contracts for two WIC-approved foods—infant cereal and/or infant fruit juices. Four of these state agencies and seven other state agencies—a total of 11 states—reported that they were considering, or were in the process of, expanding their use of rebates to foods other than infant formula. In May 1997, Delaware, one of "
1205,"the 11 states, joined the District of Columbia, Maryland, and West Virginia in a multistate rebate contract for infant cereal and juices. Another state, California, was the first state to expand its rebate program in March 1997 to include adult juices. California spends about $65 million annually on adult juice purchases. California’s WIC director told us that the state expects to collect about $12 million in annual rebates on the adult juices, thereby allowing approximately 30,000 more people to participat"
1206,"e in the program each month. With respect to placing limits on food selections, all of the 48 state WIC directors responding to our survey reported that their agencies imposed limits on one or more of the food items eligible for program reimbursement. The states may specify certain brands; limit certain types of foods, such as allowing the purchase of block but not sliced cheese; restrict container sizes; and require the selection of only the lowest-cost brands. However, some types of restrictions are more "
1207,"widely used than others. For example, 47 WIC directors reported that their states’ participants are allowed to choose only certain container or package sizes of one or more food items, but only 20 directors reported that their states require participants to purchase the lowest-cost brand for one or more food items. While all states have one or more food selection restrictions, 17 of the 48 WIC directors responding to our questionnaire reported that their states are considering the use of additional limits o"
1208,"n food selection to contain or reduce WIC costs. Separately or in conjunction with measures to contain food costs, we found that 39 state agencies have placed restrictions on their authorized retail outlets (food stores and pharmacies allowed to redeem WIC vouchers—commonly referred to as vendors) to hold down costs. For example, the prices for WIC food items charged by WIC vendors in Texas must not exceed by more than 8 percent the average prices charged by vendors doing a comparable dollar volume of busin"
1209,"ess in the same area. Once selected, authorized WIC vendors must maintain competitive prices. According to Texas WIC officials, the state does not limit the number of vendors that can participate in WIC. However, Texas’ selection criteria for approving a vendor excludes many stores from the program. In addition, 18 WIC directors reported that their states restrict the number of vendors allowed to participate in the program by using ratios of participants to vendors. For example, Delaware used a ratio of 200"
1210," participants per store in fiscal year 1997 to determine the total number of vendors that could participate in the program in each WIC service area. By limiting the number of vendors, states can more frequently monitor vendors and conduct compliance investigations to detect and remove vendors from the program who commit fraud or other serious program violations, according to federal and state WIC officials. A July 1995 report by USDA’s Office of Inspector General found that the annual loss to WIC as a resul"
1211,"t of vendor fraud in one state could exceed $3 million. The WIC directors in 2 of the 39 states that reported limiting the number of vendors indicated that they are planning to introduce additional vendor initiatives, such as selecting vendors on the basis of competitive food pricing. We also found that opportunities exist to substantially lower the cost of special infant formula. Special formula, unlike the regular formula provided by WIC, is provided to infants with special dietary needs or medical condit"
1212,ions. Cost savings may be achieved if the states purchase special infant formula at wholesale instead of retail prices. The monthly retail cost of these special formulas can be high—ranging in one state we surveyed from $540 to $900 for each infant. These high costs occur in part because vendors’ retail prices are much higher than the wholesale cost. Twenty-one states avoid paying retail prices by purchasing the special formula directly from the manufacturers and distributing it to participants. For example
1213,", Pennsylvania turned to the direct purchase of special infant formula to address the lack of availability and high cost of vendor-provided formulas. It established a central distribution warehouse for special formulas in August 1996 to serve the less than 1 percent of WIC infants in the state—about 400—who needed special formula in fiscal year 1996. The program is expected to save about $100,000 annually. Additional savings may be possible if these 21 states are able to reduce or eliminate the authorizatio"
1214,"n and monitoring costs of retail vendors and pharmacies that distribute only special infant formula. For example, by establishing its own central distribution warehouse, Pennsylvania plans to remove over 200 pharmacies from the program, resulting in significant administrative cost savings, according to the state WIC director. While the use of these cost containment practices could be expanded, our work found that a number of obstacles may discourage the states from adopting or expanding these practices. The"
1215,"se obstacles include problems that states have with existing program restrictions on how additional funds made available through cost containment initiatives can be used and resistance from the retail community when states attempt to establish selection requirements or limit retail stores participating in the program. First, FNS policy requires that during the grant year, any savings from cost containment accrue to the food portion of the WIC grant, thereby allowing the states to provide food benefits to ad"
1216,"ditional WIC applicants. None of the cost savings are automatically available to the states for support services, such as staffing, clinic facilities, voucher issuance sites, outreach, and other activities that are funded by WIC’s NSA (Nutrition Services and Administration) grants. These various support activities are needed to increase participation in the program, according to WIC directors. As a result, the states may not be able to serve more eligible persons or they may have to carry a substantial port"
1217,"ion of the program’s support costs until the federal NSA grant is adjusted for the increased participation level—a process that can take up to 2 years, according to the National Association of WIC Directors. FNS officials pointed out that provisions in the federal regulations allow the states that have increased participation to use a limited amount of their food grant funds for support activities. However, some states may be reluctant to use this option because, as one director told us, doing so may be per"
1218,"ceived as taking food away from babies. FNS and some state WIC officials told us that limiting the number of vendors in the program is an important aspect of containing WIC costs. However, they told us the retail community does not favor limits on the number of vendors that qualify to participate. Instead, the retail community favors the easing of restrictions on vendor eligibility thereby allowing more vendors that qualify to accept WIC vouchers. According to FNS officials, the amount that WIC spends for f"
1219,"ood would be substantially higher if stores with higher prices were authorized to participate in the program. To encourage the further implementation of WIC cost containment practices, we recommended in our September 1997 report that FNS work with the states to identify and implement strategies to reduce or eliminate such obstacles. These strategies could include modifying the policies and procedures that allow the states to use cost containment savings for the program’s support services and establishing re"
1220,gulatory guidelines for selecting vendors to participate in the program. FNS concurred with our findings and recommendations. We will continue to monitor the agency’s progress made in implementing strategies to reduce or eliminate obstacles to cost containment. Our survey also collected information on the practices that the states are using to ensure that program participants meet the program’s income and residency requirements. The states’ requirements for obtaining income documentation vary. Of the 48 WIC
1221," directors responding to our survey, 32 reported that their state agencies generally require applicants to provide documentation of income eligibility; 14 reported that their states did not require documentation and allowed applicants to self-declare their income; and 2 reported that income documentation procedures are determined by local WIC agencies. Of the 32 states requiring income documentation, 30 reported that their documentation requirement could be waived under certain conditions. Our review of sta"
1222,"te income documentation polices found that waiving an income documentation requirement can be routine. For example, we found that some states requiring documentation of income will waive the requirement and permit self-declaration of income if the applicants do not bring income documents to their certification meeting. While existing federal regulations allow the states to establish their own income documentation requirements for applicants, we are concerned that basing income eligibility on the applicants’"
1223," self-declarations of income may permit ineligible applicants to participate in WIC. However, the extent of this problem is unknown because there has not been a recent study of the number of program participants who are not eligible because of income. Information from a study that FNS has begun should enable that agency to determine whether changes in states’ requirements for income documentation are needed. Regarding residency requirements, we found that some states have not been requiring proof of residen"
1224,"cy and personal identification for program certification, as required by federal regulations. In our September 1997 report, we recommended that FNS take the necessary steps to ensure that state agencies require participants to provide identification and evidence that they reside in the states where they receive benefits. In February 1998, FNS issued a draft policy memorandum to its regional offices that is intended to stress the continuing importance of participant identification, residency, and income requ"
1225,"irements and procedures to ensure integrity in the certification and food instrument issuance processes. Also, at the request of FNS, we presented our review’s findings and recommendations at the EBT and Program Integrity Conference jointly sponsored by the National Association of WIC Directors and FNS in December 1997. The conference highlighted the need to reduce ineligible participation and explored improved strategies to validate participants’ income and residency eligibility. FNS requires the states to"
1226," operate a rebate program for infant formula. By negotiating rebates with manufacturers of infant formula purchased through WIC, the states greatly reduce their average per person food costs so that more people can be served. At the request of the Chairman of the House Budget Committee, we are currently reviewing the impacts that these rebates have had on non-WIC consumers of infant formula. Specifically, we will report on (1) how prices in the infant formula market changed for non-WIC purchasers and WIC ag"
1227,"encies after the introduction of sole-source rebates, (2) whether there is any evidence indicating that non-WIC purchasers of infant formula subsidized WIC purchases through the prices they paid, and (3) whether the significant cost savings for WIC agencies under sole source rebates for infant formula have implications for the use of rebates for other WIC products. Thank you again for the opportunity to appear before you today. We would be pleased to respond to any questions you may have. The first copy of "
1228,"each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office"
1229," Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists."
1230,"Since the early 1990s, increasing computer interconnectivity—most notably growth in the use of the Internet—has revolutionized the way that our government, our nation, and much of the world communicate and conduct business. The benefits have been enormous, but without proper safeguards in the form of appropriate information security, this widespread interconnectivity also poses significant risks to the government’s computer systems and the critical operations and infrastructures they support. In prior revie"
1231,"ws we have repeatedly identified weaknesses in almost all areas of information security controls at major federal agencies, including VA, and we have identified information security as a high risk area across the federal government since 1997. In July 2005, we reported that pervasive weaknesses in the 24 major agencies’ information security policies and practices threatened the integrity, confidentiality, and availability of federal information and information systems. As we reported, although federal agenc"
1232,"ies showed improvement in addressing information security, they also continued to have significant control weaknesses that put federal operations and assets at risk of inadvertent or deliberate misuse, financial information at risk of unauthorized modification or destruction, sensitive information at risk of inappropriate disclosure, and critical operations at risk of disruption. These weaknesses existed primarily because agencies had not yet fully implemented strong information security programs, as requir"
1233,"ed by the Federal Information Security Management Act (FISMA). The significance of these weaknesses led us to conclude in the audit of the federal government’s fiscal year 2005 financial statements that information security was a material weakness. Our audits also identified instances of similar types of weaknesses in nonfinancial systems. Weaknesses continued to be reported in each of the major areas of general controls: that is, the policies, procedures, and technical controls that apply to all or a large"
1234," segment of an entity’s information systems and help ensure their proper operation. To fully understand the significance of the weaknesses we identified, it is necessary to link them to the risks they present to federal operations and assets. Virtually all federal operations are supported by automated systems and electronic data, without which agencies would find it difficult, if not impossible, to carry out their missions and account for their resources. The following examples show the broad array of feder"
1235,"al operations and assets placed at risk by information security weaknesses: ● Resources, such as federal payments and collections, could be lost or stolen. ● Computer resources could be used for unauthorized purposes or to launch attacks on others. ● Personal information, such as taxpayer data, social security records, and medical records, and proprietary business information could be inappropriately disclosed, browsed, or copied for purposes of identity theft, industrial espionage, or other types of crime."
1236," ● Critical operations, such as those supporting national defense and emergency services, could be disrupted. ● Data could be modified or destroyed for purposes of fraud, theft of assets, or disruption. ● Agency missions could be undermined by embarrassing incidents that result in diminished confidence in their ability to conduct operations and fulfill their fiduciary responsibilities. The potential disclosure of personal information raise identity theft and privacy concerns. Identity theft generally involv"
1237,"es the fraudulent use of another person’s identifying information— such as Social Security number, date of birth, or mother’s maiden name—to establish credit, run up debt, or take over existing financial accounts. According to identity theft experts, individuals whose identities have been stolen can spend months or years and thousands of dollars clearing their names. Some individuals have lost job opportunities, been refused loans, or even been arrested fo crimes they did not commit as a result of identity "
1238,"theft. The Feder Trade Commission (FTC) reported in 2005 that identity theft represented about 40 percent of all the consumer fraud complaints it received during each of the last 3 calendar years. Beyond the serious issues surrounding identity theft, the unauthorized disclosure of personal information also represents a breach of individuals’ privacy rights to have control over their own information and to be aware of who has access to this information. Federal agencies are subject to security and privacy la"
1239,"ws aimed in part at preventing security breaches, including breaches that could enable identity theft. FISMA is the primary l federal government; it also addresses the protection of personal n information in the context of securing federal agency informatio r and information systems. The act defines federal requirements fo securing information and information systems that support federalaw governing information security in the agency operations and assets. Under FISMA, agencies are requiredto provide suffic"
1240,"ient safeguards to cost-effectively protect their information and information systems from unauthorized access, use disclosure, disruption, modification, or destruction, including controls necessary to preserve authorized restrictions on access and disclosure (and thus to protect personal privacy, among other things). The act requires each agency to develop, document, and implement an agencywide information security program to provide , security for the information and information systems that support the o"
1241,"perations and assets of the agency, including those provided or managed by another agency, contractor, or other source. FISMA describes a comprehensive information security pr including the following elements: periodic assessments of the risk an result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information or information systems; d magnitude of harm that could risk-based policies and procedures that cost-effectively reduce ris to an acceptable level and ensure"
1242," that security is addressed throughout the life cycle of each information system; security awareness training for agency personnel, including contractors and other users of information systems th operations and assets of the agency; periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices; ● a process for planning, implementing, evaluating, and documentingremedial action to address any deficiencies th and milestones; and procedures for detecting, repor"
1243,"ting, and responding to security incidents. In particula agencies evaluate the associated risk according to three categories: (1) confidentiality, which is the risk associated with unauthorized disclosure of the information; (2) integrity, the risk of unauthorized modification or destruction of the information; and (3) availability, which is the risk of disruption of access to or use of information. Thus, each agency should assess the risk associated with personal data held by the agency and develop appropr"
1244,"iate protections. r, FISMA requires that for any information they hold, The agency can use this risk assessment to determine the appropriate controls (operational, technical, and managerial) th will reduce the risk to an acceptably low level. For exampl agency assesses the confidentiality risk of the personal information as high, the agency could create control mechanisms to help prote ct the data from unauthorized disclosure. Besides appropriate policies,at e, if an these controls would include access cont"
1245,"rols and monitoring systems: Access con confidentiality of information. Organizations use these controls to grant employees the authority to read or modify only the information the employees need to perform their duties. In addition access controls can limit the activities that an employee c perform on data. For example, an employee may be given the right to read data, but not to modify or copy it. Assignment of right s and permissions must be carefully considered to avoid giving users unnecessary access to"
1246," sensitive files and directories. trols are key technical controls to protect the To ensure that controls are, in fact, implemented and that no violations have occurred, agencies need to monitor compliance with security policies and investigate security violations. It is crucial to determine what, when, and by whom specific actions are taken on a system. Organizations accomplish this by implementing system or security software that provides an audit trail that they can use to determine the source of a trans"
1247,"action or attempted transaction and to monitor users’ activities. The way in which organizations configure system or security software determines the nature and extent of information that can be provided by the audit trail. To be effective, organizations should configure their software to collect and maintain audit trails that are sufficient to track security events. A comprehensive security program of the type described is a prerequisite for the protection of personally identifiable information held by age"
1248,"ncies. In addition, agencies are subject to requirem specifically related to personal privacy protection, which come primarily from two laws, the Privacy Act of 1974 and the E- Government Act of 2002. The Privacy Act places lim disclosure, and use of personal information maintained in systems of records. The act describes a “record” as any item, collect ion, or grouping of information about an individual that is maintained by an agency and contains his or her name or another personal identifier.itations on "
1249,"agencies’ collection, It also defines “system of records” as a group of records under the control of any agency from which information is retrieved by the name of the individual or by an individual identifier. The Privacy Ac t requires that when agencies establish or make changes to a system of records, they must notify the public by a “system-of-records notice”: that is, a notice in the Federal Register identifying, among other things, the type of data collected, the types of individuals about whom informa"
1250,"tion is collected, the intended “routine” uses o data, and procedures that individuals can use to review and corr personal information. Among other provisions, the act also requires agencies to define and limit themselves to specific predefined purposes. The provisions of the Privacy Act are consistent with and large based on a set of principles for protecting the privacy and security of personal information, known as the Fair Information Practices, which have been widely adopted as a standard benchmark for"
1251, evaluating the adequacy of privacy protections; they include such principles as openness (keeping the public informed about privacy policies and practices) and accountability (those controlling the collection or use of personal information should be accountable for taking steps to ensure the implementation of these principles). The E-Government Act of 2002 strives to enhance protection for personal information in government information systems by requiring that agencies conduct privacy impact assessments (
1252,"PIA PIA is an analysis of how personal information is collected, st shared, and managed in a federal system. More specifically, according to OMB guidance, a PIA is to (1) ensure that handling conforms to applicable legal, regulatory, and policy requirem ents regarding privacy; (2) determine the risks and effects of collecting maintaining, and disseminating information in identifiable form in , an electronic information system; and (3) examine and evaluate protections and alternative processes for handling i"
1253,"nformation to mitigate potential privacy risks. To the extent that PIAs are made publicly available, they provide explanations to the public about such things as the information that will be collected, why it is bein collected, how it is to be used, and how the system and data will b maintained and protected. Federal laws to date have not required breaches to the public, although breac important role in the context of security breaches in the private sector. For example, requirements of California state law"
1254," led ChoicePoint, a large information reseller, to notify its customer a security breach in February 2005. Since the ChoicePoint notification, bills were introduced in at least 44 states and enacted in at least 29 that require some form of notification upon a breach. agencies to report security h notification has played an A numbe in 2005 in the wake of the ChoicePoint security breach as well as incidents at other firms. In March 2005, the House Subcommittee on Commerce, Trade, and Consumer Protection of th"
1255,"e House Energy r of congressional hearings were held and bills introduced and Commerce Committee held a hearing entitled “Protecting Consumers’ Data: Policy Issues Raised by ChoicePoint,” which focused on potential remedies for security and privacy concern s regarding information resellers. Similar hearings were held by th House Energy and Commerce Committee and by the U.S. Senate Committee on Commerce, Science, and Transportation in spring 2005. In carrying out its mission of providing health care and bene"
1256,"fits to veterans, VA relies on a vast array of computer systems and telecommunications networks to support its operations and store sensitive information, including personal information on veterans. VA’s networks are highly interconnected, its systems support many users, and the department has increasingly moved to more interactive, Web-based services to better meet the needs of its customers. Effectively securing these computer systems and networks is critical to the department’s ability to safeguard its a"
1257,"ssets, maintain the confidentiality of sensitive veterans’ health disability benefits information, and ensure the integrity of its financial data. In this complex IT environment, VA has faced long-standing challenges in achieving effective information security across the department. Our reviews identified wide-ranging, often recurring deficiencies in the department’s information security controls (attachment 2 provides further detail on our reports and the area weakness they discuss). Examples of areas of d"
1258,"eficiency include th following. Access authority was not appropriately controlled. A basic management objective for any organization is to protect the resources that support its critical operations from unauthorized access. Electronic access controls are intended to prevent, limit, and detect unauthorized access to computing resources, prog and information and include controls related to user accounts and passwords, user rights and file permissions, logging and monitori of security-relevant events, and netw"
1259,"ork management. Inadequate controls diminish the reliability of computerized information and increase the risk of unauthorized disclosure, modification, and destruction of sensitive information and disruption of service. However, VA had not established effective electronic access controls to prevent individuals from gaining unauthorized acces its systems and sensitive data, as the following examples illustra ● User accounts and passwords: In 1998, many user accounts at four VA medical centers and data cente"
1260,"rs had weaknesses including passwords that could be easily guessed, null passwords, and passwords that were set to never expire. We also found numerous instances where medical and data center staff members were sharing user IDs and passwords. ● User rights and permissions: We reported in 2000 that three VA health care systems were not ensuring that user accounts w broad access to financial and sensitive veteran informa proper authorization for such access, and were not reviewing these accounts to determine "
1261,"if their level of access remained appropriate. ● Logging and monitoring of security-related events: In 1998, VA did not have any departmentwide guidance for monitoring both successful and unsuccessful attempts to access system files containing key financial information or sensitive veteran data, and none of the medical and data centers we visited were actively monitoring network access activity. In 1999, we found that one data center was monitoring failed access attempts, but was not monitoring successful a"
1262,"ccesses to sensitive data and resources for unusual or suspicious activity. Network management: In 2000, we reported that one of the health care systems we visited had not configured a network parameter to effectively prevent unauthorized access to a network system; this same health care system had also failed to keep its network system software up to date. Physical security controls were inadequate. Physical security co resources from espionage, sabotage, damage, and theft. These co lim are housed and by p"
1263,"eriodically reviewing the access granted, in order to ensure that access continues to be appropriate. VA hadntrols are important for protecting computer facilities and ntrols restrict physical access to computer resources, usually by iting access to the buildings and rooms in whic weaknesses in the physical security for its computer facilities example, in our 1998 and 2000 reports, we stated that none of th facilities we visited were adequately controlling access to their computer rooms. In addition, in 199"
1264,"8 we reported that sensitive equipment at two facilities was not adequately protected, increas the risk of disruption to computer operations or network communications. ing Employees were not prevented from performing incompatible duties. Segregation of duties refers to the policies, procedures, a organizational structures that help ensure that one individual can independently control all key aspects of a process or computer- related operation. Dividing duties among two or more indi organizational grouvidual"
1265,"s or wps diminishes the likelihood that errors and individual or group will serve as a check on the activities of the other. We determined that VA did not assign employee duties and responsibilities in a manner that segregated incompatible functions among individuals or groups of individuals. For example, in 1998 reported that some system programmers also had security administrator privileges, giving them the ability to eliminate anyrongful acts will go undetected, because the activities of one evidence of "
1266,"their activity in the system. In 2000, we reported tha t two VA health care systems allowed some employees to request,approve, and receive medical items without management approval , violating both basic segregation of duties principles and VA policy; in addition, no mitigating controls were found to alert management of purchases made in this manner. d independently reviewed. We ound that VA did not adequately control changes to its operating Software change control procedures were not consistently implemen"
1267,"ted. It is important to ensure that only authorized and fu tested systems are placed in operation. To ensure that changes to systems are necessary, work as intended, and do not result in the loss of data or program integrity, such changes should be documented, authorized, tested, an f systems. For example, in 1998 we reported that one VA data center had not established detailed written procedures or formal guidance for modifying operating system software, for approving and testing operating system software "
1268,"changes, or for implementing these changes. The data center had made more than 100 system softwar changes during fiscal year 1997, but none of the changes included evidence of testing, independent review, or acceptance. We report in 2000 that two VA health care systems had not established procedures for periodically reviewing changes to standard application programs to ensure that only authorized program code was implemented. ed Service continuity planning was not complete. In addition to protecting data an"
1269,"d programs from misuse, organizations mu ensure that they are adequately prepared to cope with a loss operational capability due to earthquakes, fires, accidents, sabotage or any other disrup c continuity plan. Such a plan is critical for helping to ensure that information system operations and data can be promptly restored in the event of a disaster. We reported that VA had not completed o tested service continuity plans for several systems. For example, in 1998 we reported that one VA data center had 17 i"
1270,"ndividual disastertion. An essential element in preparing for such atastrophes is an up-to-date, detailed, and fully tested service recovery plans covering various segments of the organization, but itdid not have an overall document that integrated the 17 separate plans and defined the roles and responsibilities for the disaster recovery teams. In 2000, we determined that the service continuity plans for two of the three health care systems we visited did not include critical elements such as detailed recov"
1271,"ery procedures, provisions for restoring mission-critical systems, and a list of key contacts; in addition, none of the health care systems we visited were fully testing their service continuity plans. These deficiencies existed, in part, because VA had not implemen key components of a comprehensive computer security program . Specifically, VA’s computer security efforts lacked ● clearly delineated security roles and responsib regular, periodic assessments of risk; ● security policies and procedures that ad"
1272,"dressed all aspects of VA’s interconnected environment; ● an ongoing security monitoring program to identi investigate unauthorized, unusual, or suspicious access activity; and ● a process to measure, test, and report effectiveness of computer system, network, and process controls. As a result, we made a number of recommendations in 2002 were aimed at improving VA’s security management. primary elements of these recommendations were that (1) VA centralize its security management functions and (2) it perform"
1273," other actions to establish an information security program, including actions related to risk assessments, security policies procedures, security awareness, and monitoring and evaluating computer controls. GAO, Veterans Affairs: Sustained Management Attention Is Key to Achieving Information Technology Results, GAO-02-703 (Washington, D.C.: June 12, 2002). security policies and procedures. However, the department still needed to develop policy and guidance to ensure (1) authority and independence for securi"
1274,"ty officers and (2) departmentwide coordination of security functions. Periodic risk assessments: VA is implementing a commercial too identify the level of risk associated with system changes and also to conduct information security risk assessments. It also created a methodology that establishes minimum requirements for such risk assessments. However, it has not yet completed its risk assessment policy and guidance. VA reported that such guidance was forthcoming as part of an overarching information system"
1275," security certification and accreditation policy that was to be developed during 2006. Without these elements, VA cannot be assured that it is appropriately performing risk assessments departmentwide. Security policies and procedures: VA’s cyber security officer reported that VA has action ongoing to develop a process for collecting and tracking performance data, ensuring management action when needed, and providing independent validation of reported issues. VA also has ongoing efforts in the area of dete r"
1276,"eporting, and responding to security incidents. For example, it established network intrusion prevention capability at its four enterprise gateways. It is also developing strategic and tactical to complete a security incident response program to monitor suspicious activity and cyber alerts, events, and incidents. Howe these plans are not complete. Security awareness: VA has taken steps to improve security awareness training. It holds an annual department information security conference, and it has developed"
1277," a Web portal for security training, policy, and procedures, as well as a security awareness course that VA employees are required to review annually. Ho VA has not demonstrated that it has a process to ensure complia wever, nce. Monitoring and evaluating computer controls: VA established a process to better monitor and evaluate computer controls by tracking the status of security weaknesses, corrective actions taken, and independent validations of corrective actions through a software data base. However, m"
1278,"ore remains to be done in this area. For example, although certain components of VA reported vulnerability and penetration testing to evaluate controls on and external access to VA systems, this testing was not part of an ongoing departmentwide program. ince our last report in 2002, VA’s IG and independent auditors have S continued to report serious weaknesses with the department’s information security controls. The auditors’ report on internal controls, prepared at the completion of VA’s 2005 financial sta"
1279,"tement audit, identified weaknesses related to access cont rol, segregation of duties, change control, and service continuity—a li of weaknesses that are virtually identical to those we identified years earlier. The department’s FY 2005 Annual Performance an Accountability Report states that the IG determined that many information system security vulnerabilities reported in national audits from 2001 through 2004 remain unresolved, despite the department’s actions to implement IG recommendations in pre audit"
1280,"s. The IG also reported specific security weaknesses and vulnerabilities at 45 of 60 VA health care facilities and 11 of 21 VA t regional offices where security issues were reviewed, placing VA a risk that sensitive data may be exposed to unauthorized access and improper disclosure, among other things. As a result, the IG determined that weaknesses in VA’s information technology controls were a material weakness. In response to the IG’s findings, the department indicates that plans are being implemented to "
1281,"address the material weakness in information security. According to the department, it has ma limited resources to make significant improvement in its overall security posture in the near term by prioritizing FISMA remediation activities, and work will continue in the next fiscal year. Despite these actions, the department has not fully implemented the key elements of a comprehensive security management program, and its efforts have not been sufficient to effectively protect its information systems and info"
1282,"rmation, including personally identifiable information, from unauthorized disclosure, misuse, or loss. In addition to establishing a robust information security program, agencies can take other actions to help guard against the possibil that personal information they maintain is inadvertently compromised. These include conducting privacy impact assessments and taking other practical measures. It is important that agencies identify the specific instance they collect and maintain personal information and proa"
1283,"ctively assess the means they intend to use to protect this information. This can be done most effectively through the development of privacy impact assessments (PIAs), which, as previously mentioned, are required by the E-Government Act of 2002 when agencies use information technology to process personal information. PIAs are important because they serve as a tool for agencies to fully consid the privacy implications of planned systems and data collections before those systems and collections have been ful"
1284,"ly implemen when it may be relatively easy to make critical adjustments. In prior work we have found that agencies do not always conduct PIAs as they are required. For example, our review of selected data mining efforts at federal agencies determined that PIAs were not always being done in full compliance with OMB guidance. Similarly, as identified in our work on federal agency use of information resellers, few PIAs were being developed for systems or programs that made use of information reseller data, bec"
1285,"ause officials did not believe they were required. Complete assessments are an important tool for agencies to identify areas of noncompliance with federal privacy laws, evaluate risks arising from electronic collection and maintenance of information about individuals, and evaluate protections or alternative processes needed to mitigate the risks identified. Agencies that do not take all the steps required to the privacy of personal information risk the improper exposure o alteration of such information. We "
1286,recommended that the agencies responsible for the data mining efforts we reviewed complete or revise PIAs as needed and make them available to the public. We also recommended that OMB revise its guidance to clarify the applicability of the E-Gov Act’s PIA requirement to the use of personal information from resellers. OMB stated that it would discuss its guidance with agency senior officials for privacy todetermine whether additional guidance concerning reseller dat needed. Besides strategic approaches suc s
1287,"ecurity program and conducting range of specific practical measures for protecting the privacy andh as establishing an information PIAs, agencies can consider a r security of personal information. Several that may be of particula value in preventing inadvertent data breaches include the following Limit collection of personal information. One item to be analyzed as part of a PIA is the extent to which an agency needs to collect personal information in order to meet the requirements of a specific application."
1288," Limiting the collection of personal information, amon g other things, serves to limit the opportunity for that information to be compromised. For example, key identifying information—such as Social Security numbers—may not be needed for many agency applications that have databases of other personal information. Limiting the collection of personal information is also one of the information practices, which are fundamental to the Privacy Act to good privacy practice in general. Limit data retention. Closely "
1289,"related to limiting data collection is limiting retention. Retaining personal data longer than needed by an agency or statutorily required adds to the risk that the data will be compromised. In discussing data retention, California’s Office of Privacy Protection recently reported an example in which a university experienced a security breach that exposed 15-year-old data, including Social Security numbers. The university subsequently reviewed its policies and decided to shorten the retention period for cert"
1290,"ain types of information. As part of their PIAs, federal agencies can make decisions up front about how lon they plan to retain personal data, aiming to retain the data for as brief a period as necessary. Limit access to personal information and train personnel accordingly. Only individuals with a need to access agency databases of personal information should have such access, and controls should be in place to monitor that access. Further, agenc ies can implement technological controls to prevent personal "
1291,"data from being readily transferred to unauthorized systems or media, such as laptop computers, discs, or other electronic storage devices. Security training, which is required for all federal employees under FISMA, can include training on the risks of exposing personal dat a to potential identity theft, thus helping to reduce the likelihood of data being exposed inadvertently. Consider using technological controls such as encryption wh data need to be stored on portable devices. In certain instances, agenc"
1292,"ies may find it necessary to enable employees to have access to personal data on portable devices such as laptop computers. As discussed, this should be minimized. However, when absolutely necessary, the risk that such data could be exposed to unauthorized individuals can be reduced by using technological controls such as encryption, which significantly limits the ability of such individuals to gain access to the data. Although encrypting data adds to the operational burden on authorized individuals, who mu"
1293,"st enter pass codes or use other authentication means to convert the data into readable text, it can provide reasonable assurance that stolen or lost computer equipment will not result in personal data being compromised, as occurred in the recent incident at VA. A decision about whether to use encryption would logically be made as an en element of the PIA process and an agency’s broader information security program. While these suggestions do not amount to a complete presc ription for protecting personal da"
1294,"ta, they are key elements of an agency’s strategy for reducing the risks that could lead to identity theft. In the event a data breach does occur, agencies must respond quickly in order to minimize the potential harm associated with identity theft. The chairman of the Federal Trade Commission has testified that the Commission believes that if a security breach creates a significant risk of identity theft or other related harm, affected consumers should be notified. The Federal Trade Commission has also repo"
1295,"rted that the overall cost of an incide identity theft, as well as the harm to the victims, is significantly smaller if the misuse of the victim’s personal information is discovered quickly. Applicable laws such as the Privacy Act currently do not req agencies to notify individuals of security breaches involving their personal information; however, doing so allows those affected th opportunity to take steps to protect themselves against the d of identity theft. For law is credited with bringing to the publi"
1296,"c’s notice large data breaches within the private sector, such as those involving ChoicePoint and LexisNexis last year. Arguably, the California lawexample, California’s data breach notification may have mitigated the risk of identity theft to affected individuals by keeping them informed about data breaches and thus enabling them to take steps such as contacting credit bureaus to have fraud alerts placed on their credit files, obtaining copies of their credit reports, scrutinizing their monthly financial a"
1297,"ccount statem taking other steps to protect themselves. Breach notification is also important in that it can help an organization address key privacy rights of individuals, in accordanc with the fair information practices mentioned earlier. Breach notification is one way that organizations—either in the private sector or the government—can follow the openness principle and meet their responsibility for keeping the public informed of how their personal information is being used and who has access to it. Equa"
1298,"lly important, notification is consistent with the principle that those controlling the collection or use of personal information should be accountable for taking steps to ensure the implementa of the other principles, such as use limitation and security safeguards. Public disclosure of data breaches is a key step in ensuring that organizations are held accountable for the protection of personal information. Although the principle of notifying affected individuals (or the public) about data breaches has cle"
1299,"ar benefits, determining the specifics of when and how an agency should issue such notifications presents challenges, particularly in determining the specific criteria for incidents that merit notification. In congressional testim ony, the Federal Trade Commission raised concerns about the thres hold at which consumers should be notified of a breach, cautioning tha strict a standard could have several negative effects. First, notification of a breach when there is little or no risk of harm might create unne"
1300,"cessary concern and confusion. Second, a surfeit of notices, resulting from notification criteria that are too strict, could render all such notices less effective, because consumers could become numb to them and fail to act when risks are truly significant. Finally, the costs to both individuals and business are t too not insignificant and may be worth considering. FTC points out that, in response to a security breach notification, a consumer may ca credit cards, contact credit bureaus to place fraud alert"
1301,"s on credit files, or obtain a new driver’s license number. These actions cou ld panies be time-consuming for the individual and costly for the com involved. Given these potential negative effects, care is clearly needed in defining appropriate criteria for required breach notifications. Once a determination has been made that a public notice is to be issued, care must be taken to ensure that it does its job effectively. Designing useful, easy-to-understand notices has been cited a in other areas where priv"
1302,"acy notices are required by law, challenge such as in the financial industry—where businesses are required by the Gramm-Leach-Bliley Act to send notices to consumers ab out their privacy practices—and in the federal government, which is required by the Privacy Act to issue public notices in the Federal Register about its systems of records containing personal information. For example, as noted during a public workshop hosted by the Department of Homeland Security’s Privacy Office, designing easy-to-understa"
1303,"nd consumer financial privacy notices to meet Gramm-Leach Bliley Act requirements has been challenging Officials from the FTC and Office of the Comptroller of the Currency described widespread criticism of these notices—that t were unexpected, too long, filled with legalese, and not understandable. . If an agency is to notify people of a data breach, it should do so in such a way that they understand the nature of the threat and what steps need to be taken to protect themselves against identity theft. In co"
1304,"nnection with its state law requiring security breach notifications, the California Office of Privacy Protection has published recommended practices for designing and issuing security breach notices. The office recommends that such notifications include, among other things, a general description of what happened; the type of personal information that was involved; what steps have been taken to prevent further unauthorized acquisition of personal information; the types of assistance to be p free contact tele"
1305,"phone number for additional information and assistance; rovided to individuals, such as a toll- information on what individuals can do to protect th identity theft, including contact information for the three cred reporting agencies; and it information on where individuals can obtain additional information on protection against identity theft, such as the Federal Trade Commission’s Identity Theft Web site (www.consumer.gov/idtheft). The California Office of Privacy Protection also recommends making notices "
1306,"clear, conspicuous, and helpful by using clear, simple language and avoiding jargon, and it suggests avoiding using a standardized format to mitigate the risk that the public will become complacent about the process. The Federal Trade Commission has issued guidance to businesses on notifying individuals of data breaches that reiterates several key elements of effective notification—describing clearly what is known about the data compromise, explaining what responses may be appropriate for the type of inform"
1307,"ation taken, and providing information and contacts regarding identity theft in general. The Commission also suggests providing contact information for the law enforcement officer working on the case, as well as encouraging individuals who discover that their information has been misused to file a complaint with the Commission. Both the state of California and the Federal Trade Commission recommend consulting with cognizant law-enforcement officers about an incident before issuing notices to the public. In "
1308,"some cases, early notification or disclosure of certain facts about an incident could hamper a law enforcement investigation. For example, an otherwise unknowing thief could learn of the potential value of data stored on a laptop computer that was originally stolen purely for the value of the hardware. Thus it is recommended tha organizations consult with law enforcement regarding the timing and content of notifications. However, law enforcement investigations should not necessarily result in lengthy delays"
1309," in notification. California’s guidance states that it should not be necessary for a law enforcement agency to complete an investigation before notification can be given. t When providing notifications to the public, organizations should consider how to ensure that these are easily understood. Various techniques have been suggested to promote comprehension, including the concept of “layering.” Layering involves providing only the most important summary facts up front—often in a graphical format—followed by "
1310,"one or more lengthier, more narrative versions in order to ensure that all information is communicated that needs to be. Multilayering may be an option to achieving an easy-to-understand notice that is still complete. Similarly, providing context to the notice (explaining to consu why they are receiving the notice and what to do with it) has been found to promote comprehension, as did visual design elem such as a tabular format, large and legible fonts, appropriate space, and simple headings. Although these"
1311," techniques were developed for other kinds of notices, they can be applied to those informing the public of data breaches. For example, a multilayered security breach notice could include a brief description of the nature of the security breach, thepotential threat to victims of the incident, and measures to be taken to protect against identity theft. The notice could provide additional details about the incident as an attachment or by providing links to additional information. This would accomplish the pur"
1312,"pose of communicating the key details in a brief format, while still providi ng complete information to those who require it. Given that people maybe adversely affected by a compromise of their personal information, it is critical that they fully understand the nature of the threat and the options they have to address it. In summary, the recent security breach at VA has highlighted the importance of implementing effective information security practices. Long-standing information security control weaknesses "
1313,"at VA have placed its information systems and information, including personally identifiable information, at increased risk of misuse and unauthorized disclosure. Although VA has taken steps to mitigate previously reported weaknesses, it has not implemented a comprehensive, integrated information security program, which it needs in order to effectively manage risks on an ongoing basis. Much work remains to be done. Only through strong leadership, sustained management commitment and effort, disciplined proce"
1314,"sses, and consistent oversight can VA address its persistent, long-standing control weaknesses. To reduce the likelihood of experiencing such breaches, agencies can take a number of actions that can help guard against the possibility that databases of personally identifiable information are inadvertently compromised: strategically, they should ensure that a robust information security program is in place and that PIAs are developed. More specific practical measures aimed at preventing inadvertent data breac"
1315,"hes include limiting the collection of pe information, limiting data retention, limiting access to personal information and training personnel accordingly, and considering using technological controls such as encryption when data need to be stored on mobile devices. Nevertheless, data breaches can still occur at any time, and whe n they do, notification to the individuals affected and/or the public h clear benefits, allowing people the opportunity to take steps to dangers of identity theft. Care is protect "
1316,"themselves against the needed in defining appropriate criteria if agencies are to be required to report security breaches to the public. Further, care is also needed to ensure that notices are useful and easy to understand, so that they are effective in alerting individuals to actions they may want to take to minimize the risk of identity theft. We have previously testified that as Congress considers legisla requiring agencies to notify individuals or the public about security tion breaches, it should ensur"
1317,"e that specific criteria are defined for incidents that merit public notification. It may want to consider creating a two-tier reporting requirement, in which all security breaches are reported to OMB, and affected individuals are notifiedonly of incidents involving significant risk. Further, Congress should consider requiring OMB to provide guidance to agencies on how develop and issue security breach notices to the public. Mr. Chairman, this concludes our testimony today. We would be happy to answer any q"
1318,"uestions you or other members of the committee may have. If you have any questions concerning this testimony, please contact Linda Koontz, Director, Information Management, at (202) 512-6240, koontzl@gao.gov, or Gregory Wilshusen, Director, Information Security, at (202) 512-6244, wilshuseng@gao.gov. Other individuals who made key contributions include Idris Adjerid, Barbara Collier, William Cook, John de Ferrari, Valerie Hopkins, Suzanne Lightman, Barbara Oliver, David Plocher, Jamie Pressman, J. Michael R"
1319,"esser, and Charles Vrabel. Information Systems: VA Computer Control Weaknesses Increase Risk of Fraud, Misuse, and Improper Disclosure. GAO/AIMD-98- 175. Washington, D.C.: September 23, 1998. VA Information Systems: The Austin Automation Center Has Made Progress in Improving Information System Controls. GAO/AIMD-99-161. Washington, D.C.: June 8, 1999. Information Systems: The Status of Computer Security at the Department of Veterans Affairs. GAO/AIMD-00-5. Washington, D.C.: October 4, 1999. VA Systems Secur"
1320,"ity: Information System Controls at the North Texas Health Care System. GAO/AIMD-00-52R. Washington, D.C.: February 1, 2000. VA Systems Security: Information System Controls at the New Mexico VA Health Care System. GAO/AIMD-00-88R. Washington, D.C.: March 24, 2000. VA Systems Security: Information System Controls at the VA Maryland Health Care System. GAO/AIMD-00-117R. Washington, D.C.: April 19, 2000. Information Technology: Update on VA Actions to Implement Critical Reforms. GAO/T-AIMD-00-74. Washington, "
1321,"D.C.: May 11, 2000. VA Information Systems: Computer Security Weaknesses Persist at the Veterans Health Administration. GAO/AIMD-00-232. Washington, D.C.: September 8, 2000. Major Management Challenges and Program Risks: Department of Veterans Affairs. GAO-01-255. Washington, D.C.: January 2001. VA Information Technology: Important Initiatives Begun, Yet Serious Vulnerabilities Persist. GAO-01-550T. Washington, D.C.: April 4, 2001. VA Information Technology: Progress Made, but Continued Management Attention"
1322," is Key to Achieving Results. GAO-02-369T. Washington, D.C.: March 13, 2002. Veterans Affairs: Subcommittee Post-Hearing Questions Concerning the Department’s Management of Information Technology. GAO-02-561R. Washington, D.C.: April 5, 2002. Veterans Affairs: Sustained Management Attention is Key to Achieving Information Technology Results. GAO-02-703. Washington, D.C.: June 12, 2002. VA Information Technology: Management Making Important Progress in Addressing Key Challenges. GAO-02-1054T. Washington, D.C"
1323,".: September 26, 2002. Information Security: Weaknesses Persist at Federal Agencies Despite Progress Made in Implementing Related Statutory Requirements. GAO-05-552. Washington, D.C.: July 15, 2005. Privacy: Key Challenges Facing Federal Agencies. GAO-06-777T. Washington, D.C.: May 17, 2006. Personal Information: Agencies and Resellers Vary in Providing Privacy Protections. GAO-06-609T. Washington, D.C.: April 4, 2006. Personal Information: Agency and Reseller Adherence to Key Privacy Principles. GAO-06-421"
1324,". Washington, D.C.: April 4, 2006. Data Mining: Agencies Have Taken Key Steps to Protect Privacy in Selected Efforts, but Significant Compliance Issues Remain. GAO- 05-866. Washington, D.C.: August 15, 2005. Aviation Security: Transportation Security Administration Did Not Fully Disclose Uses of Personal Information during Secure Flight Program Testing in Initial Privacy Notices, but Has Recently Taken Steps to More Fully Inform the Public. GAO-05- 864R. Washington, D.C.: July 22, 2005. Identity Theft: Some"
1325," Outreach Efforts to Promote Awareness of New Consumer Rights are Under Way. GAO-05-710. Washington, D.C.: June 30, 2005. Electronic Government: Federal Agencies Have Made Progress Implementing the E-Government Act of 2002. GAO-05-12. Washington, D.C.: December 10, 2004. Social Security Numbers: Governments Could Do More to Reduce Display in Public Records and on Identity Cards. GAO-05-59. Washington, D.C.: November 9, 2004. Federal Chief Information Officers: Responsibilities, Reporting Relationships, Tenu"
1326,"re, and Challenges, GAO-04-823. Washington, D.C.: July 21, 2004. Data Mining: Federal Efforts Cover a Wide Range of Uses, GAO-04- 548. Washington, D.C.: May 4, 2004. Privacy Act: OMB Leadership Needed to Improve Agency Compliance. GAO-03-304. Washington, D.C.: June 30, 2003. Data Mining: Results and Challenges for Government Programs, Audits, and Investigations. GAO-03-591T. Washington, D.C.: March 25, 2003. Technology Assessment: Using Biometrics for Border Security. GAO-03-174. Washington, D.C.: November "
1327,"15, 2002. Information Management: Selected Agencies’ Handling of Personal Information. GAO-02-1058. Washington, D.C.: September 30, 2002. Identity Theft: Greater Awareness and Use of Existing Data Are Needed. GAO-02-766. Washington, D.C.: June 28, 2002. Social Security Numbers: Government Benefits from SSN Use but Could Provide Better Safeguards. GAO-02-352. Washington, D.C.: May 31, 2002. Full citations are provided in attachment 1. This is a work of the U.S. government and is not subject to copyright prot"
1328,"ection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately."
1329,"Interest in oil shale as a domestic energy source has waxed and waned since the early 1900s. In 1912, President Taft established an Office of Naval and Petroleum Oil Shale Reserves, and between 1916 and 1924, executive orders set aside federal land in three separate naval oil shale reserves to ensure an emergency domestic supply of oil. The Mineral Leasing Act of 1920 made petroleum and oil shale resources on federal lands available for development under the terms of a mineral lease, but large domestic oil "
1330,"discoveries soon after passage of the act dampened interest in oil shale. Interest resumed at various points during times of generally increasing oil prices. For example, the U.S. Bureau of Mines developed an oil shale demonstration project beginning in 1949 in Colorado, where it attempted to develop a process to extract the oil. The 1970s’ energy crises stimulated interest once again, and DOE partnered with a number of energy companies, spawning a host of demonstration projects. Private efforts to develop "
1331,"oil shale stalled after 1982 when crude oil prices fell significantly, and the federal government dropped financial support for ongoing demonstration projects. More recently, the Energy Policy Act of 2005 directed BLM to lease its lands for oil shale research and development. In June 2005, BLM initiated a leasing program for research, development, and demonstration (RD&D) of oil shale recovery technologies. By early 2007, it granted six small RD&D leases: five in the Piceance Basin of northwest Colorado and"
1332," one in Uintah Basin of northeast Utah. The location of oil shale resources in these two basins is shown in figure 1. The leases are for a 10-year period, and if the technologies are proven commercially viable, the lessees can significantly expand the size of the leases for commercial production into adjacent areas known as preference right lease areas. The Energy Policy Act of 2005 directed BLM to develop a programmatic environmental impact statement (PEIS) for a commercial oil shale leasing program. Durin"
1333,"g the drafting of the PEIS, however, BLM realized that, without proven commercial technologies, it could not adequately assess the environmental impacts of oil shale development and dropped from consideration the decision to offer additional specific parcels for lease. Instead, the PEIS analyzed making lands available for potential leasing and allowing industry to express interest in lands to be leased. Environmental groups then filed lawsuits, challenging various aspects of the PEIS and the RD&D program. S"
1334,"ince then, BLM has initiated another round of oil shale RD&D leasing and is currently reviewing applications but has not made any awards. Stakeholders in the future development of oil shale are numerous and include the federal government, state government agencies, the oil shale industry, academic institutions, environmental groups, and private citizens. Among federal agencies, BLM manages the land and the oil shale beneath it and develops regulations for its development. USGS describes the nature and exten"
1335,"t of oil shale deposits and collects and disseminates information on the nation’s water resources. DOE, through its various offices, national laboratories, and arrangements with universities, advances energy technologies, including oil shale technology. The Environmental Protection Agency (EPA) sets standards for pollutants that could be released by oil shale development and reviews environmental impact statements, such as the PEIS. The Bureau of Reclamation (BOR) manages federally built water projects that"
1336," store and distribute water in 17 western states and provides this water to users. BOR monitors the amount of water in storage and the amount of water flowing in the major streams and rivers, including the Colorado River, which flows through oil shale country and feeds these projects. BOR provides its monitoring data to federal and state agencies that are parties to three major federal, state, and international agreements, that together with other federal laws, court decisions, and agreements, govern how wa"
1337,"ter within the Colorado River and its tributaries is to be shared with Mexico and among the states in which the river or its tributaries are located. These three major agreements are the Colorado River Compact of 1922, the Upper Colorado River Basin Compact of 1948, and the Mexican Water Treaty of 1944. The states of Colorado and Utah have regulatory responsibilities over various activities that occur during oil shale development, including activities that impact water. Through authority delegated by EPA un"
1338,"der the Clean Water Act, Colorado and Utah regulate discharges into surface waters. Colorado and Utah also have authority over the use of most water resources within their respective state boundaries. They have established extensive legal and administrative systems for the orderly use of water resources, granting water rights to individuals and groups. Water rights in these states are not automatically attached to the land upon which the water is located. Instead, companies or individuals must apply to the "
1339,"state for a water right and specify the amount of water to be used, its intended use, and the specific point from where the water will be diverted for use, such as a specific point on a river or stream. Utah approves the application for a water right through an administrative process, and Colorado approves the application for a water right through a court proceeding. The date of the application establishes its priority—earlier applicants have preferential entitlement to water over later applicants if water "
1340,"availability decreases during a drought. These earlier applicants are said to have senior water rights. When an applicant puts a water right to beneficial use, it is referred to as an absolute water right. Until the water is used, however, the applicant is said to have a conditional water right. Even if the applicant has not yet put the water to use, such as when the applicant is waiting on the construction of a reservoir, the date of the application still establishes priority. Water rights in both Colorado"
1341," and Utah can be bought and sold, and strong demand for water in these western states facilitates their sale. A significant challenge to the development of oil shale lies in the current technology to economically extract oil from oil shale. To extract the oil, the rock needs to be heated to very high temperatures—ranging from about 650 to 1,000 degrees Fahrenheit—in a process known as retorting. Retorting can be accomplished primarily by two methods. One method involves mining the oil shale, bringing it to "
1342,"the surface, and heating it in a vessel known as a retort. Mining oil shale and retorting it has been demonstrated in the United States and is currently done to a limited extent in Estonia, China, and Brazil. However, a commercial mining operation with surface retorts has never been developed in the United States because the oil it produces competes directly with conventional crude oil, which historically has been less expensive to produce. The other method, known as an in-situ process, involves drilling ho"
1343,"les into the oil shale, inserting heaters to heat the rock, and then collecting the oil as it is freed from the rock. Some in-situ technologies have been demonstrated on very small scales, but other technologies have yet to be proven, and none has been shown to be economically or environmentally viable. Nevertheless, according to some energy experts, the key to developing our country’s oil shale is the development of an in-situ process because most of the richest oil shale is buried beneath hundreds to thou"
1344,"sands of feet of rock, making mining difficult or impossible. Additional economic challenges include transporting the oil produced from oil shale to refineries because pipelines and major highways are not prolific in the remote areas where the oil shale is located and the large-scale infrastructure that would be needed to supply power to heat oil shale is lacking. In addition, average crude oil prices have been lower than the threshold necessary to make oil shale development profitable over time. Large-scal"
1345,"e oil shale development also brings socioeconomic impacts. While there are obvious positive impacts such as the creation of jobs, increase in wealth, and tax and royalty payments to governments, there are also negative impacts to local communities. Oil shale development can bring a sizeable influx of workers, who along with their families, put additional stress on local infrastructure such as roads, housing, municipal water systems, and schools. Development from expansion of extractive industries, such as o"
1346,"il shale or oil and gas, has typically followed a “boom and bust” cycle in the West, making planning for growth difficult. Furthermore, traditional rural uses could be replaced by the industrial development of the landscape, and tourism that relies on natural resources, such as hunting, fishing, and wildlife viewing, could be negatively impacted. In addition to the technological, economic, and social challenges to developing oil shale resources, there are a number of significant environmental challenges. Fo"
1347,"r example, construction and mining activities can temporarily degrade air quality in local areas. There can also be long- term regional increases in air pollutants from oil shale processing, upgrading, pipelines, and the generation of additional electricity. Pollutants, such as dust, nitrogen oxides, and sulfur dioxide, can contribute to the formation of regional haze that can affect adjacent wilderness areas, national parks, and national monuments, which can have very strict air quality standards. Because "
1348,"oil shale operations clear large surface areas of topsoil and vegetation, some wildlife habitat will be lost. Important species likely to be negatively impacted from loss of wildlife habitat include mule deer, elk, sage grouse, and raptors. Noise from oil shale operations, access roads, transmission lines, and pipelines can further disturb wildlife and fragment their habitat. In addition, visual resources in the area will be negatively impacted as people generally consider large-scale industrial sites, pipe"
1349,"lines, mines, and areas cleared of vegetation to be visually unpleasant (see fig. 2 for a typical view within the Piceance Basin). Environmental impacts from oil shale development could be compounded by additional impacts in the area resulting from coal mining, construction, and extensive oil and gas development. Air quality and wildlife habitat appear to be particularly susceptible to the cumulative affect of these impacts, and according to some environmental experts, air quality impacts may be the limitin"
1350,"g factor for the development of a large oil shale industry in the future. Lastly, the withdrawal of large quantities of surface water for oil shale operations could negatively impact aquatic life downstream of the oil shale development. Impacts to water resources are discussed in detail in the next section of this report. Oil shale development could have significant impacts on the quality and quantity of surface and groundwater resources, but the magnitude of these impacts is unknown because some technologi"
1351,"es have yet to be commercially proven, the size of a future oil shale industry is uncertain, and knowledge of current water conditions and groundwater flow is limited. Despite not being able to quantify the impacts from oil shale development, hydrologists and engineers have been able to determine the qualitative nature of impacts because other types of mining, construction, and oil and gas development cause disturbances similar to impacts expected from oil shale development. According to these experts, in t"
1352,"he absence of effective mitigation measures, impacts from oil shale development to water resources could result from disturbing the ground surface during the construction of roads and production facilities, withdrawing water from streams and aquifers for oil shale operations, underground mining and extraction, and discharging waste waters from oil shale operations. The quantitative impacts of future oil shale development cannot be measured with reasonable certainty at this time primarily because of three un"
1353,"knowns: (1) the unproven nature of in-situ technologies, (2) the uncertain size of a future oil shale industry, and (3) insufficient knowledge of current groundwater conditions. First, geological maps suggest that most of the prospective oil shale in the Uintah and Piceance Basins is more amenable to in-situ production methods rather than mining because the oil shale lies buried beneath hundreds to thousands of feet of rock. Studies have concluded that much of this rock is generally too thick to be removed "
1354,"economically by surface mining, and deep subsurface mines are likely to be costly and may recover no more than 60 percent of the oil shale. Although several companies have been working on the in-situ development of oil shale, none of these processes has yet been shown to be commercially viable. Most importantly, the extent of the impacts of in- situ retorting on aquifers is unknown, and it is uncertain whether methods for reclamation of the zones that are heated will be effective. Second, it is not possible"
1355," to quantify impacts on water resources with reasonable certainty because it is not yet possible to predict how large an oil shale industry may develop. The size of the industry would have a direct relationship to water impacts. Within the PEIS, BLM has stated that the level and degree of the potential impacts of oil shale development cannot be quantified because this would require making many speculative assumptions regarding the potential of the oil shale, unproven technologies, project size, and producti"
1356,"on levels. Third, hydrologists at USGS and BLM state that not enough is known about current surface water and groundwater conditions in the Piceance and Uintah Basins. More specifically, comprehensive baseline conditions for surface water and groundwater do not exist. Therefore, without knowledge of current conditions, it is not possible to detect changes in groundwater conditions, much less attribute changes to oil shale development. Impacts to water resources from oil shale development would result primar"
1357,"ily from disturbing the ground surface, withdrawing surface water and groundwater, underground mining, and discharging water from operations. In the absence of effective mitigation measures, ground disturbance activities associated with oil shale development could degrade surface water quality, according to the literature we reviewed and water experts to whom we spoke. Both mining and the in-situ production of oil shale are expected to involve clearing vegetation and grading the surface for access roads, pi"
1358,"pelines, production facilities, buildings, and power lines. In addition, the surface that overlies the oil shale would need to be cleared and graded in preparation for mining or drilling boreholes for in-situ extraction. The freshly cleared and graded surfaces would then be exposed to precipitation, and subsequent runoff would drain downhill toward existing gullies and streams. If not properly contained or diverted away from these streams, this runoff could contribute sediment, salts, and possibly chemicals"
1359," or oil shale products into the nearby streams, degrading their water quality. Surface mining would expose the entire area overlying the oil shale that is to be mined while subsurface mining would expose less surface area and thereby contribute less runoff. One in-situ operation proposed by Shell for its RD&D leases would require clearing of the entire surface overlying the oil shale because wells are planned to be drilled as close as 10 feet apart. Other in-situ operations, like those proposed by American "
1360,"Shale Oil Company and ExxonMobil, envision directionally drilling wells in rows that are far enough apart so that strips of undisturbed ground would remain. The adverse impacts from ground disturbances would remain until exposed surfaces were properly revegetated. If runoff containing excessive sediment, salts, or chemicals finds its way into streams, aquatic resources could be adversely impacted, according to the water experts to whom we spoke and the literature we reviewed. Although aquatic populations ca"
1361,"n handle short-term increases in sediment, long-term increases could severely impact plant and animal life. Sediment could suffocate aquatic plants and decrease the photosynthetic activity of these plants. Sediment could also suffocate invertebrates, fish, and incubating fish eggs and adversely affect the feeding efficiency and spawning success of fish. Sedimentation would be exacerbated if oil shale activities destroy riparian vegetation because these plants often trap sediment, preventing it from entering"
1362," streams. In addition, toxic substances derived from spills, leaks from pipelines, or leaching of waste rock piles could increase mortality among invertebrates and fish. Surface and underground mining of oil shale will produce waste rock that, according to the literature we reviewed and water experts to whom we spoke, could contaminate surface waters. Mined rock that is retorted on site would produce large quantities of spent shale after the oil is extracted. Such spent shale is generally stored in large pi"
1363,"les that would also be exposed to surface runoff that could possibly transport sediment, salts, selenium, metals, and residual hydrocarbons into receiving streams unless properly stabilized and reclaimed. EPA studies have shown that water percolating through such spent shale piles transports pollutants long after abandonment of operations if not properly mitigated. In addition to stabilizing and revegetating these piles, mitigation measures could involve diverting runoff into retention ponds, where it could"
1364," be treated, and lining the surface below waste rock with impervious materials that could prevent water from percolating downward and transporting pollutants into shallow groundwater. However, if improperly constructed, retention ponds would not prevent the degradation of shallow groundwater, and some experts question whether the impervious materials would hold up over time. Withdrawing water from streams and rivers for oil shale operations could have temporary adverse impacts on surface water, according to"
1365," the experts to whom we spoke and the literature we reviewed. Oil shale operations need water for a number of activities, including mining, constructing facilities, drilling wells, generating electricity for operations, and reclamation of disturbed sites. Water for most of these activities is likely to come from nearby streams and rivers because it is more easily accessible and less costly to obtain than groundwater. Withdrawing water from streams and rivers would decrease flows downstream and could tempora"
1366,"rily degrade downstream water quality by depositing sediment within the stream channels as flows decrease. The resulting decrease in water would also make the stream or river more susceptible to temperature changes—increases in the summer and decreases in the winter. Elevated temperatures could have adverse impacts on aquatic life, including fishes and invertebrates, which need specific temperatures for proper reproduction and development. Elevated water temperatures would also decrease dissolved oxygen, wh"
1367,"ich is needed by aquatic animals. Decreased flows could also damage or destroy riparian vegetation. Removal of riparian vegetation could exacerbate negative impacts on water temperature and oxygen because such vegetation shades the water, keeping its temperature cooler. Similarly, withdrawing water from shallow aquifers—an alternative water source—would have temporary adverse impacts on groundwater resources. Withdrawals would lower water levels within these shallow aquifers and the nearby streams and sprin"
1368,"gs to which they are connected. Extensive withdrawals could reduce groundwater discharge to connected streams and springs, which in turn could damage or remove riparian vegetation and aquatic life. Withdrawing water from deeper aquifers could have longer-term impacts on groundwater and connected streams and springs because replenishing these deeper aquifers with precipitation generally takes longer. Underground mining would permanently alter the properties of the zones that are mined, thereby affecting grou"
1369,"ndwater flow through these zones, according to the literature we reviewed and the water experts to whom we spoke. The process of removing oil shale from underground mines would create large tunnels from which water would need to be removed during mining operations. The removal of this water through pumping would decrease water levels in shallow aquifers and decrease flows to streams and springs that are connected. When mining operations cease, the tunnels would most likely be filled with waste rock, which w"
1370,"ould have a higher degree of porosity and permeability than the original oil shale that was removed. Groundwater flow through this material would increase permanently, and the direction and pattern of flows could change permanently. Flows through the abandoned tunnels could decrease ground water quality by increasing concentrations of salts, metals, and hydrocarbons within the groundwater. In-situ extraction would also permanently alter aquifers because it would heat the rock to temperatures that transform "
1371,"the solid organic compounds within the rock into liquid hydrocarbons and gas that would fracture the rock upon escape. Water would be cooked off during the heating processes. Some in-situ operations envision using a barrier to isolate thick zones of oil shale with intervening aquifers from any adjacent aquifers and pumping out all the groundwater from this isolated area before retorting. Other processes, like those envisioned by ExxonMobil and AMSO, involve trying to target thinner oil shale zones that do n"
1372,"ot have intervening aquifers and, therefore, would theoretically not disturb the aquifers. However, these processes involve fracturing the oil shale, and it is unclear whether the fractures could connect the oil shale to adjacent aquifers, possibly contaminating the aquifer with hydrocarbons. After removal of hydrocarbons from retorted zones, the porosity and permeability of the zones are expected to increase, thereby allowing increased groundwater flow. Some companies propose rinsing retorted zones with wa"
1373,"ter to remove residual hydrocarbons. However, the effectiveness of rinsing is unproven, and residual hydrocarbons, metals, salts, and selenium that were mobilized during retorting could contaminate the groundwater. Furthermore, the long-term effects of groundwater flowing through retorted zones are unknown. The discharge of waste waters from operations would temporarily increase water flows in receiving streams. According to BLM’s PEIS, waste waters from oil shale operations that could be discharged include"
1374," waters used in extraction, cooling, the production of electricity, and sewage treatment, as well as drainage water collected from spent oil shale piles and waters pumped from underground mines or wells used to dewater the retorted zones. Discharges could decrease the quality of downstream water if the discharged water is of lower quality, has a higher temperature, or contains less oxygen. Lower-quality water containing toxic substances could increase fish and invertebrate mortality. Also, increased flow in"
1375,"to receiving streams could cause downstream erosion. However, at least one company is planning to recycle waste water and water produced during operations so that discharges and their impacts could be substantially reduced. While commercial oil shale development requires water for numerous activities throughout its life cycle, estimates vary widely for the amount of water needed to commercially produce oil shale. This variation in estimates stems primarily from the uncertainty associated with reclamation te"
1376,"chnologies for in-situ oil shale development and because of the various ways to generate power for oil shale operations, which use different amounts of water. Based on our review of available information for the life cycle of oil shale production, existing estimates suggest that from about 1 to 12 barrels of water could be needed for each barrel of oil produced from in-situ operations, with an average of about 5 barrels. About 2 to 4 barrels of water could be needed for each barrel of oil produced from mini"
1377,"ng operations with a surface retort. Water is needed for five distinct groups of activities that occur during the life cycle of oil shale development: (1) extraction and retorting, (2) upgrading of shale oil, (3) reclamation, (4) power generation, and (5) population growth associated with oil shale development. Extraction and retorting. During extraction and retorting, water is used for building roads, constructing facilities, controlling dust, mining and handling ore, drilling wells for in-situ extraction,"
1378," cooling of equipment and shale oil, producing steam, in-situ fracturing of the retort zones, and preventing fire. Water is also needed for on-site sanitary and potable uses. Upgrading of shale oil. Water is needed to upgrade, or improve, the quality of the produced shale oil so that it can be easily transported to a refinery. The degree to which the shale oil needs to be upgraded varies according to the retort process. Shale oil produced by surface retorting generally requires more upgrading, and therefore"
1379,", more water than shale oil produced from in-situ operations that heat the rock at lower temperatures and for a longer time, producing higher-quality oil. Reclamation. During reclamation of mine sites, water is needed to cool, compact, and stabilize the waste piles of retorted shale and to revegetate disturbed surfaces, including the surfaces of the waste piles. For in-situ operations, in addition to the typical revegetation of disturbed surfaces, as shown in figure 3, water also will be needed for reclamat"
1380,"ion of the subsurface retorted zones to remove residual hydrocarbons. The volume of water that would be needed to rinse the zones at present is uncertain and could be large, depending primarily on how many times the zones need to be rinsed. In addition, some companies envision reducing water demands for reclamation, as well as for extracting, retorting, and upgrading, by recycling water produced during oil shale operations or by treating and using water produced from nearby oil and gas fields. Recycling tec"
1381,"hnology, however, has not been shown to be commercially viable for oil shale operations, and there could be legal restrictions on using water produced from oil and gas operations. Power generation. Water is also needed throughout the life cycle of oil shale production for generating electricity from power plants needed in operations. The amount of water used to produce this electricity varies significantly according to generation and cooling technologies employed. For example, thermoelectric power plants us"
1382,"e a heat source to make steam, which turns a turbine connected to a generator that makes the electricity. The steam is captured and cooled, often with additional water, and is condensed back into water that is then recirculated through the system to generate more steam. Plants that burn coal to produce steam use more water for cooling than combined cycle natural gas plants, which combust natural gas to turn a turbine and then capture the waste heat to produce steam that turns a second turbine, thereby produ"
1383,"cing more electricity per gallon of cooling water. Thermoelectric plants can also use air instead of water to condense the steam. These plants use fans to cool the steam and consume virtually no water, but are less efficient and more costly to run. Population growth. Additional water would be needed to support an anticipated increase in population due to oil shale workers and their families who migrate into the area. This increase in population can increase the demand for water for domestic uses. In isolate"
1384,"d rural areas where oil shale is located, sufficiently skilled workers may not be available. Based on studies that we reviewed, the total amount of water needed for in-situ oil shale operations could vary widely, from about 1 to 12 barrels of water per barrel of oil produced over the entire life cycle of oil shale operations. The average amount of water needed for in-situ oil shale production as estimated by these studies is about 5 barrels. This range is based on information contained primarily in studies "
1385,"published in 2008 and 2009 by ExxonMobil, Shell, the Center for Oil Shale Technology and Research at the Colorado School of Mines, the National Oil Shale Association, and contractors to the state of Colorado. Figure 3 shows Shell’s in-situ experimental site in Colorado. Because only two studies examined all five groups of activities that comprise the life cycle of oil shale production, we reviewed water estimates for each group of activities that is described within each of the eight studies we reviewed. We"
1386," calculated the minimum and the maximum amount of water that could be needed for in-situ oil shale development by summing the minimum estimates and the maximum estimates, respectively, for each group of activities. Differences in estimates are due primarily to the uncertainty in the amount of water needed for reclamation and to the method of generating power for operations. Table 1 shows the minimum, maximum, and average amounts of water that could be needed for each of the five groups of activities that co"
1387,"mprise the life cycle of in-situ oil shale development. The table shows that reclamation activities contribute the largest amount of uncertainty to the range of total water needed for in-situ oil shale operations. Reclamation activities, which have not yet been developed, contribute from 0 to 5.5 barrels of water for each barrel of oil produced, according to the studies we analyzed. This large range is due primarily to the uncertainty in how much rinsing of retorted zones would be necessary to remove residu"
1388,"al hydrocarbons and return groundwater to its original quality. On one end of the range, scientists at ExxonMobil reported that retorted zones may be reclaimed by rinsing them several times and using 1 barrel of water or less per barrel of oil produced. However, another study suggests that many rinses and many barrels of water may be necessary. For example, modeling by the Center for Oil Shale Technology and Research suggests that if the retorted zones require 8 or 10 rinses, 5.5 barrels of water could be n"
1389,"eeded for each barrel of oil produced. Additional uncertainty lies in estimating how much additional porosity in retorted zones will be created and in need of rinsing. Some scientists believe that the removal of oil will double the amount of pore space, effectively doubling the amount of water needed for rinsing. Other scientists question whether the newly created porosity will have enough permeability so that it can be rinsed. Also, the efficiency of recycling waste water that could be used for additional "
1390,"rinses adds to the amount of uncertainty. For example, ExxonMobil scientists believe that almost no new fresh water would be needed for reclamation if it can recycle waste water produced from oil shale operations or treat and use saline water produced from nearby oil and gas wells. Table 1 also shows that the water needs for generating power contribute significant uncertainty to the estimates of total water needed for in-situ extraction. Estimates of water needed to generate electricity range from near zero"
1391," for thermoelectric plants that are cooled by air to about 3.4 barrels for coal-fired thermoelectric plants that are cooled by water, according to the studies that we analyzed. These studies suggested that from about 0.7 to about 1.2 barrels of water would be needed if electricity is generated from combined cycle plants fueled by natural gas, depending on the power requirements of the individual oil shale operation. Overall power requirements are large for in-situ operations because of the many electric hea"
1392,"ters used to heat the oil shale over long periods of time—up to several years for one technology proposed by industry. However, ExxonMobil, Shell, and AMEC—a contractor to the state of Colorado— believe that an oil shale industry of significant size will not use coal-fired electric power because of its greater water requirements and higher carbon dioxide emissions. In fact, according to an AMEC study, estimates for power requirements of a 1.5 million-barrel-per-day oil shale industry would exceed the curren"
1393,"t coal-fired generating capacity of the nearest plant by about 12 times, and therefore would not be feasible. Industry representatives with whom we spoke said that it is more likely that a large oil shale industry would rely on natural gas-powered combined cycle thermoelectric plants, with the gas coming from gas fields within the Piceance and Uintah Basins or from gas produced during the retort process. ExxonMobil reports that it envisions cooling such plants with air, thereby using next to no water for ge"
1394,"nerating electricity. However, cooling with air can be more costly and will ultimately require more electricity. In addition, table 1 shows that extracting and retorting activities and upgrading activities also contribute to the uncertainty in the estimates of water needed for in-situ operations, but this uncertainty is significantly less than that of reclamation activities or power generation. The range for extraction and retorting is from 0 to 1 barrel of water. The range for upgrading the produced oil is"
1395," from 0.6 to 1.6 barrels of water, with both the minimum and maximum of this range cited in a National Oil Shale Association study. Hence, each of these two groups of activities contribute about 1 barrel of water to the range of estimates for the total amount of water needed for the life cycle of in-situ oil shale production. Last, table 1 shows there is little variation in the likely estimates of water needed to support the anticipated population increase associated with in- situ oil shale development. Det"
1396,"ailed analyses of water needs for population growth associated with an oil shale industry are present in the PEIS, a study by the URS Corporation, and a study completed by the Institute for Clean and Secure Energy at the University of Utah. These estimates often considered the number of workers expected to move into the area, the size of the families to which these workers belong, the ratio of single-family to multifamily housing that would accommodate these families, and per capita water consumption associ"
1397,"ated with occupants of different housing types. Figure 4 compares the total water needs over the life cycle of in-situ oil shale development according to the various sources of power generation, as suggested by the studies we reviewed. This is a convenient way to visualize the water needs according to power source. The minimum, average, and maximum values are the sum of the minimum, average, and maximum water needs, respectively, for all five groups of activities. Most of the difference between the minimum "
1398,and the maximum of each power type is due to water needed for reclamation. Estimates of water needed for mining oil shale and retorting it at the surface vary from about 2 to 4 barrels of water per barrel of oil produced over the entire life cycle of oil shale operations. The average is about 3 barrels of water. This range is based primarily on information obtained through a survey of active oil shale companies completed by the National Oil Shale Association in 2009 and information obtained from three diffe
1399,"rent retorts, as published in a report by the Office of Technology Assessment (OTA) in 1980. Figure 5 shows a surface retort that is operating today at a pilot plant. Because only two studies contained reliable information for all five groups of activities that comprise the life cycle of oil shale production, we reviewed water estimates for each group of activities that is described within each of the eight studies we reviewed. We calculated the minimum and the maximum amount of water that could be needed f"
1400,"or mining oil shale by summing the minimum estimates and the maximum estimates, respectively, for each group of activities. The range of water estimates for mining oil shale is far narrower than that of in-situ oil shale production because, according to the studies we reviewed, there are no large differences in water estimates for any of the activities. Table 2 shows the minimum, maximum, and average amounts of water that could be needed for each of the groups of activities that comprise the life cycle of o"
1401,"il shale development that relies upon mining and surface retorting. Unlike for in-situ production, we could not segregate extraction and retorting activities from upgrading activities because these activities were grouped together in some of the studies on mining and surface retorting. Nonetheless, as shown in table 2, the combination of these activities contributes 1 barrel of water to the total range of estimated water needed for the mining and surface retorting of oil shale. This 1 barrel of water result"
1402,"s primarily from the degree to which the resulting shale oil would need upgrading. An oil shale company representative told us that estimates for upgrading shale oil vary due to the quality of the shale oil produced during the retort process, with higher grades of shale oil needing less processing. Studies in the OTA report did not indicate much variability in water needs for the mining of the oil shale and the handling of ore. Retorts also produce water—about half a barrel for each barrel of oil produced—b"
1403,y freeing water that is locked in organic compounds and minerals within the oil shale. Studies in the OTA report took this produced water into consideration and reported the net anticipated water use. Table 2 also shows that differences in water estimates for generating power contributed about 1 barrel of water to the range of water needed for mining and surface retorting. We obtained water estimates for power generation either directly from the studies or from power requirements cited within the studies. E
1404,"stimates of water needed range from zero barrels for electricity coming from thermoelectric plants that are cooled by air to about 0.9 barrels for coal-fired thermoelectric plants that are cooled with water. About 0.3 barrels of water are needed to generate electricity from combined cycle plants fueled by natural gas. Startup oil shale mining operations, which have low overall power requirements, are more likely to use electricity from coal-fired power plants, according to data supplied by oil shale compani"
1405,"es, because such generating capacity is available locally. However, a large-scale industry may generate electricity from the abundant natural gas in the area or from gas that is produced during the retorting of oil shale. Water needs for reclamation or for supporting an anticipated increase in population associated with mining oil shale show little variability in the studies that we reviewed. Figure 6 compares the total water needs over the life cycle of mining and surface retorting of oil shale according t"
1406,"o the various sources of power generation. The minimum, average, and maximum values are the sum of the minimum, average, and maximum water needs, respectively, for all five groups of activities. Water is likely to be available for the initial development of an oil shale industry, but the eventual size of the industry may be limited by the availability of water and demands for water to meet other needs. Oil shale companies operating in Colorado and Utah will need to have water rights to develop oil shale, an"
1407,"d representatives from all of the companies with which we spoke are confident that they hold at least enough water rights for their initial projects and will likely be able to purchase more rights in the future. Sources of water for oil shale will likely be surface water in the immediate area, such as the White River, but groundwater could also be used. Nonetheless, the possibility of competing municipal and industrial demands for future water, a warming climate, future needs under existing compacts, and ad"
1408,"ditional water needs for the protection of threatened and endangered fishes, may eventually limit the size of a future oil shale industry. Companies with interest in oil shale already hold significant water rights in the Piceance Basin of Colorado, and representatives from all of the companies with whom we spoke felt confident that they either had or could obtain sufficient water rights to supply at least their initial operations in the Piceance and Uintah Basins. Western Resource Advocates, a nonprofit env"
1409,"ironmental law and policy organization, conducted a study of water rights ownership in the Colorado and White River Basins of Colorado and concluded that companies have significant water rights in the area. For example, the study found that Shell owns three conditional water rights for a combined diversion of about 600 cubic feet per second from the White River and one of its tributaries and has conditional rights for the combined storage of about 145,000 acre-feet in two proposed nearby reservoirs. Similar"
1410,"ly, the study found that ExxonMobil owns conditional storage capacities of over 161,000 acre-feet on 17 proposed reservoirs in the area. In Utah, the Oil Shale Exploration Company (OSEC), which owns an RD&D lease, has obtained a water right on the White River that appears sufficient for reopening the White River Mine and has cited the possibility of renewing an expired agreement with the state of Utah for obtaining additional water from shallow aquifers connected to the White River. Similarly, Red Leaf Reso"
1411,"urces cites the possibility of drilling a water well on the state-owned lands that it has leased for oil shale development. In addition to exercising existing water rights and agreements, there are other options for companies to obtain more water rights in the future, according to state officials in Colorado and Utah. In Colorado, companies can apply for additional water rights in the Piceance Basin on the Yampa and White Rivers. Shell recently applied—but subsequently withdrew the application—for condition"
1412,"al rights to divert up to 375 cubic feet per second from the Yampa River for storage in a proposed reservoir that would hold up to 45,000 acre-feet for future oil shale development. In Utah, however, officials with the State Engineer’s office said that additional water rights are not available, but that if companies want additional rights, they could purchase them from other owners. Many people who are knowledgeable on western water rights said that the owners of these rights in Utah and Colorado would most"
1413," likely be agricultural users, based on a history of senior agricultural rights being sold to developers in Colorado. For example, the Western Resource Advocates study identified that in the area of the White River, ExxonMobil Corporation has acquired full or partial ownership in absolute water rights on 31 irrigation ditches from which the average amount of water diverted per year has exceeded 9,000 acre-feet. These absolute water rights have appropriation dates ranging from 1883 through 1918 and are thus "
1414,"senior to holders of many other water rights, but their use would need to be changed from irrigation or agricultural to industrial in order to be used for oil shale. Also, additional rights may be available in Utah from other sources. According to state water officials in Utah, the settlement of an ongoing legal dispute between the state and the Ute Indian tribe could result in the tribe gaining rights to 105,000 acre-feet per year in the Uintah Basin. These officials said that it is possible that the tribe"
1415," could lease the water rights to oil shale companies. There are also two water conservancy districts that each hold rights to tens of thousands of acre-feet per year of water in the Uintah Basin that could be developed for any use as determined by the districts, including for oil shale development. Most of the water needed for oil shale development is likely to come first from surface flows, as groundwater is more costly to extract and generally of poorer quality in the Piceance and Uintah Basins. However, "
1416,"companies may use groundwater in the future should they experience difficulties in obtaining rights to surface water. Furthermore, water is likely to come initially from surface sources immediately adjacent to development, such as the White River and its tributaries that flow through the heart of oil shale country in Colorado and Utah, because the cost of pumping water over long distances and rugged terrain would be high, according to water experts. Shell’s attempt to obtain water from the more distant Yamp"
1417,"a River shows the importance of first securing nearby sources. In relationship to the White River, the Yampa lies about 20 to 30 miles farther north and at a lower elevation than Shell’s RD&D leases. Hence, additional costs would be necessary to transport and pump the Yampa’s water to a reservoir for storage and eventual use. Shell withdrew its application citing the global economic downturn. At least one company has considered obtaining surface water from the even more distant Colorado River, about 30 to 5"
1418,"0 miles to the south of the RD&D leases where oil shale companies already hold considerable water rights, but again, the costs of transporting and pumping water would be greater. Although water for initial oil shale development in Utah is also likely to come from the White River as indicated by OSEC’s interest, water experts have cited the Green River as a potential water source. However, the longer distance and rugged terrain is likely to be challenging. Figure 7 shows the locations of the oil shale resour"
1419,"ce areas and their proximity to local surface water sources. In addition to surface water, oil shale companies could use groundwater for operations should more desirable surface water sources be unavailable. However, companies would need to acquire the rights to this groundwater. Shallow groundwater in the Piceance and Uintah Basins occurs primarily within alluvial aquifers, which are aquifers composed of unconsolidated sand and gravel associated with nearby streams and rivers. The states of Utah and Colora"
1420,"do refer to these aquifers legally as tributary waters, or waters that are connected to surface waters and hence are considered to be part of the surface water source when appropriating water rights. Any withdrawal of tributary water is considered to be a withdrawal from the adjacent or nearby stream or river. Less is known about deep groundwater in the Piceance and Uintah Basins, but hydrologists consider it to be of lesser quality, with the water generally becoming increasingly saline with depth. State of"
1421,"ficials in Utah said that they consider this deeper groundwater to be tributary water, and state officials in Colorado said that they generally consider this deeper water also to be tributary water but will allow water rights applicants to prove otherwise. In the Piceance and Uintah Basins, groundwater is not heavily used, illustrating the reluctance of water users to tap this source. Nevertheless, Shell is considering the use of groundwater, and ExxonMobil is considering using water co-produced with natura"
1422,"l gas from nearby but deeper formations in the Piceance Basin. Also, BLM notes that there is considerable groundwater in the regional Bird’s Nest Aquifer in the area surrounding OSEC’s RD&D lease in the Uintah Basin. In addition, representatives of oil shale companies said they plan to use water that is released from the organic components of oil shale during the retort process. Since this water is chemically bound within the solid organic components rather than being in a liquid phase, it is not generally "
1423,"viewed as being groundwater, but it is unclear as to how it would be regulated. Developing a sizable oil shale industry may take many years—perhaps 15 or 20 years by some industry and government estimates—and such an industry may have to contend with increased demands for water to meet other needs. Substantial population growth and its correlative demand for water are expected in the oil shale regions of Colorado and Utah. This region in Colorado is a fast-growing area. State officials expect that the popul"
1424,"ation within the region surrounding the Yampa, White, and Green Rivers in Colorado will triple between 2005 and 2050. These officials expect that this added population and corresponding economic growth by 2030 will increase municipal and industrial demands for water, exclusive of oil shale development, by about 22,000 acre-feet per year, or a 76 percent increase from 2000. Similarly in Utah, state officials expect the population of the Uintah Basin to more than double its 1998 size by 2050 and that correlat"
1425,"ive municipal and industrial water demands will increase by 7,000 acre-feet per year, or an increase of about 30 percent since the mid-1990s. Municipal officials in two communities adjacent to proposed oil shale development in Colorado said that they were confident of meeting their future municipal and industrial demands from their existing senior water rights, and as such will probably not be affected by the water needs of a future oil shale industry. However, large withdrawals could impact agricultural in"
1426,"terests and other downstream water users in both states, as oil shale companies may purchase existing irrigation and agricultural rights for their oil shale operations. State water officials in Colorado told us that some holders of senior agricultural rights have already sold their rights to oil shale companies. A future oil shale industry may also need to contend with a decreased physical supply of water regionwide due to climate change. A contractor to the state of Colorado ran five projections through a "
1427,"number of climate models and found that their average result suggested that by 2040, a warming climate may reduce the amount of water in the White River in Colorado by about 13 percent, or 42,000 acre-feet. However, there was much variability among the five results, ranging from a 40 percent decrease to a 16 percent increase in today’s flow and demonstrating the uncertainty associated with climate predictions. Nevertheless, any decrease would mean that less water would be available downstream in Utah. Becau"
1428,"se of a warmer climate, the contractor also found that water needed to irrigate crops could increase significantly in the White River Basin, but it is uncertain whether the holders of the water rights used to irrigate the crops would be able to secure this additional water. Simultaneously, the model shows that summer precipitation is expected to decrease, thus putting pressure on farmers to withdraw even more water from local waterways. In addition, the contractor predicted that more precipitation is likely"
1429," to fall as rain rather than snow in the early winter and late spring. Because snow functions as a natural storage reservoir by releasing water into streams and aquifers as temperatures rise, less snow means that storage and runoff schedules will be altered and less water may be available at different times of the year. Although the model shows that the White River is expected to have reduced flows due to climate change, the same model shows that the Yampa is more likely to experience an increased flow beca"
1430,"use more precipitation is expected to fall in the mountains, which are its headwaters. Hence, oil shale companies may look to the Yampa for additional water if restrictions on the White are too great, regardless of increased costs to transport the water. While there is not a similar study on climate change impacts for Utah, it is likely that some of the impacts will be similar, considering the close proximity and similar climates in the Uintah and Piceance Basins. Colorado’s and Utah’s obligations under int"
1431,"erstate compacts could further reduce the amount of water available for development. The Colorado River Compact of 1922, which prescribes how the states through which the Colorado River and its tributaries flow share the river’s water, is based on uncharacteristically high flows, as cited in a study contracted by the state of Colorado. Water regulators have since shown that the flow rates used to allocate water under the compact may be 21 percent higher than average historical flow rates, thereby overestima"
1432,"ting the amount of water that may be available to share. As a result, the upstream states of Colorado and Utah may not have as much water to use as they had originally planned and may be forced to curtail water consumption so that they can deliver the amount of water that was agreed on in the compact to the downstream states of Arizona, Nevada, and California. Another possible limitation on withdrawals from the Colorado River system is the requirement to protect certain fish species under the Endangered Spe"
1433,"cies Act. Federal officials stated that withdrawals from the Colorado River system, including its tributaries the White and Green Rivers, could be limited by the amount of flow that is necessary to sustain populations of threatened or endangered fishes. Although there are currently no federally mandated minimum flow requirements on the White River in either Utah or Colorado, the river is home to populations of the federally endangered Colorado Pikeminnow, and the Upper Colorado Recovery Program is currently"
1434," working on a biological opinion which may prescribe minimum flow requirements. In addition, the Green River in Utah is home to populations of four threatened or endangered fishes: the Colorado Pikeminnow, the Razorback Sucker, the Humpback Chub, and the Bonytail Chub. For this reason, agency officials are recommending minimum flow requirements on the Green, which could further restrict the upstream supply of available water. Although oil shale companies own rights to a large amount of water in the oil shal"
1435,"e regions of Colorado and Utah, there are physical and legal limits on how much water they can ultimately withdraw from the region’s waterways, and thus limits on the eventual size of the overall industry. Physical limits are set by the amount of water that is present in the river, and the legal limit is the sum of the water that can be legally withdrawn from the river as specified in the water rights held by downstream users. Examining physical limits can demonstrate how much water may be available to all "
1436,"water users. Subtracting the legal limit can demonstrate how much water is available for additional development, providing that current water rights and uses do not change in the future. The state of Colorado refers to this remaining amount of water in the river as that which is physically and legally available. To put the water needs of a potential oil shale industry in Colorado into perspective, we compared the needs of oil shale industries of various sizes to what currently is physically available in the"
1437," White River at Meeker, Colorado—a small town immediately east of high-quality oil shale deposits in the Piceance Basin. We also compared the water needs of an oil shale industry to what may be physically and legally available from the White River in 2030. Table 3 shows scenarios depicting the amounts of water that would be needed to develop an oil shale industry of various sizes that relies on mining and surface retorting, based on the studies we examined. Table 4 shows similar scenarios for an oil shale i"
1438,"ndustry that uses in-situ extraction, based on the studies that we examined. The sizes are based on industry and expert opinion and are not meant to be predictions. Both tables assume water demands for peak oil shale production rates, but water use may not follow such a pattern. For example, water use for reclamation activities may not fully overlap with water use for extraction. Also, an industry composed of multiple operations is likely to have some operations at different stages of development. Furthermo"
1439,"re, because of the natural variability of stream flows, both on an annual basis and from year-to-year, reservoirs would need to be built to provide storage, which could be used to release a consistent amount of water on a daily basis. Data maintained by the state of Colorado indicate the amount of water that is physically available in the Whiter River at Meeker, Colorado, averages about 472,000 acre-feet per year. Table 3 suggests that this is much more water than is needed to support the water needs for al"
1440,"l the sizes of an industry relying on mining and surface retorting that we considered. Table 4, however, shows that an industry that uses in-situ extraction could be limited just by the amount of water physically available in the White River at Meeker, Colorado. For example, based on an oil shale industry that uses about 12 barrels of water for each barrel of shale oil it produces, such an industry could not reach 1 million barrels per day if it relied solely on physically available water from the White Riv"
1441,"er. Comparing an oil shale industry’s needs to what is physically and legally available considers the needs of current users and the anticipated needs of future users, rather than assuming all water in the river is available to an oil shale industry. The amount of water that is physically and legally available in the White River at Meeker is depicted in table 5. According to the state of Colorado’s computer models, holders of water rights downstream use on average about 153,000 acre-feet per year, resulting"
1442," in an average of about 319,000 acre-feet per year that is currently physically and legally available for development near Meeker. By 2030, however, the amount of water that is physically and legally available is expected to change because of increased demand and decreased supply. After taking into account an anticipated future decrease of 22,000 acre-feet per year of water due to a growing population, about 297,000 acre-feet per year may be available for future development if current water rights and uses "
1443,"do not change by 2030. However, there may be additional decreases in the amount of physically and legally available water in the White River due to climate change, demands under interstate agreements, and water requirements for threatened or endangered fishes, but we did not include these changes in table 5 because of the large uncertainty associated with estimates. Comparing the scenarios in table 4 to the amount of water that is physically and legally available in table 5 shows the sizes that an in-situ o"
1444,"il shale industry may reach relying solely on obtaining new rights on the White River. The scenarios in table 4 suggest that if an in-situ oil shale industry develops to where it produces 500,000 barrels of oil per day—an amount that some experts believe is reasonable—an industry of this size could possibly develop in Colorado even if it uses about 12 barrels of water per barrel of shale oil it produces. Similarly, the scenarios suggest that an in-situ industry that uses about 5 barrels of water per barrel "
1445,"of oil produced—almost the average from the studies in which power comes from combined cycle natural gas plants—could grow to 1 million barrels of oil per day using only the water that appears to be physically and legally available in 2030 in the White River. Table 4 also shows that an industry that uses just 1 barrel of water per barrel of shale oil produced could grow to over 2.5 million barrels of oil per day. Regardless of these comparisons, more water or less water could be available in the future beca"
1446,"use it is unlikely that water rights will remain unchanged until 2030. For example, officials with the state of Colorado reported that conditional water rights—those rights held but not used— are not accounted for in the 297,000 acre-feet per year of water that is physically and legally available because holders of these rights are not currently withdrawing water. These officials also said that the amount of conditional water rights greatly exceeds the flow in the White River near Meeker, and if any of thes"
1447,"e conditional rights are converted to absolute rights and additional water is then withdrawn downstream, even less water will be available for future development. However, officials with the state of Colorado said that some of these conditional water rights are already owned by oil shale companies, making it unnecessary for some companies to apply for new water rights. In addition, they said, some of the absolute water rights that are accounted for in the estimated 153,000 acre-feet per year of water curren"
1448,"tly being withdrawn are already owned by oil shale companies. These are agricultural rights that were purchased by oil shale interests who leased them back to the original owners to continue using them for agricultural purposes. Should water not be available from the White River, companies would need to look to groundwater or surface water outside of the immediate area. There are less data available to predict future water supplies in Utah’s oil shale resource area. The state of Utah did not provide us summ"
1449,"ary information on existing water rights held by oil shale companies. According to the state of Colorado, the average annual physical flow of the White River near the Colorado-Utah border is about 510,000 acre-feet per year. Any amount withdrawn from the White River in Colorado would be that much less water that would be available for development downstream in Utah. The state of Utah estimates that the total water supply of the Uintah Basin, less downstream obligations under interstate compacts, is 688,000 "
1450,"acre-feet per year. Much of the surface water contained in this amount is currently being withdrawn, and water rights have already been filed for much of the remaining available surface water. Although the federal government sponsors research on the nexus between oil shale development and water, a lack of comprehensive data on the condition of surface water and groundwater and their interaction limit efforts to monitor the future impacts of oil shale development. Currently DOE funds some research related to"
1451," oil shale and water resources, including research on water rights, water needs, and the impacts of oil shale development on water quality. Interior also performs limited research on characterizing surface and groundwater resources in oil shale areas and is planning some limited monitoring of water resources. However, there is general agreement among those we contacted— including state personnel who regulate water resources, federal agency officials responsible for studying water, water researchers, and wat"
1452,"er experts—that this ongoing research is insufficient to monitor and then subsequently mitigate the potential impacts of oil shale development on water resources. In addition, DOE and Interior officials noted that they seldom formally share the information on their water-related research with each other. DOE has sponsored most of the oil shale research that involves water- related issues. This research consists of projects managed by the National Energy Technology Laboratory (NETL), the Office of Naval Petr"
1453,"oleum and Oil Shale Reserves, and the Idaho National Laboratory. As shown in table 6, DOE has sponsored 13 of 15 projects initiated by the federal government since June 2006. DOE’s projects account for almost 90 percent of the estimated $5 million that is to be spent by the federal government on water-related oil shale research through 2013. Appendix II contains a list and description of these projects. NETL sponsors the majority of the water-related oil shale research currently funded by DOE. Through works"
1454,"hops, NETL gathers information to prioritize research. For example, in October 2007, NETL sponsored the Oil Shale Environmental Issues and Needs Workshop that was attended by a cross-section of stakeholders, including officials from BLM and state water regulatory agencies, as well as representatives from the oil shale industry. One of the top priorities that emerged from the workshop was to develop an integrated regional baseline for surface water and groundwater quality and quantity. As we have previously "
1455,"reported, after the identification of research priorities, NETL solicits proposals and engages in a project selection process. We identified seven projects involving oil shale and water that NETL awarded since June 2006. The University of Utah, Colorado School of Mines, the Utah Geological Survey, and the Idaho National Laboratory (INL) are performing the work on these projects. These projects cover topics such as water rights, water needs for oil shale development, impacts of retorting on water quality, an"
1456,"d some limited groundwater modeling. One project conducted by the Colorado School of Mines involves developing a geographic information system for storing, managing, analyzing, visualizing, and disseminating oil shale data from the Piceance Basin. Although this project will provide some baseline data on surface water and groundwater and involves some theoretical groundwater modeling, the project’s researchers told us that these data will neither be comprehensive nor complete. In addition, NETL-sponsored res"
1457,"earch conducted at the University of Utah involves examining the effects of oil shale processing on water quality, new approaches to treat water produced from oil shale operations, and water that can be recycled and reused in operations. INL is sponsoring and performing research on four water-related oil shale projects while conducting research for NETL and the Office of Naval Petroleum and Oil Shale Reserves. The four projects that INL is sponsoring were self-initiated and funded internally through DOE’s L"
1458,"aboratory Directed Research and Development program. Under this program, the national laboratories have the discretion to self-initiate independent research and development, but it must focus on the advanced study of scientific or technical problems, experiments directed toward proving a scientific principle, or the early analysis of experimental facilities or devices. Generally, the researchers propose projects that are judged by peer panels and managers for their scientific merits. An INL official told us"
1459," they selected oil shale and water projects because unconventional fossil fuels, which include oil shale, are a priority in which they have significant expertise. According to DOE officials, one of the projects managed by the Office of Naval Petroleum and Oil Shale Reserves is directed at research on the environmental impacts of unconventional fuels. The Los Alamos National Laboratory is conducting the work for DOE, which involves examining water and carbon-related issues arising from the development of oil"
1460," shale and other unconventional fossil fuels in the western United States. Key water aspects of the study include the use of an integrated modeling process on a regional basis to assess the amounts and availability of water needed to produce unconventional fuels, water storage and withdrawal requirements, possible impacts of climate change on water availability, and water treatment and recycling options. Although a key aspect of the study is to assess water availability, researchers on the project told us t"
1461,"hat little effort will be directed at assessing groundwater, and the information developed will not result in a comprehensive understanding of the baseline conditions for water quality and quantity. Within Interior, BLM is sponsoring two oil shale projects related to water resources with federal funding totaling about $500,000. The USGS is conducting the research for both projects. For one of the projects, which is funded jointly by BLM and a number of Colorado cities and counties plus various oil shale com"
1462,"panies, the research involves the development of a common repository for water data collected from the Piceance Basin. More specifically, the USGS has developed a Web-based repository of water quality and quantity data obtained by identifying 80 public and private databases and by analyzing and standardizing data from about half of them. According to USGS officials, many data elements are missing, and the current repository is not comprehensive. The second project, which is entirely funded by BLM, will moni"
1463,"tor groundwater quality and quantity within the Piceance Basin in 5 existing wells and 10 more to be determined at a future date. Although USGS scientists said that this is a good start to understanding groundwater resources, it will not be enough to provide a regional understanding of groundwater resources. Federal law and regulations require the monitoring of major federal actions, such as oil shale development. Regulations developed under the National Environmental Policy Act (NEPA) for preparing an envi"
1464,"ronmental impact statement (EIS), such as the EIS that will be needed to determine the impacts of future oil shale development, require the preparing agency to adopt a monitoring and enforcement program if measures are necessary to mitigate anticipated environmental impacts. Furthermore, the NEPA Task Force Report to the Council on Environmental Quality noted that monitoring must occur for long enough to determine if the predicted mitigation effects are achieved. The council noted that monitoring and consid"
1465,"eration of potential adaptive measures to allow for midcourse corrections, without requiring new or supplemental NEPA review, will assist in accounting for unanticipated changes in environmental conditions, inaccurate predictions, or subsequent information that might affect the original environmental conditions. In September 2007, the Task Force on Strategic Unconventional Fuels—an 11-member group that included the Secretaries of DOE and Interior and the Governors of Colorado and Utah—issued a report with r"
1466,"ecommendations on promoting the development of fuels from domestic unconventional fuel resources as mandated by the Energy Policy Act of 2005. This report included recommendations and strategies for developing baseline conditions for water resources and monitoring the impacts from oil shale development. It recommended that a monitoring plan be developed and implemented to fill data gaps at large scales and over long periods of time and to also develop, model, test, and evaluate short- and long-term monitori"
1467,"ng strategies. The report noted that systems to monitor water quality would be evaluated; additional needs would be identified; and relevant research, development, and demonstration needs would be recommended. Also in September 2007, the USGS prepared for BLM a report to improve the efficiency and effectiveness of BLM’s monitoring efforts. The report noted that regional water-resources monitoring should identify gaps in data, define baseline conditions, develop regional conceptual models, identify impacts, "
1468,"assess the linkage of impacts to energy development, and understand how impacts propagate. The report also noted that in the Piceance Basin, there is no local, state-level, or national comprehensive database for surface water and groundwater data. Furthermore, for purposes of developing a robust and cost-effective monitoring plan, the report stated that a compilation and analysis of available data are necessary. One of the report’s authors told us that the two BLM oil shale projects that the USGS is perform"
1469,"ing are the initial steps in implementing such a regional framework for water resource monitoring. However, the author said that much more work is needed because so much water data are missing. He noted the current data repository is not comprehensive and much more data would be needed to determine whether oil shale development will create adverse effects on water resources. Nearly all the federal agency officials, state water regulators, oil shale researchers, and water experts with whom we spoke said that"
1470," more data are needed to understand the baseline condition of groundwater and surface water, so that the potential impacts of oil shale development can be monitored (see appendix I for a list of the agencies we contacted). Several officials and experts to whom we spoke stressed the need to model the movement of groundwater and its interaction with surface water to understand the possible transport of contaminants from oil shale development. They suggested that additional research would help to overcome thes"
1471,"e shortcomings. Specifically, they identified the following issues: Insufficient data for establishing comprehensive baseline conditions for surface water and groundwater quality and quantity. Of the 18 officials and experts we contacted, 17 noted that there are insufficient data to understand the current baseline conditions of water resources in the Piceance and Uintah Basins. Such baseline conditions include the existing quantity and quality of both groundwater and surface water. Hydrologists among those "
1472,"we interviewed explained that more data are needed on the chemistry of surface water and groundwater, properties of aquifers, age of groundwater, flow rates and patterns of groundwater, and groundwater levels in wells. Although some current research projects have and are collecting some water data, officials from the USGS, Los Alamos National Laboratory, and the universities doing this research agreed their data are not comprehensive enough to support future monitoring efforts. Furthermore, Colorado state o"
1473,"fficials told us that even though much water data were generated over time, including during the last oil shale boom, little of these data have been assimilated, gaps exist, and data need to be updated in order to support future monitoring. Insufficient research on groundwater movement and its interaction with surface water for modeling possible transport of contaminants. Sixteen of 18 officials and experts to whom we spoke noted that additional research is needed to develop a better understanding of the in"
1474,teractions between groundwater and surface water and of groundwater movement. Officials from NETL explained that this is necessary in order to monitor the rate and pattern of flow of possible contaminants resulting from the in- situ retorting of oil shale. They noted that none of the groundwater research currently under way is comprehensive enough to build the necessary models to understand the interaction and movement. NETL officials noted more subsurface imaging and visualization are needed to build geolo
1475,"gic and hydrologic models and to study how quickly groundwater migrates. These tools will aid in monitoring and providing data that does not currently exist. Interior and DOE officials generally have not shared current research on water and oil shale issues. USGS officials who conduct water-related research at Interior and DOE officials at NETL, which sponsors the majority of the water and oil shale research at DOE, stated they have not talked with each other about such research in almost 3 years. USGS staf"
1476,"f noted that although DOE is currently sponsoring most of the water-related research, USGS researchers were unaware of most of these projects. In addition, staff at Los Alamos National Laboratory who are conducting some water-related research for DOE noted that various researchers are not always aware of studies conducted by others and stated that there needs to be a better mechanism for sharing this research. Based on our review, we found there does not appear to be any formal mechanism for sharing water-r"
1477,"elated research activities and results among Interior, DOE, and state regulatory agencies in Colorado and Utah. The last general meeting to discuss oil shale research among these agencies was in October 2007, although there have been opportunities to informally share research at the annual Oil Shale Symposium, the last one of which was conducted at the Colorado School of Mines in October 2010. Of the various officials with the federal and state agencies, representatives from research organizations, and wate"
1478,"r experts we contacted, 15 of 18 noted that federal and state agencies could benefit from collaboration with each other on water-related research involving oil shale. Representatives from NETL, who are sponsoring much of the current research, stated that collaboration should occur at least every 6 months. We and others have reported that collaboration among government agencies can produce more public value than one agency acting alone. Specifically concerning water resources, we previously reported that coo"
1479,"rdination is needed to enable monitoring programs to make better use of available resources in light of organizations often being unaware of data collected by other groups. Similarly in 2004, the National Research Council concluded that coordination of water research is needed to make deliberative judgments about the allocation of funds, to minimize duplication, to present to Congress and the public a coherent strategy for federal investment, and to facilitate large-scale multiagency research efforts. In 20"
1480,"07, the Subcommittee on Water Availability and Quality within the Office of Science and Technology Policy, an office that advises the President and leads interagency efforts related to science and technology stated, “Given the importance of sound water management to the Nation’s well-being it is appropriate for the Federal government to play a significant role in providing information to all on the status of water resources and to provide the needed research and technology that can be used by all to make in"
1481,"formed water management decisions.” In addition, H.R. 1145—the National Water Research and Development Initiative Act of 2009—which has passed the House of Representatives and is currently in a Senate committee, would establish a federal interagency committee to coordinate all federal water research, which totals about $700 million annually. This bill focuses on improving coordination among agency research agendas, increasing the transparency of water research budgeting, and reporting on progress toward res"
1482,"earch outcomes. The unproven nature of oil shale technologies and choices in how to generate the power necessary to develop this resource cast a shadow of uncertainty over how much water is needed to sustain a commercially viable oil shale industry. Additional uncertainty about the size of such an industry clouds the degree to which surface and groundwater resources could be impacted in the future. Furthermore, these uncertainties are compounded by a lack of knowledge of the current baseline conditions of g"
1483,"roundwater and surface water, including their chemistry and interaction, properties of aquifers, and the age and rate of movement of groundwater, in the arid Piceance and Uintah Basins of Colorado and Utah, where water is considered one of the most precious resources. All of these uncertainties pose difficulties for oil shale developers, federal land managers, state water regulators, and current water users in their efforts to protect water resources. Attempts to commercially develop oil shale in the United"
1484," States have spanned nearly a century. During this time, the industry has focused primarily on overcoming technological challenges and trying to develop a commercially viable operation. More recently, the federal government has begun to focus on studying the potential impacts of oil shale development on surface water and groundwater resources. However, these efforts are in their infancy when compared to the length of time that the industry has spent on attempting to overcome technological challenges. These "
1485,"nascent efforts do not adequately define current baseline conditions for water resources in the Piceance and Uintah Basins, nor have they begun to model the important interaction of groundwater and surface water in the region. Thus they currently fall short of preparing federal and state governments for monitoring the impacts of any future oil shale development. In addition, there is a lack of coordination among federal agencies on water-related research and a lack of communicating results among themselves "
1486,"and to the state regulatory agencies. Without such coordination and communication, federal and state agencies cannot begin to develop an understanding of the potential impacts of oil shale development on water resources and monitor progress toward shared water goals. By taking steps now, the federal government, working in concert with the states of Colorado and Utah, can position itself to help monitor western water resources should a viable oil shale industry develop in the future. To prepare for possible "
1487,"impacts from the future development of oil shale, we are making three recommendations to the Secretary of the Interior. Specifically, the Secretary should direct the appropriate managers in the Bureau of Land Management and the U.S. Geological Survey to 1. establish comprehensive baseline conditions for groundwater and surface water quality, including their chemistry, and quantity in the Piceance and Uintah Basins to aid in the future monitoring of impacts from oil shale development in the Green River Forma"
1488,"tion; 2. model regional groundwater movement and the interaction between groundwater and surface water, in light of aquifer properties and the age of groundwater, so as to help in understanding the transport of possible contaminants derived from the development of oil shale; and 3. coordinate with the Department of Energy and state agencies with regulatory authority over water resources in implementing these recommendations, and to provide a mechanism for water-related research collaboration and sharing of "
1489,"results. We provided a copy of our draft report to Interior and DOE for their review and comment. Interior provided written comments and generally concurred with our findings and recommendations. Interior highlighted several actions it has under way to begin to implement our recommendations. Specifically, Interior stated that with regard to our first recommendation to establish comprehensive baseline conditions for surface water and groundwater in the Piceance and Uintah Basins, implementation of this recom"
1490,"mendation includes ongoing USGS efforts to analyze existing water quality data in the Piceance Basin and ongoing USGS efforts to monitor surface water quality and quantity in both basins. Interior stated that it plans to conduct more comprehensive assessments in the future. With regard to our second recommendation to model regional groundwater movement and the interaction between groundwater and surface water, Interior said BLM and USGS are working on identifying shared needs for modeling. Interior undersco"
1491,"red the importance of modeling prior to the approval of large-scale oil shale development and cites the importance of the industry’s testing of various technologies on federal RD&D leases to determine if production can occur in commercial quantities and to develop an accurate determination of potential water uses for each technology. In support of our third recommendation to coordinate with DOE and state agencies with regulatory authority over water resources, Interior stated that BLM and USGS are working t"
1492,"o improve such coordination and noted current efforts with state and local authorities. Interior’s comments are reproduced in appendix III. DOE also provided written comments, but did not specifically address our recommendations. Nonetheless, DOE indicated that it recognizes the need for a more comprehensive and integrated cross-industry/government approach for addressing impacts from oil shale development. However, DOE raised four areas where it suggested additional information be added to the report or to"
1493,"ok issue with our findings. First, DOE suggested that we include in our report appropriate aspects of a strategic plan drafted by an ad hoc group of industry, national laboratory, university, and government representatives organized by the DOE Office of Naval Petroleum and Oil Shale Reserves. We believe aspects of this strategic plan are already incorporated into our report. For example, the strategic plan of this ad hoc group calls for implementing recommendations of the Task Force on Strategic Unconventio"
1494,"nal Fuels, which was convened by the Secretary of Energy in response to a directive within the Energy Policy Act of 2005. The Task Force on Strategic and Unconventional fuels recommended developing baseline conditions for water resources and monitoring the impacts from oil shale development, which is consistent with our first recommendation. The ad hoc group’s report recognized the need to share information and collaborate with state and other federal agencies, which is consistent with our third recommendat"
1495,"ion. As such, we made no changes to this report in response to this comment. Second, DOE stated that we overestimated the amount of water needed for in-situ oil shale development and production. We disagree with DOE’s statement because the estimates presented in our report respond to our objective, which was to describe what is known about the amount of water that may be needed for commercial oil shale development, and they are based on existing publicly available data. We reported the entire range of reput"
1496,"able studies without bias to illustrate the wide range of uncertainty in water needed to commercially develop oil shale, given the current experimental nature of the process. We reported only publicly available estimates based on original research that were substantiated with a reasonable degree of documentation so that we could verify that the estimates covered the entire life cycle of oil shale development and that these estimates did not pertain solely to field demonstration projects, but were instead sc"
1497,alable to commercial operations. We reviewed and considered estimates from all of the companies that DOE identified in its letter. The range of water needed for commercial in-situ development of oil shale that we report ranges from 1 to 12 barrels of water per barrel of oil. These lower and upper bounds represent the sum of the most optimistic and most pessimistic estimates of water needed for all five groups of activities that we identified as comprising the life cycle of in-situ oil shale development. How
1498,"ever, the lower estimate is based largely on estimates by ExxonMobil and incorporates the use of produced water, water treatment, and recycling, contrary to DOE’s statement that we dismissed the significance of these activities. The upper range is influenced heavily by the assumption that electricity used in retorting will come from coal-fired plants and that a maximum amount of water will be used for rinsing the retorted zones, based on modeling done at the Center for Oil Shale Technology and Research. The"
1499," studies supporting these estimates were presented at the 29th Annual Oil Shale Symposium at the Colorado School of Mines. Such a range overcomes the illusion of precision that is conveyed by a single point estimate, such as the manner in which DOE cites the 1.59 barrels of water from the AMEC study, or the bias associated with reporting a narrow range based on the assumption that certain technologies will prevail before they are proven to be commercially viable for oil shale development. Consequently, we m"
1500,"ade no changes to the report in response to this comment. Third, DOE stated that using the amount of water in the White River at Meeker, Colorado, to illustrate the availability of water for commercial oil shale development understates water availability. We disagree with DOE’s characterization of our illustration. The illustration we use in the report is not meant to imply that an entire three-state industry would be limited by water availability at Meeker. Rather, the illustration explores the limitations"
1501," of an in-situ oil shale industry only in the Piceance Basin. More than enough water appears available for a reasonably sized industry that depends on mining and surface retorting in the Piceance basin. Our illustration also suggests that there may be more than enough water to supply a 2.5 million barrel-per-day in-situ industry at minimum water needs, even considering the needs of current water users and the anticipated needs of future water users. In addition, the illustration suggests that there may be e"
1502,"nough water to supply an in-situ industry in the Piceance Basin of between 1 and 2 million barrels per day at average water needs, depending upon whether all the water in the White River at Meeker is used or only water that is expected to be physically and legally available in the future. However, the illustration does point out limitations. It suggests that at maximum water needs, an in-situ industry in the Piceance Basin may not reach 1 million barrels per day if it relied solely on water in the White Riv"
1503,"er at Meeker. Other sources of water may be needed, and our report notes that these other sources could include water in the Yampa or Colorado Rivers, as well as groundwater. Use of produced water and recycling could also reduce water needs as noted in the draft report. Consequently, we made no changes to the report in response to this comment. Fourth, DOE stated that the report gives the impression that all oil shale technologies are speculative and proving them to be commercially viable will be difficult,"
1504," requiring a long period of time with uncertain outcomes. We disagree with this characterization of our report. Our report clearly states that there is uncertainty regarding the commercial viability of in-situ technologies. Based on our discussions with companies and review of available studies, Shell is the only active oil shale company to have successfully produced shale oil from a true in-situ process. Considering the uncertainty associated with impacts on groundwater resources and reclamation of the ret"
1505,"orted zone, commercialization of an in-situ process is likely to be a number of years away. To this end, Shell has leased federal lands from BLM to test its technologies, and more will be known once this testing is completed. With regard to mining oil shale and retorting it at the surface, we agree that it is a relatively mature process. Nonetheless, competition from conventional crude oil has inhibited commercial oil shale development in the United States for almost 100 years. Should some of the companies "
1506,"that DOE mentions in its letter prove to be able to produce oil shale profitably and in an environmentally sensitive manner, they will be among the first to overcome such long-standing challenges. We are neither dismissing these companies, as DOE suggests, nor touting their progress. In addition, it was beyond the scope of our report to portray the timing of commercial oil shale production or describe a more exhaustive history of oil shale research, as DOE had recommended, because much research currently is"
1507," privately funded and proprietary. Therefore, we made no changes to the report in response to this comment. DOE’s comments are reproduced in appendix IV. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, Secretaries of the Interior and Energy, Directors of the Bureau of Land Management and U.S. Geological"
1508," Survey, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact one of us at (202) 512-3841 or gaffiganm@gao.gov or mittala@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix V. To determine what is known about the potential impact"
1509,"s to groundwater and surface water from commercial oil shale development, we reviewed the Proposed Oil Shale and Tar Sands Resource Management Plan Amendments to Address Land Use Allocations in Colorado, Utah, and Wyoming and Final Programmatic Environmental Impact Statement (PEIS) prepared by the Bureau of Land Management in September 2008. We also reviewed environmental assessments prepared on Shell Oil’s plans for in-situ development of its research, demonstration, and development (RD&D) tracts in Colora"
1510,"do and on the Oil Shale Exploration Company’s (OSEC) plan to mine oil shale on its RD&D tract in Utah because these two companies have made the most progress toward developing in-situ and mining technologies, respectively. In addition, we reviewed the Office of Technology Assessment’s (OTA) 1980 report, An Assessment of Oil Shale Technologies; the Rand Corporation’s 2005 report, Oil Shale Development in the United States; and the Argonne National Laboratory’s 2005 report, Potential Ground Water and Surface "
1511,"Water Impacts from Oil Shale and Tar Sands Energy-Production Operations. Because the PEIS was the most comprehensive of these documents, we summarized impacts to groundwater and surface water quantity and quality described within this document and noted that these impacts were entirely qualitative in nature and that the magnitude of impacts was indeterminate because the in-situ technologies have yet to be developed. To confirm these observations and the completeness of impacts within the PEIS, we contacted "
1512,"the Environmental Protection Agency, the Colorado Division of Water Resources, the Colorado Water Conservation Board, the Division of Water Quality within the Colorado Department of Public Health and Environment, the Utah Division of Water Resources, the Utah Division of Water Quality, and the Utah Division of Water Rights—all of which have regulatory authority over some aspect of water resources. To ensure that we identified the range of views on the potential impacts of oil shale development on groundwate"
1513,"r and surface water, we also contacted the U.S. Geological Survey (USGS), the Colorado Geological Survey, the Utah Geological Survey, industry representatives, water experts, and numerous environmental groups for their views on the impacts of oil shale on water resources. To assess the impacts of oil shale development on aquatic resources, we reviewed the PEIS and contacted the Colorado Division of Wildlife and the Utah Division of Wildlife Resources. To determine what is known about the amount of water tha"
1514,"t may be needed for commercial oil shale development, we searched the Internet and relevant databases of periodicals using the words “oil shale” together with “water use.” We also searched Web sites maintained by the Bureau of Land Management (BLM), USGS, and the Department of Energy (DOE) for information on oil shale and water use and interviewed officials at these agencies to determine if there were additional studies that we had not identified. We also checked references cited within the studies for othe"
1515,r studies. We limited the studies to those published in 1980 or after because experts with whom we consulted either considered the studies published before then to be adequately summarized in OTA’s 1980 report or to be too old to be relevant. We included certain data within the OTA report because some of the surface retort technologies are similar to technologies being tested today. We did not consider verbal estimates of water needs unless companies could provide more detailed information. The 17 studies t
1516,"hat we identified appear in table 7. For further analysis, we divided the studies into two major groups—in-situ extraction and mining with a surface retort. We dismissed a combination of mining and in-situ extraction because most of these technologies are more than 30 years old and generally considered to be infeasible today. The single company that is pursuing such a combination of technologies today—Red Leaf Resources— has not published detailed data on water needs. After reviewing these studies, we found"
1517," that most of the studies did not examine water needs for the entire life cycle of oil shale development. As such, we identified logical groups of activities based on descriptions within the studies. We identified the following five groups of activities: (1) extraction and retorting, (2) generating power, (3) upgrading shale oil, (4) reclamation, and (5) population growth associated with oil shale development. We did not include refining because we believe it is unlikely that oil shale production will reach"
1518," levels in the near- or midterm to justify building a new refinery. To characterize the water needs for the entire life cycle of oil shale development, we identified within each study the water needs for each of the five groups of activities. Except for OTA’s 1980 report, which is now 30 years old, we contacted the authors of each study and discussed the estimates with them. If estimates within these studies were given for more than one group of activities, we asked them to break down this estimate into the"
1519," individual groups when possible. We only considered further analyzing water needs for groups of activities that were based on original research so as not to count these estimates multiple times. For example, original research on water needs for extraction and retorting may have analyzed mine plans, estimated water needs for drilling wells, estimated water needs for dust control, and discussed recycling of produced water. Original research on water needs for population growth may have discussed the number o"
1520,"f workers immigrating to a region, their family size, per capita water consumption, and the nature of housing required by workers. On the other hand, estimates of water needs that were not based on original research generally reported water needs for multiple groups of activities in barrels of water per barrel of oil produced and cited someone else’s work as the source for this number. We excluded several estimates that seemed unlikely. For example, we eliminated a water estimate for power generation that i"
1521,"ncluded building a nuclear power plant and water estimates for population growth where it was assumed that people would decrease their water consumption by over 50 percent. We also excluded technologies developed prior to 1980 that are dissimilar to technologies being considered by oil shale companies today. We checked mathematical calculations and reviewed power requirements and the reasonableness of associated water needs. For power estimates that did not include associated water needs, we converted power"
1522," needs into water needs using 480 gallons per megawatt hour of electricity produced by coal-fired, wet recirculating thermoelectric plants and 180 gallons per megawatt hour of electricity produced by gas-powered, combined cycle, wet recirculating thermoelectric plants. Air-cooled systems consume almost no water for cooling. Where appropriate, we also estimated shale oil recoveries based the company’s estimated oil shale resources and estimated water needs for rinsing retorted zones based on anticipated chan"
1523,"ges to the reservoir. We converted water requirements to barrels of water needed per barrel of oil produced. For those studies with water needs that met our criteria, we tabulated water needs for each group of activities for both in-situ production and mining with a surface retort. The results appear in tables 8 and 9. We estimated the total range of water needs for in-situ development by summing the minimum estimates for each group of activities and by summing the maximum estimates for the various groups o"
1524,"f activities. We did the same for mining with a surface retort. We also calculated the average water needs for each group of activities. To determine the extent to which water is likely to be available for commercial oil shale development and its source, we compared the total needs of an oil shale industry of various sizes to the amount of surface water and groundwater that the states of Colorado and Utah estimate to be physically and legally available, in light of future municipal and industrial demand. We"
1525," selected the sizes of an oil shale industry based on input from industry and DOE. These are hypothetical sizes, and we do not imply that an oil shale industry will grow to these sizes. The smallest size we selected for an in-situ industry, 500,000 barrels of oil per day, is a likely size identified by an oil shale company based on experience with the development of the Canadian tar sands. The largest size of 2,500,000 barrels of oil per day is based on DOE projections. We based our smallest size of a minin"
1526,"g industry, 25,000 barrels of oil per day, on one-half of the smallest scenario identified by URS in their work on water needs contracted by the state of Colorado. We based our largest size of a mining industry, 150,000 barrels of oil per day, on three projects each of 50,000 barrels of oil per day, which is a commonly cited size for a commercial oil shale mining operation. We reviewed and analyzed two detailed water studies commissioned by the state of Colorado to determine how much water is available in C"
1527,"olorado, where it was available, and to what extent demands will be placed on this water in the future. We also reviewed a report prepared for the Colorado Water Conservation Board on future water availability in the Colorado River. These studies were identified by water experts at various Colorado state water agencies as the most updated information on Colorado’s water supply and demand. To determine the available water supply and the potential future demand in the Uintah Basin, we reviewed and analyzed da"
1528,"ta in documents prepared by the Utah Division of Water Resources. We also examined data on water rights provided by the Utah Division of Water Rights and examined data collected by Western Resource Advocates on oil shale water rights in Colorado. In addition to reviewing these documents, we interviewed water experts at the Bureau of Reclamation, USGS, Utah Division of Water Rights, Utah Division of Water Resources, Utah Division of Water Quality, Colorado Division of Natural Resources, Colorado Division of "
1529,"Water Resources, Colorado River Water Conservation District, the Utah and Colorado State Demographers, and municipal officials in the oil shale resource area. To identify federally funded research efforts to address the impacts of commercial oil shale development on water resources, we interviewed officials and reviewed information from offices or agencies within DOE and the Department of the Interior (Interior). Within DOE, these offices were the Office of Naval Petroleum and Oil Shale Reserves, the Nation"
1530,"al Energy Technology Laboratory, and other DOE offices with jurisdiction over various national laboratories. Officials at these offices identified the Idaho National Laboratory and the Los Alamos National Laboratory as sponsoring or performing water-related oil shale research. In addition, they identified experts at Argonne National Laboratory who worked on the PEIS for BLM or who wrote reports on water and oil shale issues. Within Interior, we contacted officials with BLM and the USGS. We asked officials a"
1531,"t all of the federal agencies and offices that were sponsoring federal research to provide details on research that was water-related and to provide costs for the water-related portions of these research projects. For some projects, based on the nature of the research, we counted the entire award as water-related. We identified 15 water-related oil shale research projects. A detailed description of these projects is in appendix II. To obtain additional details on the work performed under these research proj"
1532,"ects, we interviewed officials with all the sponsoring organizations and the performing organizations, including the Colorado School of Mines, University of Utah, Utah Geological Survey, Idaho National Laboratory, Los Alamos National Laboratory, Argonne National Laboratory, and the USGS. To assess additional needs for research and to evaluate any gaps between research needs and the current research projects, we interviewed officials with 14 organizations and four experts that are authors of studies or repor"
1533,"ts we used in our analyses and that are recognized as having extensive knowledge of oil shale and water issues. The names of the 14 organizations appear in table 10. These discussions involved officials with all the federal offices either sponsoring or performing water-related oil shale research and state agencies involved in regulating water resources. Appendix II: Descriptions of Federally Funded Water-Related Oil Shale Research $4,838,097 The University of Utah received four separate awards, each coverin"
1534,"g a broad array of oil shale research over multiple years. The awards included some water-related work. Examples of projects include (1) Meeting Data Needs to Perform a Water Impact Assessment for Oil Shale Development in the Uintah and Piceance Basins, (2) Effect of Oil Shale Processing on Water Compositions, and () New Approaches to Treat Produced Water and Perform Water Availability Impact Assessments for Oil Shale Development. In addition to the individuals named above, Dan Haas (Assistant Director), Ro"
1535,"n Belak, Laura Hook, and Randy Jones made major contributions to this report. Other individuals who made significant contributions were Charles Bausell, Virginia Chanley, Alison O’Neill, Madhav Panwar, and Barbara Timmerman."
1536,"The federal government began with a public debt of about $78 million in 1789. Since then, the Congress has attempted to control the size of the debt by imposing ceilings on the amount of Treasury securities that could be outstanding. In February 1941, the Congress set an overall ceiling of $65 billion on all types of Treasury securities that could be outstanding at any one time. This ceiling was raised several times between February 1941 and June 1946 when a ceiling of $275 billion was set and remained in e"
1537,"ffect until August 1954. At that time, the Congress imposed the first temporary debt ceiling which added $6 billion to the $275 billion permanent ceiling. Since that time, the Congress has enacted numerous temporary and permanent increases in the debt ceiling. Although most of this debt is held by the public, about one fourth of it or $1.325 trillion, as of October 31, 1995, is issued to federal trust funds, such as the Social Security funds, the Civil Service fund, and the G-Fund. The Secretary of the Trea"
1538,"sury has several responsibilities relating to the federal government’s financial management operations. These include paying the government’s obligations and investing trust fund receipts not needed for current benefits and expenses. The Congress has generally provided the Secretary with the ability to issue the necessary securities to the trust funds for investment purposes and to borrow the necessary funds from the public to pay government obligations. Under normal circumstances, the debt ceiling is not a"
1539,"n impediment in carrying out these responsibilities. Treasury is notified by the appropriate agency (such as the Office of Personnel Management for the Civil Service fund) of the amount that should be invested (or reinvested) and Treasury makes the investment. In some cases, the actual security that Treasury should purchase may also be specified. These securities count against the debt ceiling. Consequently, if trust fund receipts are not invested, an increase in the debt subject to the debt ceiling does no"
1540,"t occur. When Treasury is unable to borrow as a result of reaching the debt ceiling, the Secretary is unable to fully discharge his financial management responsibilities using the normal methods. On various occasions over the years, normal government financing has been disrupted because Treasury had borrowed up to or near the debt ceiling and legislation to increase the debt ceiling had not yet been enacted. These situations are commonly referred to as debt ceiling crises. In 1985 the government experienced"
1541," a debt ceiling crisis from September 3 through December 11. During that period, Treasury took several actions that were similar to those discussed in this report. For example, Treasury redeemed Treasury securities held by the Civil Service fund earlier than normal in order to borrow sufficient cash from the public to meet the fund’s benefit payments and did not invest some trust fund receipts. In 1986 and 1987, following Treasury’s experiences during prior debt ceiling crises, the Congress provided to the "
1542,"Secretary of the Treasury statutory authority to use the Civil Service fund and the G-Fund to assist Treasury in managing its financial operations during a debt ceiling crisis. The following are statutory authorities provided to the Secretary of Treasury that are pertinent to the 1995-1996 debt ceiling crisis and the actions discussed in this report. 1. Redemption of securities held by the Civil Service fund. In subsection (k) of 5 U.S.C. 8348, the Congress authorizes the Secretary of the Treasury to redeem"
1543," securities or other invested assets of the Civil Service fund before maturity to prevent the amount of public debt from exceeding the debt ceiling. 5 U.S.C. 8348(k) also provides that, before exercising the authority to redeem securities of the Civil Service fund, the Secretary must first determine that a “debt issuance suspension period” exists. 5 U.S.C. 8348(j) also defines a debt issuance suspension period as any period for which the Secretary has determined that obligations of the United States may not"
1544," be issued without exceeding the debt ceiling. “the term ‘debt issuance suspension period’ means any period for which the Secretary of the Treasury determines for purposes of this subsection that the issuance of obligations of the United States may not be made without exceeding the public debt limit.” 2. Suspension of Civil Service fund investments. In subsection (j) of 5 U.S.C. 8348, the Congress authorizes the Secretary of the Treasury to suspend additional investment of amounts in the Civil Service fund "
1545,"if such investment cannot be made without causing the amount of public debt to exceed the debt ceiling. This subsection of the statute instructs the Secretary on how to make the Civil Service fund whole after the debt issuance suspension period has ended. 3. Suspension of G-Fund investments. In subsection (g) of 5 U.S.C. 8438, the Congress authorized the Secretary of the Treasury to suspend the issuance of additional amounts of obligations of the United States to the G-Fund if such issuance cannot be made w"
1546,"ithout causing the amount of public debt to exceed the debt ceiling. The subsection contains instructions on how the Secretary is to make the G-Fund whole after the debt ceiling crisis has ended. 4. Issuance of securities not counted toward the debt ceiling. On February 8, 1996, the Congress provided Treasury with the authority (Public Law 104-103) to issue securities in an amount equal to March 1996 social security payments. This statute provided that the securities issued under its provisions were not to "
1547,"be counted against the debt ceiling until March 15, 1996, which was later extended to March 30, 1996. On March 12, 1996, the Congress enacted Public Law 104-115 which exempted government trust fund investments and reinvestments from the debt ceiling until March 30, 1996. We have previously reported on aspects of Treasury’s actions during the 1985 and other debt ceiling crises. Those reports are: 1. A New Approach to the Public Debt Legislation Should Be Considered (FGMSD-79-58, September 7, 1979). 2. Opinio"
1548,"n on the legality of the plan of the Secretary of the Treasury to disinvest the Social Security and other trust funds on November 1, 1985, to permit payments to beneficiaries of these funds (B-221077.2, December 5, 1985). 3. Civil Service Fund: Improved Controls Needed Over Investments (GAO/AFMD-87-17, May 7, 1987). 4. Debt Ceiling Options (GAO/AIMD-96-20R, December 7, 1995). 5. Social Security Trust Funds (GAO/AIMD-96-30R, December 12, 1995). 6. Debt Ceiling Limitations and Treasury Actions (GAO/AIMD-96-38"
1549,"R, January 26, 1996). 7. Information on Debt Ceiling Limitations and Increases (GAO/AIMD-96-49R, February 23, 1996). • develop a chronology of significant events relating to the 1995-1996 debt • evaluate the actions taken during the 1995-1996 debt ceiling crisis in relation to the normal policies and procedures Treasury uses for federal trust fund investments and redemptions, and • analyze the financial aspects of the departures from the normal policies and procedures and assess their legal basis. To develo"
1550,"p a chronology of the significant events involving the 1995-1996 debt ceiling crisis, we obtained and reviewed applicable documents. We also discussed Treasury’s actions during the crisis with Treasury officials. To evaluate the actions taken during the 1995-1996 debt ceiling crisis in relation to the normal policies and procedures Treasury uses for federal trust fund investments, we obtained an overview of the procedures used. For the 15 selected trust funds, which are identified in chapter 3, we examined "
1551,"the significant transactions that affected the trust funds between November 1, 1995, and March 31, 1996. In cases where the procedures were not followed, we obtained documentation and other information to help understand the basis and impact of the alternative procedures that were used. Although Treasury maintains accounts for over 150 different trust funds, we selected for review those with investments in Treasury securities that exceeded $8 billion on November 1, 1995. In addition, we selected the Exchang"
1552,"e Stabilization Fund because Treasury used this fund in previous debt ceiling crises to help raise cash and stay under the debt ceiling. The funds we examined accounted for over 93 percent of the total securities held by these 150 trust funds as of October 31, 1995, and March 31, 1996. To analyze the financial aspects of Treasury’s departures from its normal polices and procedures, we (1) reviewed the methodologies Treasury developed to minimize the impact of such departures on the federal trust funds, (2) "
1553,"quantified the impact of the departures, and (3) assessed whether any interest losses were properly restored. To assess the legal basis of Treasury’s departures from its normal policies and procedures, we identified the applicable legal authorities and determined how Treasury applied them during the debt ceiling crisis. Our evaluation included those authorities relating to (1) issuing and redeeming Treasury securities during a debt issuance suspension period and restoring losses after a debt ceiling crisis "
1554,"has ended, (2) the ability to exchange Treasury securities held by the Civil Service fund for agency securities held by the FFB, and (3) the use of the Exchange Stabilization Fund during a debt ceiling crisis. We also compiled and analyzed applicable source documents, including executive branch legal opinions, memos, and correspondence. We have provided these documents to the Committees’ staffs. We performed our work between November 9, 1995, and July 1, 1996. Our audit was performed in accordance with gene"
1555,"rally accepted government auditing standards. We requested oral comments on a draft of this report from the Secretary of the Treasury or his designee. On August 22, 1996, Treasury officials provided us with oral comments that generally agreed with our findings and conclusions. Their views have been incorporated where appropriate. On August 10, 1993, the Congress raised the debt ceiling to $4.9 trillion, which was expected to fund government operations until spring 1995. In early 1995, analysts concluded tha"
1556,"t the debt ceiling would be reached in October 1995. This set the stage for the 1995-1996 debt ceiling crisis, which was resolved on March 29, 1996, when Congress raised the debt ceiling to $5.5 trillion. The major actions taken by the Congress and the Executive Branch involving the 1995-1996 debt ceiling crisis are shown in table 2.1. Our analysis showed that, during the 1995-1996 debt ceiling crisis, Treasury used its normal investment and redemption procedures to handle the receipts and maturing investme"
1557,"nts and to redeem Treasury securities for 12 of the 15 trust funds we examined. These 12 trust funds accounted for about 65 percent, or about $871 billion, of the $1.3 trillion in Treasury securities held by the federal trust funds on October 31, 1995. The trust funds included in our analysis are listed in table 3.1. Trust funds which are allowed to invest receipts, such as the Social Security funds, normally invest them in nonmarketable Treasury securities. Under normal conditions, Treasury is notified by "
1558,"the appropriate agency of the amount that should be invested or reinvested, and Treasury then makes the investment. In some cases, the actual security that Treasury should purchase is also specified. When a trust fund needs to pay benefits and expenses, Treasury is normally notified of the amount and the date that the disbursement is to be made. Depending on the fund, Treasury may also be notified to redeem specific securities. Based on this information, Treasury redeems a fund’s securities. Between Novembe"
1559,"r 15, 1995, and March 28, 1996, Treasury followed its normal investment and redemption policies for all of the trust funds shown in table 3.1. For example, during this period, Treasury invested about $156.7 billion and redeemed about $115.8 billion of Treasury securities on behalf of the Social Security funds and invested about $7.1 billion and redeemed about $6.8 billion of Treasury securities on behalf of the Military Retirement Fund. The departures from normal investment and redemption procedures involvi"
1560,"ng the other three trust funds (Civil Service fund, G-Fund, and Exchange Stabilization Fund), which held over $370 billion of Treasury securities on October 31, 1995, or about 28 percent of the Treasury securities held by all federal trust funds at that time, are discussed in chapters 4 and 5. During the 1995-1996 debt ceiling crisis, the Secretary of the Treasury redeemed Treasury securities held by the Civil Service fund and suspended the investment of some Civil Service fund receipts. Also, Treasury exch"
1561,"anged Treasury securities held by the Civil Service fund for non-Treasury securities held by the FFB. Subsection (k) of 5 U.S.C. 8348 authorizes the Secretary of the Treasury to redeem securities or other invested assets of the Civil Service fund before maturity to prevent the amount of public debt from exceeding the debt ceiling. The statute does not require that early redemptions be made only for the purpose of making Civil Service fund benefit payments. Furthermore, the statute permits the early redempti"
1562,"ons even if the Civil Service fund has adequate cash balances to cover these payments. During November 1995 and February 1996 the Secretary of the Treasury redeemed about $46 billion of the Civil Service fund’s Treasury securities before they were needed to pay for trust fund benefits and expenses. Table 4.1 shows an example of the use of this procedure during the 1995-1996 debt ceiling crisis. Before redeeming Civil Service fund securities earlier than normal, the Secretary must first determine that a “deb"
1563,"t issuance suspension period” exists. Such a period is defined as any period for which the Secretary has determined that obligations of the United States may not be issued without exceeding the debt ceiling. The statute authorizing the debt issuance suspension period and its legislative history are silent as to how to determine the length of a debt issuance suspension period. On November 15, 1995, the Secretary declared a 12-month debt issuance suspension period. On February 14, 1996, the Secretary extended"
1564," this period from 12 to 14 months. The Secretary, in the November 15, 1995, determination, stated that a debt issuance suspension period existed for a period of 12 months “ased on the information that is available to me today.” A memorandum to the Secretary from Treasury’s General Counsel provided the Secretary a rationale to support his determination. The memorandum noted that based on the actions of the Congress and the President and on public statements by both these parties, there was a significant impa"
1565,"sse that made it unlikely that a statute raising the debt ceiling could be enacted. Furthermore, the positions of the President and the Congress were so firm that it seemed unlikely that an agreement could be reached before the next election, which was 12 months away. The Secretary extended the debt issuance suspension period by 2 months on February 14, 1996. Treasury’s General Counsel again advised the Secretary concerning the reasons underlying the extension and noted that nothing had changed since Novemb"
1566,"er to indicate that the impasse was any closer to being resolved. The General Counsel further reasoned that it would take until January 1997 for a newly elected President or a new Congress to be able to enact legislation raising the debt ceiling. On November 15, 1995, the Secretary authorized the redemption of $39.8 billion of the Civil Service fund’s Treasury securities, and on February 14, 1996, authorized the redemption of another $6.4 billion of the fund’s Treasury securities. The total, $46 billion of "
1567,"authorized redemptions was determined based on (1) the 14-month debt issuance suspension period determination made by the Secretary (November 15, 1995, through January 15, 1997) and (2) the estimated monthly Civil Service fund benefit payments. Treasury considered appropriate factors in determining the amount of Treasury securities to redeem early. About $39.8 billion of these securities were redeemed between November 15 and 30, 1995. Then, in December 1995, Treasury’s cash position improved for a few days,"
1568," primarily because of the receipt of quarterly estimated tax payments due in December. This inflow of cash enabled Treasury to reinvest, in late December 1995, about $21.2 billion in securities that had the same terms and conditions as those that were redeemed in November. However, because of Treasury’s deteriorating cash position, these securities were again redeemed by the end of December. Finally, between February 15 and 20, 1996, an additional $6.4 billion in Treasury securities held by the Civil Servic"
1569,"e fund were redeemed. Subsection (j) of 5 U.S.C. 8348 authorizes the Secretary of the Treasury to suspend additional investment of amounts in the Civil Service fund if such investment cannot be made without causing the amount of public debt to exceed the debt ceiling. Between November 15, 1995, and March 29, 1996, the Civil Service fund had about $20 billion in receipts. In all but one case, Treasury used its normal investment policies to handle the trust fund’s requests to invest these receipts. The except"
1570,"ion involved the trust fund’s December 31, 1995, receipt from Treasury of a $14 billion semiannual interest payment on the fund’s securities portfolio. The Secretary determined that investing these funds in additional Treasury securities would have caused the public debt to exceed the debt ceiling and, therefore, suspended the investment of these receipts. During the debt ceiling crisis, about $6.3 billion of the Civil Service fund’s uninvested receipts were used to pay for the trust fund’s benefits and exp"
1571,"enses. Normally, government trust funds that are authorized to invest in Treasury securities do not have uninvested cash—all of a trust fund’s receipts that are not needed to pay for benefits and expenses are invested. In the case of the Civil Service fund, when a redemption is necessary, Treasury’s stated policy is to redeem the securities with the shortest maturity first. Should a group of securities have the same maturity date, but different interest rates, the securities with the lowest interest rate ar"
1572,"e redeemed first. During previous debt ceiling crises, Treasury’s actions resulted in uninvested cash. The uninvested cash not only required restoring lost investment interest but also affected the normal method Treasury uses to determine securities to redeem to pay for trust fund benefits and expenses. Accordingly, in 1989, Treasury developed policies and procedures for determining when uninvested trust fund cash should be used to pay trust fund benefits and expenses and used these policies during the 1995"
1573,"-1996 debt ceiling crisis. Overall, Treasury’s policy continued to be to redeem the securities with the lowest interest rate first. However, in making this determination, uninvested cash is treated as though it had been invested in Treasury securities. These procedures are presented in table 4.2. The following illustrates how this policy was implemented. On January 2, 1996, Treasury needed about $2.6 billion to pay fund benefits and expenses for the Civil Service fund. To make these payments, it redeemed or"
1574," used • $43 million of the fund’s Treasury securities which carried an interest rate of 5-7/8 percent and matured on June 30, 1996; • $815 million of the fund’s Treasury securities which carried an interest rate of 6 percent and matured on June 30, 1996 (these securities were redeemed first since the $815 million had been invested prior to December 31, 1995); and • $1.7 billion of uninvested cash since the uninvested cash, if normal procedures had been followed, would have been invested on December 31, 1995"
1575,", in 6 percent securities maturing on June 30, 1996. On February 14, 1996, about $8.6 billion in Treasury securities held by the Civil Service fund were exchanged for agency securities held by FFB. FFBused the Treasury securities it received in this exchange to repay some of its borrowings from Treasury. Since the Treasury securities provided by the Civil Service fund had counted against the debt ceiling, reducing these borrowings resulted in a corresponding reduction in the public debt subject to the debt "
1576,"ceiling. Thus, Treasury could borrow additional cash from the public. The decision to exchange Treasury securities held by the Civil Service fund for non-Treasury securities held by FFB required Treasury to determine (1) which non-Treasury securities were eligible for the exchange and (2) how to value the securities so that the exchange was fair to both the Civil Service fund and FFB. Treasury’s objective was to ensure that the securities that were exchanged were of equal value and that the Civil Service fu"
1577,"nd would not incur any long-term loss. Regarding the first issue, the law governing the Civil Service fund does not specifically identify which securities issued by an agency can be purchased. However, the laws authorizing the Postal Service and the Tennessee Valley Authority to issue securities state that these securities are lawful investments of the federal trust funds (39 U.S.C. 2005(d)(3) and 16 U.S.C. 831n-4(d)). Regarding the second issue, the Treasury securities held by the Civil Service fund and th"
1578,"e non-Treasury securities held by FFB had different terms and conditions; thus complicating the task of valuing the securities. For example, most of the Treasury securities held by the Civil Service fund mature on June 30 of a given year and can be redeemed at par when needed to pay benefits and expenses. None of the agency securities held by FFB, and selected by Treasury for the exchange transaction, matured on June 30 and, if redeemed before maturity, the redemption price would be based on market interest"
1579," rates. Because the effects of these differences can be significant, a methodology was needed to determine the proper valuation for the securities that would be exchanged. Therefore, Treasury used a generally accepted methodology to compute the value of each portfolio. Examples of factors used in this methodology include (1) the current market rates for outstanding Treasury securities at the time of the exchange, (2) the probability of changing interest rates, (3) the probability of the agency paying off th"
1580,"e debt early, and (4) the premium that the market would provide to a security that could be redeemed at par regardless of the market interest rates. Treasury obtained the opinion of an independent third party to determine whether its valuations were accurate. Our review of the consultant’s report showed that the consultant (1) identified the characteristics of each security to be exchanged, (2) reviewed the pricing methodology to be used, (3) calculated the value of each security based on the pricing method"
1581,"ology, and (4) reviewed the terms and conditions of the exchange agreement. The consultant concluded that the exchange was fair. Due to the complexity of the consultant’s computations and the large number of securities exchanged, we did not independently verify the consultant’s conclusion. The factors included in Treasury’s methodology and the consultant’s analysis were appropriate for assessing the exchange. Treasury’s actions during the 1995-1996 debt ceiling crisis involving the Civil Service fund were i"
1582,"n accordance with statutory authority provided by the Congress and the administrative policies and procedures established by Treasury. These actions helped the government to avoid default on its obligations and to stay within the debt ceiling. Specifically, we conclude the following: • Based on the information available to the Secretary when the November 15, 1995, and February 14, 1996, debt issuance suspension period determinations were made, the Secretary’s determinations were not unreasonable. • Treasury"
1583, considered appropriate factors in determining the amount of Treasury securities to redeem early. • The Secretary acted within the authorities provided by law when suspending the investment of Civil Service fund receipts. • Treasury’s policies and procedures regarding the uninvested funds are designed primarily to facilitate the restoration of fund losses when Treasury does not follow its normal investment and redemption policies and procedures. They also provide an adequate basis for considering the uninve
1584,"sted receipts in determining the securities to be redeemed to pay Civil Service fund benefits and expenses during the debt ceiling crisis. • The agency securities used in the exchange between the Civil Service fund and FFB were lawful investments for the Civil Service fund. In addition, by having an independent verification of the value of the exchanged securities, Treasury helped to ensure that both the Civil Service fund and FFB were treated equitably in the exchange. In addition to the actions involving "
1585,"the Civil Service fund, during the 1995-1996 debt ceiling crisis, the Secretary of the Treasury (1) suspended the investment of G-Fund receipts and (2) did not reinvest some of the Exchange Stabilization Fund’s maturing securities. Also, the Congress authorized Treasury to issue selected securities that were temporarily exempted from being counted against the debt ceiling. These actions also assisted Treasury in staying under the debt ceiling. Subsection (g) of 5 U.S.C. 8438 authorizes the Secretary of the "
1586,"Treasury to suspend the issuance of additional amounts of obligations of the United States to the G-Fund if such issuance cannot be made without causing the amount of public debt to exceed the debt ceiling. Each day, between November 15, 1995, and March 18, 1996, Treasury determined the amount of funds that the G-Fund would be allowed to invest in Treasury securities and suspended the investment of G-Fund receipts that would have resulted in exceeding the debt ceiling. On November 15, 1995, when the Secreta"
1587,"ry determined a debt issuance suspension period, the G-Fund held about $21.6 billion of Treasury securities maturing on that day. In order to meet its cash needs, Treasury did not reinvest about $18 billion of these securities. Until March 19, 1996, the amount of the G-Fund’s receipts that Treasury invested changed daily depending on the amount of the government’s outstanding debt. Although Treasury can accurately predict the result of some of these factors affecting the outstanding debt, the result of othe"
1588,"rs cannot be precisely determined until they occur. For example, the amount of securities that Treasury will issue to the public from an auction can be determined some days in advance because Treasury can control the amount that will actually be issued. On the other hand, the amount of savings bonds that will be issued and of securities that will be issued to, or redeemed by, various government trust funds are difficult to predict. Because of these difficulties, Treasury needed a way to ensure that the gove"
1589,"rnment’s trust fund activities did not cause the debt ceiling to be exceeded and also to maintain normal trust fund investment and redemption policies. To do this, each day during the debt ceiling crisis, Treasury • calculated the amount of public debt subject to the debt ceiling, excluding the funds that the G-Fund would normally invest; • determined the amount of G-Fund receipts that could safely be invested without exceeding the debt ceiling and invested this amount in Treasury securities; and • suspende"
1590,"d investment of the G-Fund’s remaining funds. For example, on January 17, 1996, excluding G-Fund transactions, Treasury issued about $17 billion and redeemed about $11.4 billion of securities that counted against the debt ceiling. Since Treasury had been at the debt ceiling the previous day, Treasury could not invest the entire amount ($21.8 billion) that the G-Fund had requested without exceeding the debt ceiling. As a result, the $5.6 billion difference was added to the amount of uninvested G-Fund receipt"
1591,"s and raised the amount of uninvested funds for the G-Fund to $7.2 billion on that date. Interest on the uninvested funds was not paid until the debt ceiling crisis ended. On several occasions between February 21 and March 12, 1996, Treasury did not reinvest some of the maturing securities held by the Exchange Stabilization Fund. Because the Fund’s securities are considered part of the government’s outstanding debt subject to the debt ceiling, when the Secretary does not reinvest the Fund’s maturing securit"
1592,"ies, the government’s outstanding debt is reduced. The purpose of the Exchange Stabilization Fund is to help provide a stable system of monetary exchange rates. The law establishing the Fund authorizes the Secretary to invest Fund balances not needed for program purposes in obligations of the federal government. This law also gives the Secretary the sole discretion for determining when, and if, the excess funds will be invested. During previous debt ceiling crises, Treasury exercised the option of not reinv"
1593,"esting the Fund’s maturing Treasury securities, which enabled Treasury to raise additional cash and helped the government stay within the debt ceiling limitation. In other actions to stay within the debt ceiling, the Congress passed legislation allowing Treasury to issue some Treasury securities that were temporarily exempted from being counted against the debt ceiling. During January 1996, Treasury’s cash position continued to deteriorate. The Secretary notified the Congress that, unless the debt ceiling w"
1594,"as raised before the end of February 1996, Social Security and other benefit payments could not be made in March 1996. Under normal procedures, monthly Social Security benefits are paid by direct deposit on the third day of each month. Because checks take a period of time to clear, Treasury only redeems securities equal to the amount of benefits paid by direct deposit on this date. The securities necessary to pay the benefits made by check are redeemed on the third and fourth business day after the payments"
1595," are made. This sequencing is designed to allow the fund to earn interest during the average period that benefit checks are outstanding but not cashed (the so-called “float period”). For Social Security payments, the check float period is about 3.6 days. According to Treasury officials, they may need to raise the actual cash needed to pay these benefits several days before the payments are made since the check float is an average. For example, some checks may clear the next business day while others may cle"
1596,"ar several days after the securities are redeemed. Under normal conditions, this is not a problem since Treasury is free to issue the securities to raise the necessary cash without worrying about when the trust fund securities will be redeemed. To ensure that these benefits would be paid on time, on February 8, 1996, the Congress provided Treasury with the authority (Public Law 104-103) to issue securities in an amount equal to the March 1996 Social Security payments. Further, this statute provided that the"
1597," securities issued under its provisions were not to be counted against the debt ceiling until March 15, 1996, which was later extended to March 30, 1996. The special legislation did not create any long-term borrowing authority for Treasury since it only allowed Treasury to issue securities that, in effect, would be redeemed in March 1996. However, it allowed Treasury to raise significant amounts of cash. This occurred because March 15, 1996—the date initially established in the special legislation for which"
1598," this debt would be counted against the debt ceiling—was later than the date that most of the securities would have been redeemed from the trust fund under normal procedures. On February 23, 1996, Treasury issued these securities. Following normal redemption policies, Treasury redeemed about $29 billion of Treasury securities from the Social Security fund for the March benefit payments. Since the majority of the Social Security fund payments are made at the beginning of the month, by March 7, 1996, Treasury"
1599," had redeemed about $28.3 billion of the trust fund’s Treasury securities. This lowered the amount of debt subject to the limit, and Treasury was able to issue securities to the public for cash or invest trust funds receipts—as long as they were issued before March 15, 1996. Therefore, Treasury could raise an additional $28.3 billion in cash because of the difference in timing between when the securities could be issued (March 15, 1996) and when they were redeemed to pay fund benefits and expenses. Accordin"
1600,"g to Treasury officials, during the 1995-1996 debt ceiling crisis, this flexibility allowed Treasury to raise about $12 billion of cash. The remaining capacity was used to invest trust fund receipts. According to Treasury officials, this was the first time that Treasury had been provided with this kind of authority during a debt ceiling crisis. Providing this legislation was important because during a debt ceiling crisis, Treasury may not be free to issue securities in advance to raise the necessary cash. W"
1601,"ithout this legislation, Treasury would have had at least the following three choices, of which only the first would have been practical. • Trust fund securities could have been redeemed earlier than normal. This action was used in the 1985 debt ceiling crisis to make benefit payments for the Social Security and Civil Service funds. In exercising this option, securities could have been redeemed on the same day that a like amount of securities were issued to the public for cash; these issues would have had n"
1602,"o effect on the amount of debt subject to the debt ceiling. However, since the securities would have been redeemed earlier than normal, the trust fund would have lost interest income. In the case of the Social Security funds, such a loss could not be restored without special legislation. • The government could have not paid the benefits. This option would have resulted in the government not meeting an obligation, which it has never done. • Treasury could have issued additional securities, which would have c"
1603,"aused the debt ceiling to be exceeded, in violation of the law, and raised legal issues concerning the validity of the securities as obligations of the United States. According to Treasury officials, Treasury has never issued securities that would cause the debt ceiling to be exceeded. We reviewed Treasury reports and confirmed that, at least since July 1, 1954, that this statement was correct. On March 12, 1996, the Congress enacted Public Law 104-115 which exempted government trust fund investments and re"
1604,"investments from the debt ceiling until March 30, 1996. Under the authority provided by this statute, between March 13 and March 29, 1996, Treasury issued about $58.2 billion in Treasury securities to government trust funds as investments of their receipts or reinvestments of their maturing securities. In addition, using its normal redemption policies, Treasury redeemed significant amounts of Treasury securities, which counted against the debt ceiling, held by various government trust funds to pay for benef"
1605,"its and expenses. Thus, Treasury was provided the ability to raise significant amounts of cash because these actions reduced the amount of public debt subject to the debt ceiling. To designate government trust fund investments that were not considered subject to the debt ceiling, Treasury issued special Treasury securities. This enabled Treasury, at the time a trust fund redemption was made, to identify whether the redemption lowered the amount of outstanding debt subject to the debt ceiling. For example, o"
1606,"n March 12, 1996, the Civil Service fund invested about $100 million in Treasury securities that were counted against the debt ceiling and on March 14, 1996, invested about $184 million in Treasury securities that were exempt. Therefore, if on March 19, 1996, using normal procedures, Treasury redeemed the trust fund’s Treasury securities to pay for benefits and expenses, it would know whether, or how much of, the redemption reduced outstanding securities subject to the debt ceiling. A similar determination "
1607,"could also be made for securities that were reinvested. For example, on March 12, 1996, the Postal Service fund had about $1.2 billion in maturing securities that were subject to the debt ceiling. These funds were reinvested in securities that matured the next business day and were not subject to the debt ceiling. As a result, the amount of debt subject to the debt ceiling decreased by this amount, thus enabling Treasury to issue additional securities to the public for cash. On March 14, 1996, this reinvest"
1608,"ment matured and was again reinvested. This transaction did not change the amount of securities subject to the debt ceiling because the maturing securities did not count against the debt ceiling when they were issued. During the 1995-1996 debt ceiling crisis, Treasury acted in accordance with statutory authorities when it (1) suspended some investments of the G-Fund, (2) exercised its discretion in not reinvesting some of the Exchange Stabilization Fund’s maturing Treasury securities, and (3) issued certain"
1609," Treasury securities to government trust funds without counting them toward the debt ceiling. During the 1995-1996 debt ceiling crisis, Treasury did not exceed the $4.9 trillion debt ceiling limitation established in August 1993. However, Treasury’s actions during the crisis resulted in the government incurring about $138.9 billion in additional debt that would normally have been considered as subject to the debt ceiling. Several of Treasury’s actions during the debt ceiling crisis also resulted in interest"
1610," losses to certain government trust funds. Our analysis showed that, because of several of the actions discussed in chapters 4 and 5, the government incurred about $138.9 billion in debt that Treasury would have normally included in calculating debt subject to the debt ceiling. The methods of financing this additional debt are presented in table 6.1. It was necessary for Treasury to issue debt to raise the funds necessary to honor authorized government obligations. Consequently, actions by the Congress and "
1611,"Treasury during the 1995-1996 debt ceiling crisis allowed Treasury to avoid defaulting on government obligations while staying under the debt ceiling. On March 29, 1996, legislation was enacted to raise the debt ceiling to $5.5 trillion, which ended the debt ceiling crisis. The legislation enabled Treasury to resume its normal issuance and redemption of trust fund securities and, where statutorily allowed, to begin restoring the interest losses government trust funds incurred during the debt ceiling crisis."
1612," Passage of this legislation was inevitable; without it, the federal government’s ability to operate was jeopardized. The level of the public debt is determined by the government’s prior spending and revenue decisions along with the performance of the economy. In 1979, we reported that debt ceiling increases were needed simply to allow borrowing adequate to finance deficit budgets which had already been approved. The Civil Service fund incurred $995 million in interest losses during the 1995-1996 debt ceili"
1613,"ng crisis. In 5 U.S.C. 8348, the Congress recognized that the Civil Service fund would be adversely affected if Treasury exercised its authority to redeem Treasury securities earlier than normal or failed to promptly invest trust fund receipts. To ensure that the fund would not have long-term losses, the Congress provided Treasury with the authority to restore such losses once a debt ceiling crisis was resolved. Under this statute, Treasury took the following actions once the debt ceiling crisis had ended. "
1614,"• Treasury reinvested about $46 billion in Treasury securities which had the same interest rates and maturities as those redeemed during November 1995 and February 1996. We verified that, after this transaction, the Civil Service fund’s investment portfolio was, in effect, the same as it would have been had Treasury not redeemed these securities early. • Treasury issued about $250.2 million in Treasury securities to cover the interest that would have been earned through December 31, 1995, on the securities "
1615,"that were redeemed in November 1995. Treasury issued these securities to replace securities that would otherwise have been issued to the fund if normal investment polices had been followed. • Treasury issued about $33.7 million in Treasury securities associated with the benefit payments made from the Civil Service fund’s uninvested cash balances from January 1996 through March 29, 1996. We verified that, in completing this transaction, Treasury calculated the amount of securities that would have been contai"
1616,"ned in the Civil Service fund’s portfolio had normal investment and redemption policies been followed. Also, between December 31, 1995, and March 29, 1996, the Civil Service fund’s Treasury securities that were redeemed early did not earn about $711 million in interest, as required by law. Treasury restored this lost interest on June 30, 1996, when the semiannual interest payment for these securities would have been paid if normal procedures had been followed. Between November 15, 1995, and March 29, 1996, "
1617,"the G-Fund lost about $255 million in interest because its excess funds were not fully invested. As discussed in chapter 5, the amount of funds invested for the G-Fund fluctuated daily during the debt ceiling crisis, with the investment of some funds being suspended. In 5 U.S.C. 8438(g) the Congress recognized that the G-Fund would be adversely affected if Treasury exercised its authority to suspend G-Fund investments. To ensure that the Fund would not have long-term losses, the Congress provided Treasury w"
1618,"ith the authority to restore such losses once a debt ceiling crisis was resolved. When the debt ceiling was raised, Treasury restored the lost interest on the G-Fund’s uninvested funds. Consequently, the G-Fund was fully compensated for its interest losses during the 1995-1996 debt ceiling crisis. During the 1995-1996 debt ceiling crisis, the Exchange Stabilization Fund lost about $1.2 million in interest. As discussed in chapter 5, these losses occurred because Treasury, to avoid exceeding the debt ceiling"
1619,", did not reinvest some of the maturing Treasury securities held by the Exchange Stabilization Fund. Treasury officials said that the Fund’s losses could not be restored without special legislation authorizing Treasury to do so. They said further that such legislation was not provided during the 1995-1996 debt ceiling crisis. Consequently, without specific legal authority, Treasury cannot restore the Exchange Stabilization Fund’s losses. As of August 1, 1996, Treasury had no plans to seek such statutory aut"
1620,"hority. During the 1995-1996 debt ceiling crisis, the federal government’s debt increased substantially. Under normal procedures, this debt would have been considered in calculating whether the government was within the debt ceiling. Regarding restoration of the Civil Service fund, Treasury restored the securities that would have been issued had a debt issuance suspension period not occurred and the interest losses. Treasury’s restoration actions will eliminate any long-term losses to the Civil Service fund"
1621,". Also, Treasury restored the G-Fund’s interest losses, ensuring that the G-Fund will not incur any long-term adverse affects from Treasury’s actions. Regarding the Exchange Stabilization Fund, Treasury cannot restore the $1.2 million in interest losses resulting from the Secretary’s decision not to reinvest the Fund’s maturing Treasury securities without special statutory authority."
1622,"Federal law has required broadcasters to identify sponsors of radio program content since 1927.requirements have been amended to expand and further define the requirements. Since that time, sponsorship identification In 1934, the Communications Act established FCC and gave it authority to administer sponsorship identification requirements for broadcasters, among other responsibilities, as well as creating additional sponsorship identification requirements. In 1944, FCC adopted rules implementing the sponsor"
1623,"ship identification requirements created in 1934. These rules, which required a full and fair disclosure of the sponsor’s identity, remain largely unchanged. In 1960, the Communications Act was amended to redefine the situations in which broadcasters must identify program sponsors. The need for this change arose due largely to the payola scandals of the late 1950s. The conference report accompanying the 1960 act included 27 case examples that were included to provide guidance on how the committee believed t"
1624,"he sponsorship identification requirements should be applied. In 1963, FCC adopted regulations implementing the 1960 amendments and provided 36 sponsorship identification case examples as guidance. In 1969, FCC adopted regulations applying sponsorship identification requirements modeled on the broadcast rules to cablecasting by community antenna television systems (CATV). Cablecasting was defined as “programming distributed on a CATV system which has been originated by the CATV operator or by another entity"
1625,", exclusive of broadcast signals.” In 1972, FCC updated its regulations to apply sponsorship identification requirements to programming under the exclusive control of cable television operators. In 1975, FCC clarified the meaning of its 1944 requirement for full and fair disclosure of the identity of the sponsor, modifying its regulations to make clear that broadcasters and cablecasters are expected to look beyond the immediate source of payment where they have reason to know (or could have known through th"
1626,"e exercise of reasonable diligence) that the purchaser of the advertisement is acting as an agent for another, and to identify the true sponsor. In 1991, FCC adopted rules requiring visual and audible sponsorship identification announcement for televised advertisements concerning political issues. In 1992, FCC amended the requirements for advertisements concerning candidates by removing the requirement for an audible announcement and adopting specific criteria for a visual announcement. consist of letters a"
1627,"t least 4 percent of the vertical picture height and that the statement be shown for at least 4 seconds. 7 FCC Rcd. 678 (1992). 7 FCC Rcd. 1616 (1992) (rule is codified at 47 C.F.R. §1212(a)(2)(ii)). There have been no changes to the sponsorship identification statutes or regulations since 1992, although there have been more recent FCC cases affecting their interpretation and application. These sponsorship identification requirements generally apply to different types of advertising. Table 1 shows the range"
1628," of different types of content that often require a sponsorship announcement, including commercial advertising where the sponsor is not typically apparent and political or controversial issue advertising where an announcement must meet additional requirements. Presently, the Communications Act, as implemented by FCC, requires broadcasters and cablecasters to disclose to their listeners or viewers if content has been aired in exchange for money, services, or other inducement. For commercial content, such as "
1629,"advertisements, embedded advertisements, and video news releases, the announcement must be aired when the content is broadcast and can be either a visual or an audible announcement. Political and controversial content must also have either type of announcement when aired on television, but candidate advertisements have specific visual requirements. In addition, when anyone provides or promises to provide money, services, or other inducement to include programming in a broadcast, that fact must be disclosed "
1630,"to the broadcaster or cablecaster. Both the person providing or promising to provide the money, services, or other benefits and the recipient must make this disclosure so that the station can broadcast the sponsorship identification announcement. The general public and to a lesser extent other sources, such as media public interest groups, file complaints with FCC about violations. Because of the high number of broadcasters and cablecasters, FCC relies on the public as an important source of information abo"
1631,"ut compliance with The public is able to assist in monitoring broadcasters’ requirements. compliance with requirements because, as we will describe later in our finding on requirements, broadcasters are required to maintain a publicly available inspection file. This publicly available file lists pertinent information, such as quarterly issues and programs list, which describes the programs that have provided the station’s most significant treatment of community issues during the preceding 3 months. The publ"
1632,"ic can access the public inspection file to check and monitor broadcasters’ compliance and service. As part of its enforcement process, FCC investigates complaints about potential violations by broadcasters and cable operators of the statutes and rules it administers, including sponsorship identification complaints. Two bureaus within FCC—the Consumer and Governmental Affairs Bureau (CGB) and the Enforcement Bureau—are primarily responsible for developing and implementing procedures for processing complaint"
1633,"s, conducting investigations, and taking enforcement actions. As part of its role of responding to consumer complaints and inquiries, CGB initially processes the majority of the complaints FCC receives. To the extent that a complaint is defective, for example, for failing to identify a particular broadcast, including its date, time of day, and the station on which it was aired, CGB will dismiss the complaint as incomplete and advise the complainant accordingly, providing guidance as to what information shou"
1634,"ld be included in a complaint. CGB forwards most complaints deemed complete to the Enforcement Bureau, but some complaints, including political sponsorship identification complaints go to the Media Bureau for further investigation. When FCC discovers violations it can take various enforcement actions dependent on the seriousness of the violation, such as admonishment, monetary forfeiture, or not renewing a broadcaster’s license. 2 U.S.C. § 441d. the advertisements. The disclaimer requirements apply to any k"
1635,"ind of communications media carrying public political advertising and are not limited to broadcast or cablecast advertisements. Similar to FCC, FEC initiates most enforcement activity pursuant to complaints received from the general public, including individuals and organizations associated with federal political campaigns. Complaints are filed with the Office of Complaints Examination and Legal Administration (CELA), which reviews the complaint to determine if the complaint states facts, identifies the par"
1636,"ties involved, and provides or identifies supporting documentation. If the complaints are deemed sufficient, CELA informs the complainants that they will be notified once the case has been resolved. If FEC discovers violations, enforcement can include negotiated corrective action, including civil penalties, or other Commission initiated legal action seeking judicially imposed civil penalties or other relief. As previously stated, sponsorship identification statutes and regulations require broadcasters and c"
1637,"ablecasters to identify commercial content— usually an advertisement, an embedded advertisement, or a video news release (VNR) that has been broadcast in exchange for money or payment in-kind. According to most broadcasters we spoke with, commercial content is fairly straightforward to identify, and they are accustomed to dealing with such content and report that compliance is manageable. For content considered political or discussing a controversial public issue, requirements, enforced by FCC and FEC, are "
1638,"more extensive and require more detailed on-air announcements and tracking of all related communications and agreements in a public file for FCC. According to FCC, commercial advertisements do not always require a sponsorship announcement. FCC does not require an announcement when an obvious connection exists between the content and sponsor, such as with a standard commercial advertisement. For all commercial advertisements where the true sponsor is not apparent, even for infomercials that may be 30 minutes"
1639," or longer, FCC requires a written or verbal announcement to occur only once during the program. This announcement must fully and fairly disclose the true identity of those who are paying for the advertisement. In addition, whenever an individual, such as a deejay, receives money or payment in-kind for airing specific content or favorably discussing a specific product a sponsorship announcement must be made. Therefore, station employees must disclose such transactions to the station. Thus, if a record compa"
1640,"ny or its agent pays a deejay to play records or talk favorably about an artist or record on the air, and he does so, the result is considered sponsored content. FCC guidance directs that the deejay must reveal the payment to the broadcaster and a sponsorship announcement must be made when the content goes on-the-air. According to broadcasters, industry trade groups, and others we spoke with, compliance with these standards and requirements is not a problem because the requirements are part of their standar"
1641,"d review process. Embedded advertisements—typically, when a commercial product is provided without charge to use in entertainment programming—may not require a sponsorship announcement if they are reasonably related to the show. Since many consumers now record shows or change the channel during commercials, broadcasters have increased their use of embedded advertising. However, a sponsorship announcement is not required every time a product appears in a program. For example, FCC’s guidance describes scenari"
1642,"os in which a manufacturer provides a car to a television show for a detective to chase and capture the villain, and states that the use of the car alone would not require a sponsorship announcement. In this scenario the use of the car could be considered “reasonably related” to its use in the show. However, in the same scenario, if a character also made a promotional statement about the specific brand—such as its being fast—FCC requires a written or verbal sponsorship announcement sometime during the progr"
1643,"am. According to FCC’s guidance, in this second scenario, the specific mention of the brand may go beyond what would be “reasonably related” to its use in the show. The reasonably related standard requires some assessment of the content. Broadcasters told us they have processes in place to review content on their networks to determine if a program needs a sponsorship announcement for an embedded advertisement. VNRs are another type of commercial content which may require a sponsorship announcement. VNRs are"
1644," pre-packaged news stories that may include only film footage or may also include suggested scripts. However, broadcasters do not always use a VNR in its entirety but may use portions of the video. For example, if a news story about car manufacturing could benefit by showing video from inside a manufacturing plant, a broadcaster may use footage from a VNR because it cannot easily access the interior of a plant during its operations. According to FCC, it requires broadcasters to air a sponsorship announcemen"
1645,"t when using VNRs, even when they are provided free of charge, under the same circumstances as it would require a sponsorship identification for other programming. When a film or a story was provided by a third party and it conveys value to the station, it must have either a verbal or written sponsorship announcement, if it is furnished in consideration for identification of a product or brand name beyond what is reasonable related to the broadcast.FCC issued in its 2005 Public Notice concerning the use of "
1646,"VNRs. In that Public Notice, FCC reminded broadcasters of their obligation to comply with sponsorship identification requirements when using VNRs and that there must be an announcement to the audience about the source and This is an update to the guidance sponsorship of the VNR.with FCC’s position and believe it should treat VNRs similar to press releases and not require a sponsorship announcement if a broadcaster did not pay for the material and uses only a portion of its content. For example, in the previ"
1647,"ous illustration, a broadcaster may use VNR footage, because it does not have access to the interior of a car manufacturing plant. In such instances, FCC requires broadcasters to make an announcement that could appear on the screen during the footage stating, “Footage furnished by ABC Motor Company” or as a verbal or written announcement at the end of the program. Broadcasters we spoke with had differing opinions on whether to use VNRs. While one broadcaster believes it should be up to the news program to d"
1648,"etermine if an announcement is needed, others we spoke with were divided about whether to use VNRs with a sponsorship announcement or to never use VNRs at all. Some broadcasters and others reported the use of VNRs has been increasing, in part, because of tighter news budgets and the need to fill airtime. In recent years, instances of VNR use without proper credit have been reported and investigated by FCC; we will discuss these instances later in our report. Nevertheless, some broadcasters disagree Most bro"
1649,"adcasters we spoke with indicated the sponsorship identification requirements are generally manageable as part of their review processes. As previously indicated, broadcasters told us they have processes in place to review the different types of advertisements and other programming aired. These reviews check to ensure the advertisement or programming meets FCC requirements, including the sponsorship identification requirements. Since it is part of the standard content review process and the sponsorship iden"
1650,"tification requirements have not changed for many years, broadcasters told us the requirements were not difficult to meet. Political content and content discussing a controversial issue of public importance are subject to all requirements that commercial content must follow but have additional on-air and public file sponsorship identification requirements. Advertisements that contain political content or involve public discussion of a controversial issue must include a sponsorship announcement at the beginn"
1651,"ing or end of the program. If the program is longer than 5 minutes, the announcement must be made at both the beginning and end of the program. For broadcast television and political content discussing a candidate, a visual announcement must be made that is at least equal to 4 percent of the screen height must exist and lasts 4 seconds. For broadcast radio, there must be an audible announcement. 47 C.F.R. §§ 73.1212(e) (for broadcast material), 76.1701(e) (for cablecast material). post a majority of their p"
1652,"ublic file on this website by February 2013, making the file more easily accessible to the general public. According to FEC, paid political communications supporting or opposing candidates for election to federal office, which include radio and television advertisements, are required to contain what are called “disclaimer statements.”statutes and regulations. Television and radio political advertisements authorized and paid for by a federal candidate or his or her campaign committee or another organization "
1653,"must include a disclaimer spoken by the candidate identifying him or herself and stating that he or she approved the advertisement, as well as a statement identifying the organization that paid for the advertisement. Television advertisements must either show the candidate making the disclaimer statement or show a clearly identifiable image of the candidate during the statement. They must also include a clearly readable written statement similar to the verbal statement that appears at the end of the adverti"
1654,"sement for at least 4 seconds. Certain advertisements not approved by a candidate or his or her committee must identify who paid for the advertisement, state that it was not authorized by any candidate or candidate’s committee, and list the permanent street address, telephone number, or World Wide Web address of the person who paid for the communication. In addition to monitoring compliance with these disclaimer requirements, FEC serves as a repository for campaign finance data for candidates for political "
1655,"office. Just as stations licensed by FCC are required to preserve records to establish that they are meeting their responsibility, among others, to treat political candidates running for the same public office equally, FEC oversees requirements to report campaign funding and expenditures. Individuals, political committees, and other organizations supporting or opposing candidates for federal office are required to report campaign funding and expenditures for certain activities, which can include payments ma"
1656,"de for purchasing political advertising and information on the funds they receive for advertisements. This reporting is done to assure that money is being collected and spent in accordance with federal election campaign law. The reporting requirements vary according to the purpose of the advertisement, who paid for the advertisement, and whether it is the product of a coordinated effort between political committees and others. The political committees are always subject to the reporting requirements and mus"
1657,"t submit itemized reports to FEC showing all of their expenditures, including advertising. Political committees must also submit itemized reports to FEC showing contributions received, including contribution amounts, dates, and contributor names and addresses. FEC has also required organizations and individuals to report expenditures for political advertisements and donations of $1,000 or more made for certain political advertisements, called “electioneering communications,” which are related to elections f"
1658,"or federal office and broadcasts within specified time frames before the elections. As described in FEC’s guidance, FEC administers specific reporting requirements for those making electioneering communications, which can include political advertisements on television or radio. Specifically, electioneering communications refers to any broadcast, cable, or satellite communication that refers to a candidate for federal office and is distributed within specific time frames before a federal general election or "
1659,"Political advertisements that do not meet these federal primary election. specifications are not subject to these reporting requirements. Once payments for electioneering communications, including television or radio advertisements, exceeds $10,000 in any calendar year, those responsible for them must report payments and the sources of funds used to FEC within 24 hours of each broadcast.things, identify: Each report must, among other the person or organization that made the payments, including their princip"
1660,"al place of business; any person sharing or exercising direction or control over the activities of the person who made the payments; the amount of each payment in excess of $200, the payment dates, and the payee; all candidates referred to in the advertisements and the elections in which they are candidates; and the name and address of each person who donated $1,000 or more since the first day of the preceding calendar year to those responsible for the advertisement. According to FEC, “coordinated communica"
1661,"tions” are contributions for communications that are coordinated with a candidate or party committee. These contributions are subject to amount limitations, source prohibitions, and reporting requirements under the Federal Election Campaign Act. coordinated, also known as independent expenditures, have requirements to report itemized payments for the advertisements that are triggered if they expressly advocate the election or defeat of a clearly identified candidate. While independent expenditures are not s"
1662,"ubject to spending limitations, they are subject to the reporting requirements. Those responsible for the payments must report: Expenditures for communications that are not a statement indicating whether each payment was in support of, or in their names, mailing addresses, occupations, and employers; the name and mailing address of the person to whom payments were made; the amount, date, and purpose of each payment; opposition to, a candidate, together with the candidate’s name and office sought; the identi"
1663,"fication of each person who made a contribution in excess of $200 for the purpose of making a coordinated advertisement; and a verified certification as to whether such expenditure was made in cooperation, consultation, or concert with, or at the request or suggestion of a candidate, a candidate’s authorized committee, or its agents, or a political party committee or its agents. Corporations, labor unions, individuals and businesses with federal government contracts, foreign citizens, and qualified non-prof"
1664,"it corporations are prohibited from coordinating these advertisements. FCC provides guidance on meeting sponsorship identification requirements, which broadcasters we spoke with generally report to be helpful. Broadcasters we spoke with told us they apply the sponsorship identification requirements many times a day during reviews of programs and when preparing news programs. This process involves network employees viewing all content, and if a program appears to focus too much on a product, then the broadca"
1665,"ster will ask the producer of the content for a sponsorship announcement. Broadcasters we spoke with indicated they tend to be cautious in reviewing and identifying sponsored content in order to avoid enforcement actions. The guidance issued in FCC’s 1963 report and order has remained substantially unchanged, and while many broadcasters indicate the guidance is still useful, it addresses issues with older technology that may no longer be relevant and does not discuss how the rules apply to newer technologie"
1666,"s. Specifically, one case example discusses a broadcaster’s use of a kinescope recording of a congressional hearing provided by a third party. The guidance states that “expensive kinescope prints dealing with controversial issues are being paid for by someone,” and therefore the broadcaster should determine who and make a sponsorship announcement. While this case example provides guidance for the use of content discussing a controversial issue, which clearly falls under the sponsorship identification requir"
1667,"ements, the cost of creating such content is less of an issue today. We have previously reported on the benefits of revisiting provisions of regulatory programs to determine if changes might be needed to better achieve the program’s goals. Current technologies, such as digital video equipment and the Internet, allow similar content to be created and distributed and it is often publicly available at no cost and the rules are not clear how the rules apply in these situations. FCC officials told us the agency "
1668,"has not updated the guidance because there has been no need to update it. Rather, FCC officials said they have relied on case law and public notices, among other devices, to provide guidance to broadcasters and cablecasters. However, some broadcasters indicated that FCC could clarify how the guidance applies in specific situations, such as when a VNR or product is used but the broadcaster was not paid. In its Public Notice issued in 2005, FCC reminded broadcasters and cablecasters of their sponsorship ident"
1669,"ification obligations and indicated that VNRs generally need a sponsorship announcement. According to FCC’s enforcement reports, its enforcement actions against broadcasters’ and cablecasters’ use of VNRs have involved cases where the footage and script of a VNR focused too much on a specific brand or product, beyond what was reasonably related to the story. FCC told us these cases indicate that VNRs should be following the same rules regarding sponsorship identification as other programming. However, some "
1670,"stakeholders argue VNRs are similar to press releases because they are often provided for with no money or payment in-kind including no understanding or agreement that they will be broadcast on-the-air. According to FCC guidance, a press release does not need a sponsorship announcement. Some broadcasters indicated they remain unsure of when there needs to be a sponsorship announcement as part of a VNR. As a result, FCC’s interpretation and the broadcasters’ interpretation of how the requirements apply to VN"
1671,"Rs remain vastly different, in-part because no payment is made to the broadcaster to air the VNR. The Public Notice in 2005 sought comment on a number of issues related to the use of VNRs and also indicated FCC intends to issue a report or initiate a formal proceeding based on the comments received. As of the issuance of this report, however, FCC has taken no further action in response to the comments received. FCC’s investigation and enforcement process generally begins with a complaint to the agency that "
1672,"will be reviewed by the CGB and may be forwarded to the Enforcement Bureau if the complaint is complete. As previously indicated, FCC receives complaints primarily through the CGB. Since 2003, FCC has received over 200,000 complaints of all types annually through CGB, some of which it dismisses as incomplete. Others, including sponsorship identification complaints deemed to be complete are forwarded to the Enforcement Bureau for possible investigation and enforcement. Complaints involving non-political spon"
1673,"sorship identification issues are forwarded to the Enforcement Bureau; but complaints raising political sponsorship identification issues go to the Media Bureau. When the Enforcement Bureau receives a complaint, the bureau conducts several reviews prior to being classified as a sponsorship identification complaint and prior to contacting the broadcaster named in the complaint, as shown in figure 1. First, if a complaint is related to an alleged sponsorship identification violation, the complaint goes to the"
1674," Investigations and Hearings Division where a manager conducts a review of the complaint. If the manager determines the subject of the complaint to be sponsorship identification related or related to another topic handled by the Investigations and Hearings Division, then the complaint is assigned to an attorney. The attorney enters it into the database at which time it is considered a case and can be classified as related to sponsorship identification. A case may be linked to numerous complaints, or a case "
1675,"may be opened even though FCC received no complaints. For example, in 2007, FCC received over 18,000 complaints and opened 3 sponsorship identification cases in response to a single incident wherein a nationally syndicated radio and television host discussed the “No Child Left Behind” program and did not disclose that the discussion was sponsored. As shown in table 2, according to FCC, it opened 369 sponsorship identification cases from the beginning of 2000 through 2011, representing just over 1 percent of"
1676," the total cases the Investigation and Hearings Division opened during that time period. According to FCC officials, after opening a case, the attorney conducts a more substantive review to determine if the allegations in the complaint, if true, would constitute a possible violation of any statutes or regulations. If warranted, the attorney may contact the complainant for more information. If it is determined that no violation occurred or can be supported, the case may be closed following the substantive re"
1677,"view, by making a note in the case file. If this substantive review determines a violation may have occurred, then FCC will send a letter of inquiry to the broadcaster named in the complaint initiating an in-depth investigation. As shown in table 2, 101 cases were closed following a substantive review and prior to a letter of inquiry being sent. If a case proceeds to a letter of inquiry being sent, the letter serves as a notification to the broadcaster named in the complaint that it is under investigation. "
1678,"The letter of inquiry requests specific information concerning the complaint, such as a video of the broadcast. As shown in table 2, from 2000 to 2011, FCC sent 242 letters of inquiry for sponsorship identification cases. Next, FCC reviews the information provided by the broadcaster named in the complaint in response to the letter of inquiry. If FCC determines that a violation of the sponsorship identification requirements did not occur or cannot be proven, it can close the case. As with the process of clos"
1679,"ing a case prior to sending a letter of inquiry, FCC closes the case by making a note in the case file but typically does not inform the broadcaster named in the complaint. From 2000 through 2011, FCC reported it closed 195 cases with no enforcement action following a letter of inquiry. In other cases, following the letter of inquiry, FCC may determine that a violation occurred and seek an enforcement action. Since 2000, FCC has issued enforcement actions in 22 sponsorship identification cases with varying "
1680,"types of violations and enforcement actions. For example, in 2011 FCC issued a notice of apparent liability to KMSP-TV in Minnesota, for airing a VNR without identifying the sponsor of the release. KMSP-TV was fined $4,000. In 2007, FCC issued a notice of apparent liability to Sonshine Family television for airing five different episodes of programs on ten separate occasions, during which an individual discussed the federal “No Child Left Behind” program. Sonshine was fined $40,000 because the station faile"
1681,"d to identify the sponsor of the content. Since 2000, FCC has also agreed to 10 consent decrees with different broadcasters that include the broadcaster’s adopting a plan for compliance and making a voluntary contribution to the United States Treasury. The voluntary payments to the Treasury have varied in amounts, from as little as $12,000 for a pay-for-play incident to as much as $4 million a separate but similar incident. While most complaints do not end with an enforcement action, FCC generally does not "
1682,"communicate with the broadcaster named in the complaint when it closes sponsorship identification investigations. As previously indicated, the letter of inquiry notifies the broadcaster named in the complaint that an investigation is under way but following that communication FCC does not provide any information on the investigation unless the case results in an enforcement action. GAO has previously reported that FCC enforcement actions can help correct identified compliance problems and deter future nonco"
1683,"mpliance.Similarly, informing a broadcaster under investigation that a matter has been closed could help inform broadcasters about compliant activities. Furthermore, while not specifically related to sponsorship identification issues, in an effort to promote open government and public participation, the administration has developed a plan to increase openness in the government. The plan includes an initiative to enhance enforcement of regulations through further disclosure of compliance information. This bu"
1684,"ilds on previous guidance to use increased disclosure to provide relevant information to help make decisions. It further directs agencies to develop plans for providing greater transparency about their enforcement activities and for making such information available online. However, broadcasters we spoke with confirmed that FCC does not inform them of the status of investigations, and some indicated they currently do not know the status of several investigations. They reported the lack of information about "
1685,"cases and FCC decisions creates uncertainty about the propriety of their past actions. In addition, this practice of not informing broadcasters about the results of investigations does not align with the administration’s goals to disclose compliance information to help regulated entities make decisions. As a result, broadcasters might not have sufficient information to determine whether they should modify their practices. This could result in stations unnecessarily editing content because of unwritten regul"
1686,"atory policy or what they assume the policy to be. According to FCC officials, they do not communicate with the broadcaster named in the complaint because, among other reasons, FCC has no legal obligation to do so. In addition, FCC officials identified several other factors as to why it does not communicate with the broadcaster named in the complaint. First, FCC officials told us it does not want to inform the broadcaster named in the complaint a case was closed because it may want to reopen the case if new"
1687," evidence presents itself. Second, officials also said that FCC does not want closing a case to be inaccurately interpreted as an endorsement of the action being investigated even if the investigation does not result in a finding of a violation. Finally, officials indicated informing the broadcaster named in the complaint about closure of an investigation would require crafting a letter tailored to fit the unique set of facts and requirements for each case. This would be resource intensive, and according to"
1688," FCC officials, FCC does not have sufficient resources to implement such practices. FCC sponsorship identification investigations can be lengthy, according to FCC data, taking from 10 months to over 5 years to complete. As shown in table 3, the shortest time period for resolution of a case with an enforcement action, was 10 months. The process to negotiate a consent decree takes longer because it often involves complex negotiations between FCC and a broadcaster. Even when the investigation sends a letter of"
1689," inquiry and results in no enforcement action, according to FCC officials, the median length of time to close investigations was 38 months for approximately 200 cases. In 2011, FCC set a performance goal to resolve 90 percent of sponsorship identification cases within 15 months. According to FCC officials, FCC missed its goal by a few days although officials could not provide data to support this. Specific goals about timeliness of investigations provide better service for regulated entities, but in 2012 an"
1690,"d 2013 FCC removed this goal. As previously stated, paid political advertisements require disclaimer statements and FEC’s enforcement process begins typically with a complaint to CELA. FEC receives most disclaimer complaints from the public. As shown in figure 2, complaints proceed through several procedural steps, including a review and vote by the FEC commissioners. CELA reviews the complaint for compliance with required criteria, including ensuring it identifies the parties involved, involves a violation"
1691," of campaign finance law, and provides supporting documentation. If a complaint does not meet these criteria, CELA notifies the complainant of the deficiencies and informs them that no action can be taken pursuant to the complaint unless those deficiencies are resolved. If the complaint meets the criteria, CELA informs the complainant that they will be notified when the matter has been resolved. From 2000 through May 15, 2012, FEC opened 301 cases based on complaints alleging violations of disclaimer statem"
1692,"ent requirements. The cases were based on complaints alleging violations of the disclaimer requirements for advertisements using various media, including television and radio, letters, and billboards. For example, in 2006, a complaint alleged a television advertisement for a congressional candidate in Ohio failed to include an oral statement that identifies the candidate and states that the candidate has approved the communication. Less than 17 percent of the complaints alleging violations of disclaimer sta"
1693,"tement requirements involved television or radio disclaimer requirements. Prior to taking any action other than dismissing a complaint, FEC provides the entity named in the complaint at least 15 days to respond and demonstrate that no violation occurred. After the response period, FEC’s Office of General Counsel evaluates the complaint and response and may refer the case to the Alternative Dispute Resolution Office. This office provides solutions for settling cases in lieu of litigation and allows FEC to se"
1694,"ttle the case early in the enforcement process. While alternative dispute resolution avoids the litigation process, the entity named in the complaint must commit to terms for participation in an alternative dispute resolution, which include setting aside the statute of limitations and participating in negotiations to settle the case, among other conditions. Alternative dispute resolution settlements generally require entities named in the complaints to take corrective action, such as hiring compliance speci"
1695,"alists, designating persons as responsible for disclosure, and attending educational conferences. Generally, FEC does not refer cases for alternative dispute resolution that are highly complex but does refer cases that could include incidents where FEC believes there was knowing and willful intent to commit violations or potential violations in areas that FEC has set as priorities. For cases not recommended for alternative dispute resolution, FEC Commissioners vote before an investigation is initiated. The "
1696,"Federal Election Campaign Act requires that FEC find reason to believe that a person has committed, or is about to commit, a violation as a precondition to opening an investigation into an alleged violation. Should the Commissioners’ vote to find reason to believe a violation occurred, FEC and the alleged violator can negotiate a conciliation agreement that can include a monetary penalty or corrective action. If the Commission needs additional information prior to settling a case using a conciliation agreem"
1697,"ent, the Enforcement Division conducts an investigation. Violations not resolved with a conciliation agreement can result in the Commission filing suit against the respondents. Our review of FEC data found the disclaimer cases resulted in 330 case outcomes that range from dismissals to civil penalties through conciliation agreements. However, as shown in table 4, of the 38 outcomes that could have ended with a civil penalty—conciliation agreement, alternative dispute resolution agreement, and lawsuit—FEC as"
1698,"sessed civil penalties in only 29 cases, 7 of which were related to television or radio disclaimers. Unlike FCC, FEC provides status updates to those involved in investigations and issues reports explaining investigation findings. On December 31, 2009, FEC issued guidelines for tracking and reporting the status and time frames of complaint responses, investigations, and enforcement actions. The guidelines require the FEC’s Office of General Counsel and the Office of Alternative Dispute Resolution to provide"
1699," the Commissioners and affected parties with a status report once per year for cases in which the Commissioners have not yet voted on the recommendation made by the General Counsel or the Office of Alternative Dispute Resolution based on their initial reviews. These status reports include estimate of when the Commissioners will vote. Also unlike FCC, FEC issues reports explaining its resolution of enforcement cases, including case dismissals. These reports can clarify acceptable and unacceptable practices f"
1700,"or the regulated community. For example, during 2007, FEC received a complaint alleging that a candidate had violated television advertisement disclaimer requirements by including an improper disclaimer in the advertisement. The complaint alleged that the printed disclaimer violated the requirements because it did not also state that the candidate approved the advertisement. FEC dismissed the case in an exercise of its prosecutorial discretion to not pursue a violation in part because of partial compliance "
1701,"with disclaimer requirements. In doing so, FEC observed that the verbal disclaimer identified the candidate and informed the public of the candidate’s approval of the advertisement and the printed disclaimer informed the public that the candidate’s committee paid for the advertisement. FCC receives hundreds of thousands of complaints related to all areas it regulates but there have only been a small number of sponsorship identification cases. Of the sponsorship identification cases opened by FCC, only a han"
1702,"dful have resulted in enforcement actions against broadcasters, and many of those enforcement actions were for fines of less than $100,000. Most broadcasters told us they generally have no problems meeting the sponsorship identification requirements because they have processes in place to review all content and ensure it has a sponsorship announcement if needed. However, FCC guidance for the sponsorship identification requirements has not been updated in nearly 50 years to address more modern technologies a"
1703,"nd applications. We have previously reported that retrospective reviews of regulations can change behavior of regulated entities. Similarly, a review and update of FCC guidance that discusses outdated technologies could result in changes in behavior. One example discusses a broadcaster’s use of expensive kinescope prints as part of a story on a controversial issue. The example directs such a use should receive a sponsorship announcement because of the controversial issue being discussed and the cost of the "
1704,"film. Yet, today, because the expense of providing film is no longer relevant, broadcasters may be unsure on whether the concern is the expense of the film or the controversial issues discussed in the film. FCC should clarify its guidance to clearly address how, when content is provided with no money or payment in-kind and it does not discuss a controversial issue, the situation should be treated. Furthermore, FCC should clarify its examples to direct broadcasters’ treatment of content provided with no mone"
1705,"y or payment in-kind that does not highlight a product or brand beyond the “reasonably related” standard, such as a VNR. FCC has indicated VNRs must have a sponsorship announcement; however, FCC’s enforcement of VNRs has not found fault with the use of the VNR but rather when the VNRs focus on a specific product. Stakeholders disagree on the use of VNRs. FCC’s enforcement actions and guidance do not distinguish how to act when portions of VNRs are used or when a VNR does not disproportionately focus on a pr"
1706,"oduct or brand. FCC indicated in 2005 that it would issue a report or take other necessary action regarding this issue and updating the guidance could serve this purpose. Unlike FEC in its enforcement of disclaimer requirements, FCC’s enforcement process for sponsorship identification cases generally does not inform the broadcasters or cablecasters named in the complaint when investigations have been closed. In cases where a letter of inquiry has been sent, the broadcaster or cablecaster must fulfill its re"
1707,"sponsibility and provide FCC with the requested information. Yet, according to FCC, because they have no legal obligation to inform broadcasters that an investigation has concluded, it typically does not provide that information. By providing this information, for cases in which FCC conducts a full investigation and determines the broadcaster’s actions not to be a violation of requirements, the outcome could provide guidance to the broadcaster of allowable activities. Even in cases where FCC closed a case w"
1708,"ith no investigation, informing the broadcaster that the case is closed, even if it may be reopened in the future, would support government-wide goals of greater transparency and sound oversight practices. Finally, while in 2011 FCC had specific goals related to the timeliness of completing sponsorship identification investigations, it was unable to provide data supporting how it met those goals, and in subsequent years it withdrew the goals. In an effort to achieve greater openness, the timeliness of repor"
1709,"ting and publishing information has been identified as an essential component. By re-establishing goals about completing sponsorship identification investigations in a timely manner, FCC would support broader government goals of completing actions in a timely manner to better serve its constituencies and regulated entities. We recommend that the Chairman of the FCC take the following three actions: To provide clarity on how sponsorship identification requirements apply to activities not directly addressed b"
1710,"y FCC’s current guidance, such as the use of video news releases, and to update its guidance to reflect current technologies and recent FCC decisions about video news releases, FCC should initiate a process to update its sponsorship identification guidance and consider providing additional examples relevant to more modern practices. To improve its transparency concerning which investigations are ongoing or have been concluded and to provide guidance on allowable activities, FCC should communicate the closur"
1711,"e of all sponsorship identification investigations with the broadcaster named in the complaint after a letter of inquiry was sent. The letter should indicate the case has been closed, but in doing so, FCC could note that closing the case does not signify an endorsement of the actions that were being investigated and that the case could be reopened. To improve timeliness of investigations and ensure, when possible, that investigations are completed in an expeditious manner, FCC should develop goals for compl"
1712,"eting sponsorship identification cases within a specific time frame and develop a means to measure and report on how well it meets those goals. We provided a draft of our report to FCC and FEC for review and comment. FCC provided comments in a letter dated January 23, 2013, that is reprinted in appendix II. Overall, FCC indicated that it will consider our recommendations and how to address the concerns discussed in our report. In response to our second recommendation—to communicate the closure of investigat"
1713,"ions with the broadcaster named in the complaint when a letter of inquiry has been sent—FCC identified a number of issues, many of which were cited in our report. Specifically, FCC has concerns that reporting the closing of a case may be misinterpreted as an endorsement of a broadcaster’s actions. FCC further noted its limited number of Enforcement Bureau staff available to work on the large portfolio of cases could and that it could not dedicate the necessary time to craft closing letters tailored to each "
1714,"case. However, we feel that FCC could create a standard letter—stating that a case has been closed, that the closing of the case does not endorse the actions of the broadcaster named in the complaint, and that the case could be reopened because of new evidence. We believe such a standard letter would require minimal resources to create and send, yet would contribute to greater transparency. FCC also noted that it is reluctant to single out sponsorship identification matters for special treatment in terms of"
1715," closure letters but are also concerned about the even greater impact on resources if closure letters are instituted on a broad basis. However, we believe that this could serve as a pilot program for greater adoption of closure letters for other types of FCC investigations. In response to FCC’s concerns, we updated our recommendation to demonstrate how a closure letter could be worded to indicate the closure did not indicate an endorsement of the actions being investigated and that a case could be reopened."
1716," Both FCC and FEC provided technical comments that were incorporated as appropriate. When providing its technical comments, FCC discussed the treatment of VNRs indicating that although the 2005 Public Notice states VNRs generally must have a sponsorship announcement, recent cases involving VNR complaints have resulted in FCC treating VNRs similar to other programming subject to the sponsorship identification requirements. We reflected this change in the report, and added a reference to FCC decisions about V"
1717,"NRs to our first recommendation. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of his letter. At that time, we will send copies of this report to the Chairman of the Federal Communications Commission, and the Chair of the Federal Election Commission. We will also make copies available to other on request. In addition, the report will be available on the GAO Web site at http://www.gao.gov. If you"
1718," or your staff have any question, please contact me at (202) 512- 2834 or goldsteinm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made major contributions to this report are listed in appendix III. We were asked to review requirements for identifying the sponsors of broadcast commercial and political advertisements and to determine the extent to which agencies responsible for administering them address comp"
1719,"laints alleging violations of the requirements. Specifically, we (1) describe the sponsorship identification requirements and guidance for commercial and political content, the federal election disclaimer requirements, as well as stakeholders’ views of these requirements and guidance and (2) assess how and to what extent FCC and FEC address sponsorship complaints through each agency’s enforcement process. To describe the sponsorship identification requirements and guidance as well as stakeholders views on t"
1720,"hese requirements and guidance, we reviewed sponsorship identification statutes and regulations, including the Communication Act of 1934, as amended, and the Federal Election Campaign Act. We also reviewed relevant academic literature and interviewed FCC and FEC officials to gather their understanding of the governing statutes and regulations, how they have changed, their purposes, and how they apply to various media platforms, including conventional and embedded advertising and video news releases, and pol"
1721,"itical and controversial advertisements. We conducted interviews with over one-dozen stakeholders selected because they are either subject to sponsorship identification requirements, have monitored broadcasters’ compliance with sponsorship identification requirements, or contributed research to the topic. These stakeholders’ interviews were conducted with representatives from the four major television broadcast networks as well as two additional groups that own television and radio stations. We also intervi"
1722,"ewed representatives from a consumer watchdog organization, academics, and trade associations that represent broadcasters and news directors and producers. These interviews were conducted to obtain views on the effect of statutes and regulations and possible changes to them. To determine how and to what extent FCC and FEC address sponsorship identification complaints, we interviewed FCC and FEC officials responsible for receiving, processing, and investigating complaints. In addition, we analyzed relevant F"
1723,"CC and FEC documents describing agency methods and processes for identifying violations, receiving sponsorship identification complaints, communicating with the complainant and subject of the complaint, initiating and conducting investigations, and taking enforcement actions. We also analyzed relevant FCC and FEC data to describe sponsorship identification complaints, investigations, and enforcement actions. We analyzed FCC data showing all complaints received by FCC from 2000 through June 2012 to determine"
1724," the percentage of complaints that were sponsorship identification complaints, FCC actions in response to sponsorship identification complaints, and the time frames for resolving these complaints. We determined the FCC data to be sufficiently reliable for our purposes based on previous analysis of the FCC database and based on current interviews. To determine the extent to which FCC addresses sponsorship identification complaints, we analyzed all FCC enforcement actions pursuant to these complaints from 200"
1725,"0 through June 2012. We also analyzed FEC data showing all complaints received by FEC from 2000 through May 15, 2012, to determine the percentage of complaints that were disclaimer statement complaints, FEC actions in response to disclaimer statement complaints, and the time frames for resolving these complaints. The FEC data were not materially relevant to our findings and so while we asked a series of questions about the internal controls and data reliability, we did not make a final determination of its "
1726,"reliability. To determine the extent to which FEC addresses disclaimer statement complaints, we analyzed all FEC disclaimer statement cases, including cases dismissed by FEC, and all FEC disclaimer statement enforcement actions from 2000 through May 15, 2012. We also analyzed FCC and FEC strategic plans describing the agencies’ respective goals for sponsorship identification and disclaimer statement complaint processing and enforcement. In addition, we analyzed FCC and FEC data and documents describing whet"
1727,"her the agencies met their respective goals. We interviewed FCC and FEC officials about their goals and their progress toward achieving them. We conducted this performance audit from March 2012 through January 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obt"
1728,"ained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Ray Sendejas, Assistant Director; Eric Hudson; Bert Japikse; Michael Mgebroff; Amy Rosewarne; and Andrew Stavisky made key contributions to this report."
1729,"USPS has a universal service obligation, part of which requires it to provide access to retail services. It is required to serve the public and provide a maximum degree of effective and regular postal services to rural areas, communities, and small towns where post offices are not self- sustaining. USPS is intended to be a financially self-sufficient entity that covers its expenses almost entirely through postal revenues. USPS receives virtually no annual appropriations but instead generates revenue through"
1730," selling postage and other postal products and services. Retail alternatives are increasingly important to USPS; revenues from all retail alternatives—including self-service kiosks in post offices, USPS’s website, and CPUs, among others—increased by about $1.6 billion from fiscal years 2007 to 2011 while post office revenues decreased by $3 billion. (See fig. 1.) During this same period, USPS’s share of total retail revenues from all retail alternatives increased from about 24 percent to 35 percent. USPS pr"
1731,"ojects that by 2020, retail alternatives will account for 60 percent of its retail revenues. Given this growing importance and USPS’s planned-retail-network restructuring, we recommended in November 2011 that USPS implement a strategy to guide efforts to modernize its retail network that addresses both post offices and retail alternatives. According to USPS officials, USPS is currently in the process of finalizing its retail strategy. The retail alternatives most similar to post offices are CPUs. They are p"
1732,"rivately owned, operated, and staffed and are usually colocated with a primary business, such as a convenience store or supermarket. They provide most of the same products and services as post offices (see fig. 2) at the same prices. CPUs typically have a counter with prominently displayed official USPS signage, provided by USPS, giving the CPU the look of a post office. (See fig. 3.) According to USPS, CPUs offer potential service and financial benefits, and, as we have previously reported, some foreign po"
1733,"sts have successfully used private partnerships similar to CPUs to realize such benefits. CPUs can enhance service by being located closer to customers’ homes and workplaces and operating at hours when post offices may not be open. They can alleviate long lines at existing post offices and provide postal services to areas with rapid population growth or where opening new post offices may be cost prohibitive. Regarding financial benefits, USPS has reported that the costs it incurs for CPUs are less than thos"
1734,"e it incurs for post offices, relative to revenue earned. USPS estimated that in fiscal year 2011, it incurred $0.17 in costs for each dollar of revenue at CPUs and $0.51 in costs for each dollar of revenue at post Costs are lower, in part because CPU operators, and not USPS, offices.are responsible for their operating costs, such as rent, utilities, and wages for their employees. CPUs provide all their revenues from postal products and services to USPS, and USPS compensates CPUs for providing postal servic"
1735,"es under the terms of their contracts. The amount of compensation USPS pays to a CPU operator depends in large part on the type of contract the CPU operates under. Currently there are two basic types of contracts: fixed-price, under which USPS compensates the CPU a contractually determined amount regardless of sales, and performance-based, under which USPS compensates the CPU a contractually determined percentage of sales. USPS’s compensation to CPUs—either the amount under a fixed-price contract or the per"
1736,"centage under a performance-based contract—is specific for each CPU contract and the result of negotiation between USPS and the CPU operator. CPU hours of service are also negotiated for each contract, although USPS guidance on CPUs, in line with USPS’s goal for CPUs to provide increased access and convenience, states that their days and hours of service should exceed those at post offices. Other terms and conditions are standardized in all contracts. For example, all CPUs are required to offer the same bas"
1737,"ic set of products and services such as stamps, Priority Mail, Express Mail, and Certified Mail. In addition, all CPUs are contractually prohibited from selling services, including private mailboxes and others, that are competitive with USPS’s products, and all CPU contracts specify USPS’s rights to inspect the CPU at any time during operating hours. CPU contracts are valid for an indefinite period, but CPU contracts specify that the CPU operator or USPS can terminate a contract and close the CPU at any tim"
1738,"e with 120 days notice. USPS management and oversight of CPUs, including identifying and justifying the need for new CPUs, is done at the district and local levels. Staff at the district and local levels oversee day-to-day operations of CPUs and identify the need for new CPUs. When a district identifies the need for a new CPU, it approaches local businesses in the targeted area as potential partners and engages in a competitive application process. USPS has other partnerships with private entities to provid"
1739,"e retail postal services, similar to CPUs. USPS launched a retail partnership called the Village Post Office in July 2011 in which existing small businesses provide a limited range of postal products and services in small communities where underutilized yet costly post offices may close, be consolidated with another nearby post office, or have their hours of service reduced. partnerships with national and regional retailers to provide postal services. These partnerships differ from CPUs in that they will no"
1740,"t be subject to the same prohibitions as CPUs on selling competing services, and with them, USPS is attempting to expand access at a national or regional level as opposed to addressing specific local needs as CPUs do. Village Post Offices sell a more limited range of USPS products and services than CPUs do. Local USPS staff solicit a local business for a Village Post Office opportunity and a USPS contracting officer agrees to enter into a contract if they believe that the terms and conditions of that Villag"
1741,"e Post Office present a best value to USPS. USPS plans to launch these partnerships in test markets in early 2013 and will evaluate the effectiveness of these partnerships before making decisions whether to expand the program. Although total number of CPUs has decreased in recent years, USPS continues to use CPUs to provide customers with access to postal services at additional locations and for more hours of service. CPUs are located in a variety of locations, both urban and rural, and range from very clos"
1742,"e to far from post offices, demonstrating how USPS uses CPUs to provide customers with alternatives located near crowded post offices—which are often found in urban areas— and to provide service where post offices are not conveniently located or may not be cost effective for USPS, often in rural areas. In addition, CPUs allow USPS to provide customer access at times often beyond the hours of service at post offices. According to USPS data, the number of CPUs fell from 5,290 in 2002 to 3,619 in 2011. During "
1743,"the past 5 fiscal years, USPS has opened new CPUs, but a higher number of CPUs have closed. (See table 1.) According to USPS headquarters officials who manage the CPU program, economic conditions forced many businesses that operated CPUs to close and declining mail volume and sales of postal products have been the primary factors behind the decrease in the number of CPUs. Although USPS does not track specific reasons for CPU closures in its contract postal unit technology (CPUT) database, retail managers in"
1744," eight USPS districts that we met with cited specific local issues resulting in CPU closures, including the following: The CPU operator retired or otherwise stopped working. For example, an Indiana CPU operator closed his primary business and moved out of the area. The CPU operator moved the primary business to a new location and did not retain the CPU. For example, the operator of a CPU in Texas moved his primary business across the street, but the new space was too small to host a CPU. The CPU operator so"
1745,"ld the primary business. For example, a California CPU operator sold his self-storage business, and the new operators were not interested in maintaining the CPU. The CPU operator chose to close for financial considerations. For example, a CPU operator in Virginia closed the CPU because he felt it did not help his primary business. USPS initiated the closure because the CPU failed to meet the terms of the contract or USPS determined that the CPU was not cost effective. For example, USPS determined that a Mar"
1746,"yland CPU that operated out of a private residence no longer brought in enough revenue to justify USPS’s compensation to the CPU, so USPS closed the CPU. Consistent with USPS’s goal to use CPUs to absorb excess demand at post offices, our analysis of the distance between CPUs and post offices shows that more than 56 percent of CPUs are less than 2 miles from the nearest post office and 26 percent are less than 1 mile. (See table 2.) For example, USPS opened a CPU in Frederick, Maryland, to better meet deman"
1747,"d and reduce customer wait times in lines at the local post office about one-half mile away. Conversely, about 14 percent of CPUs are located 5 miles or more from the nearest post office, showing how CPUs can be used to provide services where post offices are not conveniently located, such as a CPU in rural Vigo Park, Texas, that is located 16 miles from the nearest post office. Similarly, USPS opened a CPU in Aubrey, Texas, located about 5 miles from the nearest post office, in order to serve customers in "
1748,"a fast growing area. Consistent with the majority of CPUs’ being within 2 miles of a post office, CPUs are also more likely to be in urban than rural areas, and recent CPU openings further demonstrate this pattern. As shown in figure 4, more than 60 percent of CPUs active as of March 30, 2012, were in urban areas, as defined by the Rural-Urban Commuting Area codes we used for this analysis.CPUs to reduce the time customers have to wait in line at a post office, more often in urban areas. Furthermore, more t"
1749,"han three-fourths of new CPUs in fiscal year 2011 were in urban locations. This suggests that CPUs may be most viable in urban areas with higher populations and customer traffic. Our analysis shows that CPUs are rarer in suburban, large-town rural, and small-town rural locations. In recent years, USPS has intentionally shifted its means of compensating CPUs from fixed-price contracts—in which compensation to CPUs is a fixed amount regardless of sales—to performance-based contracts—under which compensation t"
1750,"o CPUs is a percentage of the CPU’s postal sales—resulting in potentially greater revenue and less financial exposure to USPS. (See fig. 7.) According to USPS officials, since 2002, USPS has entered into performance-based contracts for most new CPUs and has converted many fixed-price contracts to performance-based. The purpose of the shift is to incentivize CPU operators to market postal products and services to increase postal revenues. CPUs with fixed-price contracts have limited incentive to sell more po"
1751,"stal products, since their compensation is the same regardless of their sales. Furthermore, since USPS compensates CPUs with performance-based contracts a percentage of the CPU’s sales, USPS does not compensate these CPUs more than it receives in revenues, a situation that can happen with CPUs with fixed-price contracts. The total revenues USPS received from sales of postal products and services at CPUsyear 2007 to $611 million in fiscal year 2011, as shown in figure 8. However, as mentioned earlier, USPS’s"
1752," revenues from post offices declined about 22 percent during this period. The decline in CPU revenues is part because of the decrease in the number of CPUs, as average CPU revenues decreased only 2 percent during this time. The downward trend in mail volume was also a factor, according to USPS officials. Several CPUs we visited experienced declining sales in recent years. For example, a CPU in Cedar Lake, Indiana, saw CPU revenues decline 17 percent from fiscal year 2007 to 2011. Several USPS district retai"
1753,"l managers cited CPUs that closed because of low sales. For example, a CPU in Texas closed because neither the CPU nor the primary business generated sufficient revenue for the operator to stay in business. Our analysis of USPS data found that CPUs with lower than declined about 9 percent from $672 million in fiscal average revenues were more likely to close than were those with higher revenues. On average, CPUs that closed from fiscal years 2008 to 2011 generated roughly 26 percent less revenue on average "
1754,"in the year prior to closure than the average CPU revenue for that year. Individual CPU revenues vary widely, as shown in figure 9. On average, USPS’s revenue from individual CPUs averaged about $160,000 in revenue in fiscal year 2011, but a substantial number (41 percent) generated less than $50,000. Moreover, low revenue CPUs are more likely to be located in rural areas where population is sparse and demand for services is lower; 22 percent of small-town rural and large-town rural CPUs had revenues under "
1755,"$5,000 in fiscal year 2011. High-revenue CPUs—such as the 7 percent that earned $500,000 or more in fiscal year 2011—are mostly located in urban areas where demand is likely higher and post offices are more likely to have long wait times. For instance, we visited one CPU in downtown Los Angeles with $1.8 million in revenues in fiscal year 2011. The ability to generate high revenues at this CPU led it to increase capacity by adding postal windows to keep pace with demand. USPS compensation to CPUs increased "
1756,"about 6 percent from $75.4 million in fiscal year 2007 to $79.9 million in fiscal year 2011. However, USPS compensation to CPUs has decreased every fiscal year from 2008 to 2011. (See fig. 10). According to USPS officials, the increase in compensation from fiscal years 2007 and 2008 was because of larger numbers of performance-based contracts, fewer public service contracts, which are generally less expensive, individual CPUs’ petitions for increased compensation because of increased cost of doing business,"
1757," and economic conditions. The subsequent decline in USPS compensation to CPUs from fiscal years 2008 to 2011 was because of declining numbers of CPUs during the time. As with CPU revenues, USPS compensation to individual CPUs varies widely. (See fig. 11.) For example, 326 CPUs received no more than $100 in annual compensation in fiscal year 2011. On the other hand, that same year, 55 high-revenue CPUs with performance-based contracts received over $100,000 in compensation. In fiscal year 2011, USPS compensa"
1758,"ted CPUs an average of about $21,000, but compensated more than a quarter of CPUs less than $5,000. As USPS undertakes actions to achieve a sustainable cost structure, it will be important to understand the implications of CPUs for USPS’s costs and revenues. Currently, USPS retains most of the revenues generated by CPUs, its major expense being compensation payments to CPU operators. As we described previously, in fiscal year 2011, USPS earned a total of $610.5 million in revenues from CPUs and, in return, "
1759,"compensated CPUs a total of $79.9 million, allowing USPS to retain $530.6 million in CPU revenues. Measured in another way, after compensating CPUs, USPS retained $0.87 of every dollar of CPU revenues. However, for individual CPUs, the amount of revenues USPS retains after compensating the CPU varies significantly. USPS’s target for individual CPUs is to retain, after compensation, $0.80 for every dollar in revenues. percent of the roughly half of CPUs that have fixed-price contracts. (See fig. 12.) Moreove"
1760,"r, for 23 percent of CPUs with fixed-price contracts in fiscal year 2011, USPS did not retain any revenues as it compensated the CPU an amount greater than the revenue USPS received from the CPU. Most of these CPUs were in rural areas. Forty-nine percent of small-town rural CPUs with fixed-price contracts generated less revenue for USPS than the compensation USPS provided in fiscal year 2011. According to USPS officials, while USPS does not retain any revenue from these CPUs after compensating them, operati"
1761,"ng a post office in the same locations would be more onerous from a cost perspective. Because USPS compensates the roughly 45 percent of CPUs with performance- based contracts with a percentage of their sales—usually between 9 and 12 percent—USPS’s revenues from CPUs with performance-based contracts will, by definition, always be greater than the amount of USPS compensation to them. USPS officials said that they review CPUs in which USPS retains less than $0.80 per dollar of revenue and attempts to take act"
1762,"ion to decrease CPU compensation or terminate the CPU if necessary. USPS is embarking on a substantial makeover of its retail network, including reducing hours of service at thousands of underutilized post offices and expanding the use of retail alternatives through partnerships with national and regional retailers. According to USPS officials, at this time there are no plans to strategically increase the number of CPUs to help enhance service in the changing postal retail landscape. USPS officials said tha"
1763,"t they plan to continue to use CPUs to meet specific local needs identified by local and district officials. At the same time, pending legislation in the Senate would require USPS to consider opening CPUs as replacements for post offices that it closes.pared down its plans to close post offices by instead reducing their hours, to the extent that USPS closes post offices in the future, this requirement may put more pressure on USPS to open more CPUs. Furthermore, some district retail managers we spoke with s"
1764,"aid that they see a potentially larger role for CPUs in the future as USPS transforms its traditional retail network. However, we identified a number of challenges USPS might face in its future use of CPUs: Limited Potential Business Partners. USPS may face limited private interest in opening CPUs in certain areas. USPS planned to open thousands of Village Post Offices, which, similar to CPUs, involve partnerships with private businesses, by the end of 2012. However, as of August 20, 2012, USPS has opened o"
1765,"nly 41 Village Post Offices in part because of a lack of interested private parties. USPS officials said that this lack of interested parties is because in some rural areas, there may not be any businesses to host a Village Post Offices and in other rural areas, businesses may not want to partner with USPS in what some communities may perceive as a reduction in services they receive. In addition, some district retail managers told us there are a number of reasons that some interested businesses do not becom"
1766,"e CPUs, including financial instability and not wanting to meet the conditions of new CPU contracts, such as space requirements or prohibiting sales of competitors’ products and services. As a result, district staff are not always able to open as many new CPUs as they would like. Limited Staff Resources in USPS Districts. As we have previously mentioned, local and district-level USPS officials identify and justify the need for new CPUs, determining when and where to approach businesses as potential CPU part"
1767,"ners. Some USPS district retail managers we spoke with told us that although there are unmet needs for CPUs in their districts, compared to prior years, they now have fewer staff and less time to seek out opportunities for new CPUs. Given the resources required to seek opportunities and open new CPUs, USPS may be unable to meet all local needs for CPUs with existing resources. Risk of Service Disruptions from CPU Closures. Because CPUs can close at any time—unlike post offices, which must undergo a lengthy "
1768,"review process including a public comment period prior to closure—there is a risk in relying on CPUs to provide service, especially in underserved areas where there may be a limited number of potential CPU partners and other post office alternatives. As discussed earlier, CPU operators can decide to close their CPUs for a variety of reasons. Although CPU contracts require CPUs to provide 120 days notice to USPS before closing, some district retail managers we spoke with said that CPU operators often provide"
1769," much less notice, often as little as one week. Given the other challenges in opening new CPUs, USPS may have trouble replacing the lost service from unexpectedly closed CPUs. CPUs can play an important role in helping USPS provide universal service as it cuts costs to improve its financial condition—at times two conflicting goals. CPUs can help USPS reach customers in convenient locations during convenient hours at a potentially lower cost than through post offices. USPS data show that an increasing propor"
1770,"tion of retail revenue is generated through channels other than post offices, which indicates a growing level of customer acceptance of these non-traditional means of accessing postal services. While USPS plans to continue to use CPUs as one alternative to post offices to fill local needs for postal services, it is exploring planned national and regional partnerships to more broadly expand access to convenient retail alternatives nation-wide. As USPS develops these regional and national partnerships, reduce"
1771,"s hours of service at many post offices, and continues to use CPUs to fill specific local needs, it is important for USPS to consider CPUs’ continuing role in USPS’s evolving national retail network. We recommended in November 2011 that USPS develop and implement a retail network strategy that would address USPS customer access to both post offices and retail alternatives.officials told us that as of July 2012, the agency is in the process of finalizing this retail strategy. We continue to believe, as we st"
1772,"ated in November 2011, that it is important that such a strategy discuss how USPS plans to increase its use of retail alternatives—including CPUs— while considering significant changes to its network of post offices and the means through which it provides access to USPS’s customers. As USPS continues to develop this retail strategy, we believe that USPS can capitalize on growing acceptance of retail alternatives by using information about CPUs to inform its decisions. For example, by considering factors, su"
1773,"ch as the distance of CPUs to existing post offices, CPU hours and days of service, and USPS’s costs of compensating CPUs, USPS could better inform its retail strategy in order to make better strategic use of CPUs in its future retail network, which will likely include reduced hours at thousands of post offices. We provided a draft of this report to USPS for review and comment. USPS provided a written response (see appendix III) in which they discussed USPS’s efforts beyond CPUs to provide customers with su"
1774,"fficient and convenient access to its products and services through other types of partnerships and alternatives to post offices. We are sending copies of this report to the appropriate congressional committees, the Postmaster General, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions regarding this report, please contact me at (202) 512-2834 or stjamesl@gao.gov. Contact points for our Office"
1775,"s of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. To determine how contract postal units (CPUs) supplement the U.S. Postal Service’s (USPS’s) network of post offices, we analyzed data from USPS’s contract postal unit technology (CPUT) database. This database contains information for individual CPUs, including location, contract number, revenues, compensation, CPU contract type (fixed-pr"
1776,"ice or performance-based), contract termination dates, and if the CPU is in active service. Location data for each CPU in CPUT includes a physical address including city, state, and ZIP+4 code. USPS provided us these data on March 30, 2012. In determining the number of active CPUs, we encountered some duplicate CPU records. To avoid double counting, we used the CPU contract number to keep the record for only the oldest contact associated with each CPU. Based on the physical address, including ZIP+4 code, we"
1777," determined the location type for each CPU by using the Department of Agriculture’s Economic Research Service’s Rural-Urban Commuting Area (RUCA) codes. RUCA codes classify a given location based on patterns of urbanization, population density, and daily commuting patterns. We classified CPU locations as one of four types: urban, suburban, large-town rural, and small-town rural. We also determined how many CPUs were located in each state using the state data in CPUT. Based on data from CPUT, we identified w"
1778,"hich CPUs closed from fiscal years 2007 to 2011. We identified which CPUs opened during this time period based on contract start dates from USPS’s Contract Authoring Management System (CAMS). Contract start dates generally do not match the date that a CPU opens because, according to USPS officials, it usually takes 4 to 6 months for a CPU to open after USPS initiates a solicitation. We determined this date to be a reasonable approximation of when a CPU opens. We determined the number of CPUs that opened or "
1779,"closed in each fiscal year by counting the number of contract start dates and closure dates for each year. In addition, we obtained data from USPS’s facilities database (FDB) on all post office locations including physical street address, city, state, and ZIP+4. USPS provided us these data on December 19, 2011. We determined the distance between the list of active CPUs as of March 30, 2012, and post offices as of December 19, 2011, using the latitude and longitude for each CPU and each post office and measu"
1780,"ring the straight- line distance between the two points. We then determined which post office was closest to each CPU and by what distance. We also counted the number of post offices in each state and, along with using data on the number of CPUs in each state, to determine the number of CPUs per 100 post offices in each state. We analyzed FDB data to determine the number of hours of service per day and per week for each CPU and post office, and how many locations are open at certain times, such as on Sunday"
1781,"s. USPS provided these data for CPUs on June 7, 2012, and for post offices on June 27, 2012. We also visited 10 CPUs in the following regions: Chicago, Illinois; Dallas- Fort Worth, Texas; Southern California; and Washington, D.C. We selected those regions and the 10 CPUs to ensure diversity in geographic location, location type (urban, suburban, and rural), CPU revenue levels, and type of CPU contract (fixed-price and performance-based). We also selected locations close to GAO office locations in order to "
1782,"minimize the use of travel funds by GAO staff on this engagement. During our visits, we interviewed each CPU operator. We also interviewed district retail managers in each of the USPS districts responsible for managing these CPUs. During these interviews as well as interviews with USPS headquarters staff in charge of managing the CPU program, we discussed the reasons for and benefits from using CPUs, the reasons why CPUs have closed, and factors that affect CPU revenues and compensation. We also reviewed GA"
1783,"O reports and USPS documents detailing the CPU program, including USPS guidance on CPUs and standard CPU contracts. To determine USPS revenue from CPUs and USPS’s compensation to them from fiscal years 2007 to 2011, we analyzed data from CPUT. We encountered numerous duplicate records for a single CPU address. To avoid double counting, we merged all financial data for a given contract number into a single record by summing up data for each unique contract number. As CPUT stores CPU revenue and compensation "
1784,"data on a monthly basis, we summed monthly data to determine the total revenues and USPS compensation for each CPU for each fiscal year. We determined the amount of revenues USPS retains after compensating CPUs in each fiscal year by subtracting CPU compensation from CPU revenues and dividing that by CPU revenues. Finally, we linked data from CAMS on contract start dates to this financial data from CPUT by using the contract number for each CPU. As a result, we were able to determine the revenues and USPS c"
1785,"ompensation to each CPU for CPUs that opened in each fiscal year. We did the same for closed CPUs by using CPU closure dates included in CPUT. We assessed the reliability of each of the data sources we used by interviewing responsible USPS officials about procedures for entering and maintaining the data and verifying their accuracy. We manually reviewed all data provided by USPS for any obvious outlying data. After reviewing this information, we determined that the CPUT data were sufficiently reliable for e"
1786,"valuating revenue and compensation trends, closure dates, and CPU locations. We did find that CPUT reported outlying data on revenues in certain months for four CPUs in fiscal year 2007. To address these outlying data, we averaged the revenues for each of the four CPU in the other months, where reported revenues seemed normal, and assumed that the CPU earned the average level of revenue in the outlying months. We determined that the CAMS data were sufficiently reliable for evaluating CPU start dates. We det"
1787,"ermined that the FDB post office and CPU hours-of-service data were sufficiently reliable for overall comparison purposes. As previously stated, the FDB included hours-of- service data for 3,320 CPUs as of June 27, 2012, 6.3 percent less than 3,542 CPUs indicated by our analysis of CPUT as of March 30, 2012. In discussing the discrepancy with USPS officials, we determined that there was no indication that the CPU records missing from the FDB differed from the general population and were therefore unlikely t"
1788,"o affect the outcome of our analysis. To determine challenges USPS might face if it increases its use of CPUs, we reviewed relevant legislation, USPS documents related to managing CPUs, prior GAO reports, and USPS Office of Inspector General reports. We also interviewed USPS officials responsible for implementing the CPU program, CPU operators, and USPS district retail managers at the sites and districts discussed earlier regarding current CPU operations and challenges the CPU program might face going forwa"
1789,"rd. Table 5 provides the number of Contract Postal Units (CPUs) and post offices in each state, as well as the number of CPUs per 100 post offices in each state as a measure of how reliant each state is on CPUs for providing access to postal services. Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov. In addition to the individual named above, Heather Halliwell, Assistant Director; Patrick Dudley; John Mingus; Jaclyn Nelson; Joshua Ormond; Matthew Rosenberg; Amy Rosewarne; Kelly Rubin; and Crystal Wesco"
1790, made key contributions to this report.
1791,"The voucher program is not an entitlement program. As a result, the amount of budget authority HUD requests and Congress provides through the annual appropriations process limits the number of households that the program can assist. Historically, appropriations for the voucher program (or for other federal housing programs) have not been sufficient to assist all households that HUD has identified as having worst-case housing needs—that is, unassisted households with very low incomes that pay more than 50 pe"
1792,"rcent of their incomes in rent, live in substandard housing, or both. In 2009, 41 percent of the more than 17 million very low-income renters had worst-case housing needs, according to HUD. The primary problem affecting these renters was rent burden— approximately 97 percent paid more than 50 percent of their incomes in rent. To be eligible for assistance, in general, households must have very-low incomes—not exceeding 50 percent of the area median income, as determined by HUD. Under the Quality Housing and"
1793," Work Responsibility Act of 1998 (P.L. 105-276), at least 75 percent of new voucher program participants must have extremely low incomes—not exceeding 30 percent of the area median income. Under the voucher program, an assisted household pays 30 percent of its monthly adjusted income in rent; the remainder of the rent is paid through a HUD-subsidized “voucher,” which generally is equal to the difference between (1) the lesser of the unit’s gross rent (generally, rent plus utilities) or a local “payment stan"
1794,"dard” and (2) the household’s payment. The payment standard is based on the HUD-determined fair market rent for the locality, which generally equals the 40th percentile of market rents (including utilities) recent movers paid for standard-quality units. HUD annually estimates fair market rents for metropolitan and nonmetropolitan areas. Housing agencies—the state and local agencies that administer the voucher program on HUD’s behalf—can set payment standards (that is, pay subsidies) between 90 percent and 1"
1795,"10 percent of the fair market rent for their areas. By determining fair market rents and setting payment standards at a rate sufficient to provide acceptable choices for voucher program participants, HUD and housing agencies essentially set the upper and lower bounds on the cost of typical, standard-quality units that voucher holders rent. Participants in the voucher program can choose to live in units with gross rents that are higher than the payment standard, but they must pay the full difference between "
1796,"the unit’s gross rent and the payment standard, plus 30 percent of their income. In 2011, more than 2,400 housing agencies administered more than 2.2 million vouchers—their programs ranged in size from more than 96,000 vouchers to fewer than 5. Housing agencies are responsible for inspecting units, ensuring that rents are reasonable, determining households’ eligibility, calculating and periodically re-determining households’ incomes and rental payments, and making subsidy payments to landlords.functions, su"
1797,"ch as establishing and maintaining a waiting list, processing tenant moves, conducting landlord and tenant outreach, and reporting to HUD. HUD disburses appropriated funds to housing agencies for subsidy payments to landlords and administrative expenses. In addition, housing agencies perform basic program Each year, Congress appropriates funding for subsidies for renewal (existing) and incremental (new) vouchers and administrative expenses. As part of the appropriations process, Congress outlines a formula "
1798,"that determines the amount of renewal funding for which housing agencies are eligible (“eligible amount”). However, the amount Congress appropriates to the voucher program may not equal the total amount for which housing agencies are eligible under the formula. HUD is responsible for allocating program funding (“appropriated amount”) among housing agencies based on their eligible amounts. To the extent that the appropriated amount does not fully fund housing agencies at their eligible amounts, HUD reduces t"
1799,"he funding housing agencies receive to fit within the appropriated amount. Housing agencies are expected to use all the subsidy funding HUD allocates for authorized program expenses (including subsidy and utility payments). However, if housing agencies’ allocated amounts exceed the total cost of their program expenses in a given year, they must maintain their unused subsidy funds in NRA (reserve) accounts. Housing agencies may use their NRA balances (subsidy reserves) to pay for authorized program activitie"
1800,"s in subsequent years. Incremental vouchers include various special-purpose vouchers. Congress appropriates funding for these vouchers in separate line items in the budget, which distinguish them from renewal vouchers. Housing agencies must apply to HUD to receive allocations of and funding for the special-purpose vouchers, which, as described in table 1, include Enhanced, Tenant Protection, Family Unification Program, Mainstream, Nonelderly Disabled, and Veteran Affairs Supportive Housing vouchers. These v"
1801,"ouchers may have different or additional eligibility and operational requirements than renewal vouchers. After the first year, special-purpose vouchers generally become renewal vouchers for purposes of determining funding eligibility in the next year, but HUD may require that housing agencies separately track them as special-purpose vouchers. Congress appropriates funding for administrative fees, and the formula used to calculate the administrative fee generally is based on fair market rents, adjusted annua"
1802,"lly to reflect changes in wage rates. HUD pays fees to housing agencies based on the number of units leased (vouchers used) as of the first of each month. HUD pays one (higher) rate for the first 600 units under lease and a second (lower) rate for the remaining units. As with subsidy funding, if the appropriated amount does not fully cover housing agencies’ fees as determined by the formula, HUD will reduce the amount of funding each housing agency receives to fit within the appropriated amount. Since fisca"
1803,"l year 2006, administrative fees have accounted for less than 10 percent of total voucher program funding. Some housing agencies that administer vouchers can participate in and receive funding under MTW, a demonstration program authorized by Congress in 1996 and implemented by HUD in 1999. MTW allows participating housing agencies to test locally designed housing and self- sufficiency initiatives in the voucher and other federal housing programs. Housing agencies may waive certain statutes and HUD regulatio"
1804,"ns to achieve three objectives: (1) reduce cost and achieve cost-effectiveness in federal expenditures; (2) give incentives to families with children whose heads of household are working, seeking work, or in job training, educational or other programs that assist in obtaining employment and becoming economically self-sufficient; and (3) increase housing choices for low-income families. MTW agencies also have “funding flexibility”— they may use their program-related funding (including voucher subsidy funding"
1805,") and administrative fees for any purpose (programmatic or administrative). Currently, 35 housing agencies participate in MTW— according to HUD, they administer about 15 percent of all vouchers and account for approximately 16 percent of all subsidy and administrative fee funding on an annual basis. Congress and HUD fund MTW agencies pursuant to their MTW agreements; however, the agencies could have subsidies and administrative fees reduced if the amounts Congress appropriated were less than the housing age"
1806,"ncies’ eligible amounts under the formulas. Several factors affected voucher program costs (as measured through congressional appropriations, HUD outlays, and housing agencies’ expenditures) and in some cases contributed to cost increases from 2003 through 2010, including: (1) increases in subsidy costs for existing vouchers, (2) subsidy costs for new vouchers, and (3) administrative fees paid to housing agencies. In addition to these factors, the design and goals of the voucher program, such as requirement"
1807,"s to target assistance to certain households, contributed to overall program costs. Despite increases in the cost of the program from 2003 through 2010, our work and other published studies have found that vouchers generally have been more cost-effective in providing housing assistance than federal housing production programs designed to add to or rehabilitate the low- income housing stock. In addition, Congress and HUD have taken several steps to manage cost increases over the period. Several factors affec"
1808,"ted increases in congressional appropriations, HUD outlays, and housing agencies’ expenditures in the voucher program from 2003 through 2010. As shown in table 2, from fiscal years 2005 through 2011, voucher program appropriations increased from approximately $14.8 billion to $18.4 billion (approximately 4 percent annually). Over the same period, outlays—funding HUD disburses to housing agencies for program expenses—increased from $10 billion to $18.6 billion (approximately 11 percent annually). Information"
1809," on appropriations and outlays for the voucher program were not available for 2003 and 2004 because HUD did not report this information separately from other rental assistance programs. Once disbursed, housing agencies expend program funds on activities such as making subsidy payments to landlords and for administrative expenses. As shown in figure 1, from 2003 through 2010, housing agencies’ expenditures increased from approximately $11.7 billion to $15.1 billion (about 4 percent annually). Expenditure dat"
1810,"a for 2011 were not available at the time we were conducting our review. HUD’s outlays and housing agencies’ expenditures can differ somewhat in any given year because of differences in the timing of payments and fluctuations in the rate of funding utilization—that is, some housing agencies may not use all of their apportioned funds and may build reserves. Later in this report we discuss the extent to which housing agencies have accumulated subsidy reserves and steps Congress and HUD could take to reduce fu"
1811,"ture budget requests or reallocate the reserve funds. As shown in table 3, housing agencies’ expenditures increased by a total of about 28.9 percent in nominal dollars from 2003 through 2010. Once adjusted for inflation, housing agencies’ expenditures increased by a smaller rate, approximately 8.8 percent. (We evaluated expenditure after adjusting for the general effects of inflation using a broad base index of price changes for all goods and services. We expressed expenditures in 2011 constant dollars, the"
1812," latest year for which complete data on price changes are available.) In the sections below, we discuss how (1) increases in subsidy costs for existing vouchers, (2) subsidy costs for new vouchers, and (3) administrative fees paid each contributed to the nominal and constant dollar increases in voucher program costs from 2003 through 2010. As shown in table 3 above, in nominal terms, subsidy costs for existing vouchers grew by of 19.5 percent, accounting for a majority of the increase in housing agencies’ e"
1813,"xpenditures from 2003 through 2010. After adjusting for inflation, subsidy costs for existing vouchers grew by a small amount (2.4 percent) and were a smaller contributor to the total increase in expenditures. Two factors generally explain the remaining increase in expenditures for existing vouchers after adjusting for inflation—changes in market rents and household incomes. As previously discussed, the subsidies HUD and housing agencies pay to landlords on behalf of assisted households are based on market "
1814,"rents and household incomes. As a result, changes in market rents and household incomes affect subsidy cost. As shown in figure 2, in 2011 constant dollars, median gross rents for voucher-assisted households increased from about $850 to $880 (or 4 percent) over the period. Growth in rents outpaced the rate of general inflation. As rents increase, HUD and housing agencies must pay larger subsidies to cover the increases, assuming no changes to household incomes or contributions to rent. Housing agencies we c"
1815,"ontacted reported that this increase in rental prices can be explained, in part, by increased demand and competition for affordable housing—for example, some noted that the number of renters has increased as a result of an increase in the number of foreclosures in recent years. National vacancy rates—an indicator of the relative tightness of the rental market—decreased from 2009 to 2010. Further, as figure 3 shows, in 2011 constant dollars, the median annual income of voucher-assisted households contracted "
1816,"from about $11,000 to $10,700 (a decrease of about 3 percent) from 2003 through 2010. Over the period, incomes of assisted households did not keep pace with the rate of general inflation. As incomes decline, voucher-assisted households are paying less towards rent, requiring larger subsidies to cover the difference between the rents and tenant payments. More than half of the housing agencies we contacted reported that job loss and wage reductions contributed to in their subsidy costs over the period of our "
1817,"analysis. One housing agency in California we contacted also reported that state cuts to social welfare programs, including those that provide direct cash assistance, lowered incomes for some households and therefore have increased subsidy costs. HUD estimated that reductions in federal welfare and disability income payments have resulted in monthly subsidy payment increases of $17 and $5, respectively, for households that receive those forms of assistance. The increase in the number of households assisted "
1818,"with vouchers (that is, subsidy costs for new vouchers) from 2003 through 2010 was another important contributor to the program’s rising costs. As table 3 shows, in nominal dollars, subsidy costs for new vouchers grew by 5.3 percent over the period. After adjusting for inflation, the addition of new vouchers grew by 4.4 percent, accounting for half of the overall increase in housing agencies’ expenditures over the period. Congress increased the size of the program through the addition of special-purpose vou"
1819,"chers such as Enhanced, Tenant Protection, Family Unification Program, Mainstream, Nonelderly Disabled, and Veteran Affairs Supportive Housing (see table 1 for a description of each of these types of vouchers). HUD was unable to provide the data necessary to determine the extent to which each type of voucher contributed to the growth in program expenditures during this period. Finally, growth in the fees paid to housing agencies to administer the voucher program grew about 4.1 percent in nominal dollars fro"
1820,"m 2003 through 2010 (see table 3). In constant dollar terms, administrative fees grew by 2 percent over the period. The formula HUD uses to pay administrative fees to housing agencies is not directly tied to the cost of performing the administrative tasks the program requires. Moreover, the fees HUD has paid housing agencies in recent years have been less than the amount for which they were eligible under the formula because of reductions in appropriations. Housing agencies we contacted noted that the cost "
1821,"of doing business increased over the period of our analysis. For example, several noted that inspection costs have increased with the growing cost of gasoline, especially for housing agencies that administer vouchers over large geographic areas. Others noted that policies such as portability—the ability of voucher holders to use their vouchers outside of the jurisdiction of the housing agency that issued the voucher—increased staff costs because they have been increasingly complex and difficult to implement"
1822," and monitor. Representatives of housing agencies with whom we spoke said that they have frozen salaries and hiring and increased staff hours, among other things, to cope with reductions in administrative fees. The design and goals of the voucher program contribute to the overall expense of the voucher program, although it is difficult to quantify how much of the cost increase from 2003 through 2010 was due to design issues. Specifically, the voucher program has various features that are intended to target "
1823,"or give priority to the poorest households, and serving these households requires greater subsidies. Long-standing federal policy generally has required household contributions to rent to be based on a fixed percentage of household income, which can be reduced through income exclusions and deductions for certain expenses, such as child care and health services. Further, housing agencies are required to lease 75 percent of their new vouchers to extremely low-income households. In addition, housing agencies a"
1824,"lso may establish local preferences for selecting applicants from their waiting lists. Like the income standards and targeting requirements, these preferences have a direct impact on subsidy costs—for example, the Boston Housing Authority has established preferences designed to assist “hard-to-house” individuals and families, including those experiencing homelessness. According to housing agency officials, because these individuals and families have little to no income, the agency’s annual per-unit subsidy "
1825,"costs are higher than they would be absent the preferences. While these types of requirements help address Congress’s and HUD’s goal of serving the neediest households, HUD officials noted that such requirements make the program more expensive than it would otherwise be if housing agencies had more flexibility to serve households with a range of incomes. Similarly, program goals, such as HUD’s deconcentration policy also can affect program costs. Specifically, this policy encourages assisted households to r"
1826,"ent units in low-poverty neighborhoods, which typically are more expensive. According to HUD officials, the deconcentration goal increases subsidy costs for housing agencies and overall costs for the department because, as previously discussed, if rents increase, but household contributions to rent remain constant, HUD and housing agencies must make up for the increased rent burden in the form of higher subsidy payments. Despite increases in the cost of the voucher program from 2003 through 2010, our work a"
1827,"nd other published studies consistently have found that vouchers generally have been more cost-effective in providing housing assistance than federal housing production programs designed to add to or rehabilitate the low-income housing stock. Our 2002 report provides the most recent original estimates of the cost differences between the voucher program and certain existing production programs. We estimated that, for units with the same number of bedrooms in the same general location, the production programs"
1828," cost more than housing vouchers. In metropolitan areas, the average total 30-year costs of the production programs ranged from 8 to 19 percent greater for one- bedroom units. For two-bedroom units, the average total 30-year costs ranged from 6 percent to 14 percent greater. The cost advantage of the voucher over the production programs was likely understated because other subsidies—such as property tax abatements—and potential underfunding of reserves to cover expected capital improvements over the 30-year"
1829," cost period were not reflected in the cost estimates for the production programs. Much of the research over the past several decades reached similar conclusions. For example, in 2000, HUD found that average ongoing costs per occupied unit of public housing were 8 to 19 percent higher than voucher subsidy costs. In 1982, the President’s Commission on Housing found that subsidy costs for new construction were almost twice as much as subsidy costs for existing housing. The commission’s finding set the stage f"
1830,"or the eventual shift from production programs to vouchers as the primary means through which the federal government provides rental housing assistance. Notwithstanding the cost-effectiveness of vouchers relative to other forms of rental housing assistance, many of these studies noted the benefits that production programs can and have conferred on low-income households and communities such as supportive services for the elderly and persons with disabilities. The voucher program typically does not confer suc"
1831,"h benefits. In addition, research has indicated that some markets may have structural issues. For example, regulatory restrictions that reduce the supply of housing (and thus, opportunities for households to use vouchers) make production programs more effective tools for providing affordable housing than vouchers in those locations. And our work found that voucher holders sometimes are unsuccessful in using their vouchers, either because they cannot find units that meet their needs or because landlords are "
1832,"unwilling to accept their vouchers. These households may benefit more from production programs, which can better guarantee access to affordable housing, than vouchers. In light of increasing program costs, Congress and HUD have taken several steps to limit the extent of increases from fiscal years 2003 through 2011, while maintaining assistance for existing program participants. These steps include legislative changes to the formula HUD uses to calculate and distribute subsidy funding to housing agencies, a"
1833,"s well as continued efforts to reduce improper rental assistance payments. Before fiscal year 2003, Congress and HUD funded housing agencies’ renewal needs based on their average per-voucher costs from the previous year, adjusted for inflation, and multiplied by the number of authorized vouchers. Meaning, housing agencies received funding for all of their authorized vouchers, regardless of whether they leased all of those vouchers. In addition, prior to 2003, HUD provided each housing agency with reserve fu"
1834,"nding equal to one month of its subsidy funding— housing agencies could use their reserves to fund new vouchers (a practiced called “maximized leasing”). Beginning in fiscal year 2003, Congress changed the voucher program’s funding formula so that it would provide housing agencies with renewal funding that was tied to housing agencies’ actual costs and leasing rates rather than the number of authorized vouchers (whether used or unused). Starting in fiscal year 2003, Congress stopped providing funding for vo"
1835,"uchers that housing agencies issued in excess of their authorized levels, thus prohibiting over- (or maximized) leasing. Congress generally based voucher program appropriations for fiscal year 2003 and thereafter on the number of leased vouchers (not to exceed authorized levels) and actual cost data that housing agencies reported to HUD. Congress discontinued the practice of providing reserve funding for housing agencies and instead started reserving a portion of renewal funding to make adjustments to housi"
1836,"ng agencies’ allocations for contingencies such as increased leasing rates or certain unforeseen costs. In more recent years, Congress has provided HUD appropriations that did not fully fund housing agencies at their eligible amounts under the funding formula. In every year since 2004, Congress has provided administrative fees that were at least 6 percent lower than the 2003 rate. Finally, as shown in table 4, in fiscal years 2008 and 2009, Congress rescinded a portion of housing agencies’ subsidy reserves "
1837,"and directed HUD, in total, to offset almost $1.5 billion from 1,605 housing agencies). HUD has taken steps to reduce improper payments in the voucher program. According to HUD reports, the department has reduced gross improper payments (subsidy over- and underpayments) resulting from program administrator errors (that is, a housing agency’s failure to properly apply income exclusions and deductions and correctly determine income, rent, and subsidy levels) by almost 60 percent, from $1.1 billion in fiscal y"
1838,"ear 2000 to $440 million in fiscal year 2009. In addition, HUD has provided housing agencies with fraud detection tools—such as the Enterprise Income Verification system, which makes income and wage data available to housing agencies—and realized continued reductions in improper payments as a result of these tools. According to HUD, from fiscal year 2006 through 2009, the department reduced gross improper payments resulting from errors in reported tenant income—including the tenant’s failure to properly dis"
1839,"close all income sources—by approximately 37 percent, from $193 million to $121 million. These efforts do not necessarily reduce the cost of assisting households, but they help increase the program’s efficiency by helping ensure that an appropriate level of assistance is provided and potentially serving more households with appropriated funds. HUD has requested the authority to implement program reforms that could have had the potential to decrease voucher program subsidy costs, administrative costs, or bot"
1840,"h. For example, as shown in table 5, in its fiscal year 2012 budget request, HUD proposed implementing a rent demonstration to test alternatives to the current rent structure that could result in assisted households paying more in rent. As we discuss later in this report, changes to the way assisted household contributions to rent are calculated could result in cost savings to the program. Although Congress did not grant HUD the authority to implement these voucher-related initiatives, HUD recently initiate"
1841,"d administrative changes to its housing agency consortium rule, a first step in the effort to encourage housing agencies to consolidate as envisioned by the department’s 2011 Transforming Rental Assistance proposal. The revised rule would treat participating housing agencies in a consortium as one entity. HUD’s current regulation requires that consortium members be treated separately for oversight, reporting—as a result, few housing agencies have formed consortiums since 1998. Finally, in 2010, HUD began re"
1842,"viewing the administrative fee structure for the voucher program. The study aims to ascertain how much it costs a housing agency to run an efficient voucher program. HUD plans to use the results to help develop a new formula for allocating administrative fees. Although not enough time has passed to determine whether HUD’s findings will positively or negatively affect costs in the voucher program, this study represents a positive effort on HUD’s part to more clearly understand administrative costs in the vou"
1843,"cher program and identify ways to improve efficiency. According to HUD officials, HUD intends to use this study as a basis for future legislative proposals, which could have implications for the cost of administering the program. Finally, in 2009, HUD developed a tool designed to help HUD staff and housing agencies forecast voucher and budget utilization (that is, the percentage of budget allocation and percentage of authorized vouchers they are using) for up to 3 years. Department officials credit the tool"
1844," with increasing voucher program efficiency; however, HUD and housing agencies’ use of the forecasting tool has not reduced overall costs in the voucher program. We identified several options that if implemented effectively, could reduce voucher program costs (by approximately of $2 billion annually, based on our estimates) or allow housing agencies to assist additional households if Congress chose to reinvest the costs savings in the program. First, improved information on the level of subsidy reserve fund"
1845,"ing housing agencies should maintain could aid budget decisions and reduce the need for new appropriations. ; Second, agency officials have noted that the voucher program’s requirements are complex and burdensome and streamlining these requirements could reduce costs. Finally, changes to the calculation of voucher-assisted households’ payments toward rent— known as rent reform—and consolidating voucher administration under fewer housing agencies’ could also reduce program costs Each of these options would r"
1846,"equire congressional action to implement, and we discuss below possible steps that HUD could take to facilitate the implementation of some of them. Rent reform and administrative consolidation also involve difficult policy decisions that will affect some of the most vulnerable members of the population and alter long-standing program priorities and practices. Housing agencies have accumulated subsidy reserves (unspent funds) that Congress could use to (1) reduce program appropriations (through a rescission "
1847,"and offset) and potentially meet other federal needs or (2) direct HUD to assist additional households. As previously discussed, HUD allocates subsidy funding to housing agencies based on the formula Congress establishes in annual appropriations legislation. In recent years, the formula has specified that HUD allocate funds based on housing agencies’ leasing rates and subsidy costs from the prior year. In any given year, housing agencies may under-lease or receive more funding than they can spend. Unless th"
1848,"ese funds are rescinded and offset, housing agencies can keep their unused subsidy funding in reserve accounts and spend these funds on authorized program expenses (including rent subsidies and utility allowance payments) in future years. Over time, large sums of money can accumulate. As of September 30, 2011, 2,200 housing agencies had more than $1.5 billion in subsidy reserves, which includes unspent subsidy funding from prior years and certain set-aside funding and funding for new vouchers where insuffic"
1849,"ient time has passed for expenditure. In addition, beginning in 2012, HUD implemented changes to how it disburses subsidy funds to housing agencies. As a result of these changes, although housing agencies may continue to accumulate subsidy reserves, HUD, rather than the housing agencies, holds these reserves. This change also will allow HUD to better determine the extent of the reserves housing agencies have accumulated. HUD officials told us that the department believes that it requires specific authority "
1850,"from Congress to reduce (offset) future voucher program budget requests by all or a portion of housing agencies’ subsidy reserves. Although HUD provides quarterly reports to the Congressional Budget Office on the extent of housing agencies’ reserves and has requested the authority to offset and in some cases, redistribute “excess” reserves (that is, reserves beyond what is needed to fund contingencies, such as cost increases from rising rental rates or falling tenant incomes, as defined by HUD), the departm"
1851,"ent has not developed specific or consistent criteria defining what constitutes excess reserves or how it would redistribute funding among housing agencies. For example, in its fiscal year 2012 voucher program budget proposal, HUD requested the authority to offset excess reserves. According to the proposal, if given this authority, the department first would reallocate the funds to housing agencies to make up any difference between the appropriated amount and the total funding for which housing agencies wer"
1852,"e eligible based on the renewal formula and then redistribute any remaining funds to housing agencies based on “need and performance.” However, the proposal did not specify how HUD would calculate excess subsidy reserves or a detailed methodology for redistributing the funds, and HUD officials acknowledged that redistributing excess funds among housing agencies will increase the size and the cost of the program over time because if housing agencies are able to lease more vouchers with these funds, Congress "
1853,"will have to appropriate more funding for renewal vouchers in subsequent years. Because housing agencies’ reserves are resources that HUD has disbursed and expended, HUD effectively recaptures any excess reserves by reducing or offsetting the housing agencies’ funding allocation in another year. percent, respectively, of housing agencies’ allocated amounts.HUD generally has excluded housing agencies with 250 and fewer vouchers from its proposed offsets. HUD officials told us that they have been considering "
1854,"lowering this threshold or developing a sliding scale methodology (generally based on size) to determine the amount of reserves housing agencies should maintain and the amount of excess reserves that HUD would propose offsetting and redistributing. In past work, we highlighted the importance of HUD’s clearly identifying the existence and amount of unexpended subsidy funds (reserves) so that Congress could have confidence in the department’s capacity to effectively manage the funding appropriated for the vou"
1855,"cher program. We concluded that HUD should take steps to ensure that reserves did not reach unreasonable levels—that is, in excess of what is prudently needed to address contingencies. More recently, we stated that agency reporting about key areas such as financial management or program reforms should competently inform congressional decision making, and agencies should engage Congress about how to present this information. While a reserve for contingencies is prudent, without clear and consistent criteria "
1856,"for determining what constitutes an appropriate level for housing agency reserves, it is difficult to judge how well HUD managed the funding Congress has provided for the voucher program. For example, as previously discussed, in fiscal years 2008 and 2009 Congress rescinded and directed HUD to offset excess subsidy reserves. However, as shown in table 6, the 2009 rescission and offset were too large for 288 (about 18 percent) of the 1,605 housing agencies that were subject to the 2008 and 2009 rescissions a"
1857,"nd offsets to absorb. Congress had to provide these 288 and an additional 152 housing agencies with supplemental funding to prevent the termination of voucher assistance. Similarly, in the fiscal year 2012 budget, Congress rescinded and directed HUD to offset housing agencies’ subsidy reserves by $650 million. Based on our analysis, as of September 30, 2011, housing agencies had approximately $606 million in excess reserves, approximately $44 million short of the $650 million rescission amount. Our analysis"
1858," assumed that housing agencies retained in reserves the equivalent of one month or about 8.5 percent of their annual funding allocations—HUD’s current thinking on the appropriate level of reserves—and also excluded certain set-aside funding and funding for new vouchers. As a result, to meet the $650 million rescission goal, HUD would have to offset more funds from housing agencies’ reserves than would be required under a one-month reserve criterion, potentially resulting in some housing agencies holding les"
1859,"s than a one month reserve for contingencies. HUD officials have noted that certain requirements for administering the voucher program have grown burdensome and costly and could be streamlined. In May 2010, the Secretary of HUD testified that the department’s rental assistance programs “desperately need simplification.” He further stated that HUD must streamline and simplify its programs so that they are easier for families to access, less costly to operate, and easier to administer at the local level. For "
1860,"example, under current rules, housing agencies must re-examine household income and composition at least annually and adopt policies describing when interim re-examinations will be conducted. HUD has expressed support for extending the time between re-examination of income for households on fixed incomes from 1 to 3 years and the time between unit inspections from 1 to 2 years—according to one program administrator that manages voucher programs for five housing agencies, annual re- examinations and inspecti"
1861,"ons account for more than 50 percent of administrative costs in the voucher programs the agency administers. However, overall data are not available on the actual costs of specific administrative activities, such as annual income re-examinations and inspections, and how they vary across housing agencies. To help address this lack of information, HUD has initiated a study to determine (1) what constitutes an efficient voucher program, (2) what a realistic expectation would be for what a housing agency should"
1862," be doing to run an efficient program, (3) how much it costs to run an efficient program, and (4) what an appropriate formula would be for allocating administrative fees to housing agencies operating voucher programs. According HUD, the study will allow the department to analyze all aspects of voucher program administration to reduce and simplify housing agencies’ administrative responsibilities. Such information will be important as congressional decision makers consider potential reforms of administrative"
1863," requirements. Although some of the changes needed to simplify and streamline the voucher program would require Congress to amend existing statutes, HUD’s administrative fee study and the experiences of housing agencies participating in MTW may provide insight into specific reforms to ease housing agencies’ reported administrative burden, as well as any potential cost savings resulting from these reforms. For example, according to a HUD report, while conclusive effects of many MTW reforms, particularly as t"
1864,"hey relate to assisted households, are not known, some of the demonstration’s most compelling results to date are those As shown in table 7, many of the related to housing agency operations. housing agencies that participate in the demonstration have implemented reforms that Congress has been considering through draft legislation, HUD has proposed in its fiscal year 2012 budget request, or both. According to the MTW agencies, many of these initiatives have resulted in both time and cost savings in their pro"
1865,"grams. In addition, and as previously discussed, the existing administrative fee formula generally is linked to fair market rents that are adjusted annually to reflect changes in wage rates, and HUD pays fees to housing agencies based on the number of units leased (vouchers used) as of the first of each month. This formula is not tied to the program’s current administrative costs or requirements. Further, housing agencies we contacted reported that the cost of administering the voucher program has been on t"
1866,"he rise, with contributing factors including higher postage, fuel, and employee health care costs, as well as increased reporting and other requirements. Without more specific information about potential reform options, policymakers will not be able to make an informed decision about how to reform the administrative fee formula and the activities required to administer an efficient voucher program. These efforts—using the administrative fee study to identify specific reforms and leveraging the experiences o"
1867,"f MTW agencies—are in line with the goals of the Government Performance and Results Act of 1993 (GPRA), which Congress enacted, in part, to inform its decision making by helping to ensure that agencies provide objective information on the relative effectiveness and efficiency of their programs and spending. Whether HUD’s study will yield findings that eventually will result in measureable cost or time savings is not clear. While reforming administrative requirements for the voucher programs could lead to in"
1868,"creased efficiencies and cost savings, the administrative fee paid to housing agencies is a relatively modest share of the program’s overall annual appropriations—approximately 9 percent in recent years. Nevertheless, such efforts will provide Congress with timely and meaningful information, which will enhance its ability to make decisions about funding for and requirements of the voucher program. If implemented, rent reform (that is, changes to the calculation of households’ payment toward rent) and the co"
1869,"nsolidation of voucher administration under fewer housing agencies could yield substantial cost savings, allow housing agencies to serve additional households if Congress were to reinvest annual cost savings in the voucher program, or both.cost savings or additional households served could be greater if both options were implemented. Further, implementation of these options may involve some trade-offs, including increased rent burdens for assisted households. Further, these reform options are not mutually e"
1870,"xclusive; that is, As previously discussed, under current program rules, an assisted household generally must contribute the greater of 30 percent of its monthly adjusted income or the housing-agency established minimum rent—up to $50—toward its monthly rent. HUD’s subsidy is the difference between (1) the lesser of the unit’s gross rent or the applicable payment standard and (2) the household’s rental payment. Therefore, as an assisted household’s income increases, HUD’s subsidy payment decreases, and vice"
1871," versa. Under existing program rules, a household could pay no rent—if the household has no monthly income after adjustments, the housing agency from which the household receives assistance does not have a minimum rent, or the household obtained a hardship exemption. However, such households make up a small share of all voucher-assisted households, with more than 99 percent making some dollar contributions to their rent. Because about 90 percent of voucher program funds are used to pay subsidies, decreasing"
1872," the level of subsidy for which households are eligible (or, alternatively stated, increasing the amount households must contribute toward rent) necessarily will yield the greatest costs savings for the program. We estimated the effect, both in terms of cost savings and additional households that could be served with those savings if Congress chose to reinvest the savings in the program, of several options including requiring assisted households to pay higher minimum rents; 35 percent of their adjusted inco"
1873,"me in rent; 30 percent of their gross income in rent (with no adjustments); a percentage of the applicable fair market rent. Using HUD data, we determined that each of these options could reduce the federal cost burden—in some cases, quite considerably—or if Congress chose to reinvest cost savings in the program, allow housing agencies to serve more households without additional funding. For example, as shown in table 8, increasing minimum rents to $300 would yield the greatest cost savings on an annual bas"
1874,"is—an estimated $1.8 billion—or allow housing agencies to serve the greatest number of additional households—an estimated 287,000. Requiring assisted households to pay 30 percent of their gross income in rent would yield the least savings for the voucher program and serve the fewest additional households. Further, HUD operates a number of other rental assistance programs where household subsidies are based on the same calculations as those for the voucher program. Implementation of these rent reform options"
1875," in its other rental assistance programs has the potential to create additional cost savings. These reform options could be implemented individually and some could be implemented together, depending on the objective policymakers were trying to achieve—such as maximizing cost savings, minimizing the impact on assisted households, or promoting work and self sufficiency among families with children (that is, nonelderly, nondisabled households). To illustrate, one housing agency in the MTW program put in place "
1876,"a rent structure that gradually increases household rents—from 27 percent of gross income in years 1 and 2, to the greater of $100 or 29 percent of gross income in years 3 and 4, and to the greater or $200 or 31 percent of gross income in all subsequent years—to promote self- sufficiency among all assisted households. Under this approach, our analysis showed that households receive more subsidy in the first 2 years, but pay more rent over time than under the current rent structure. In addition to estimating"
1877," the cost savings that could result from each of these rent reform options, we evaluated each option in terms of its effect on (1) changes in the rent paid by assisted households, (2) household attrition rates, (3) HUD’s goals of encouraging households to move to the neighborhoods of their choice (mobility) and discouraging households from choosing communities that have higher levels of poverty (deconcentration), (4) incentives to seek work, (5) program administration, and (6) housing agency and industry su"
1878,"pport. While each of these options has advantages over the current rent structure—they could reduce costs or create administrative efficiencies—each also involves trade-offs. Under each rent reform option, some households would have to pay more in rent than they currently pay. For example, as shown in table 9, if all households were required to pay at least $50 in rent per month, an estimated 36,000 households (2 percent) would experience an average increase of $31 in their monthly rent. HUD’s fiscal year 2"
1879,"013 budget request proposes increasing the minimum rent to $75 per month for all assisted household. Under this option, 207,000 households (11 percent) would experience an average increase of $27. Table 9 also shows options that change the formula for calculating the households’ payment toward rent. For example, setting the households rental payment to 30 percent of gross income (that is, without any deductions) would affect about 1,662,000 households (86 percent) and increase mean household rent by $27. In"
1880,"creasing minimum rents primarily would affect families with children that tend to report little or no income. Conversely, assisted elderly and disabled households almost always report income (most likely because they are on fixed incomes, like Social Security) and a large percentage of them already pay close to $200 in rent. On a programwide level, imposing minimum rents of $200 or less does not change the amount these households pay in rent, when considering all assisted households. Figure 4 shows the mean"
1881," change in all households’ monthly rent resulting from each of these rent reform options. Increases in monthly rental payments for elderly and disabled households begin to increase more significantly with a $200 minimum rent and under each of the rent formula changes. As a result, higher minimum rents or increases to the percentage of their incomes paid in rent will yield the greatest cost savings. For the rent formula change to 35 percent of adjusted income, the mean change in monthly rent generally would "
1882,"be similar across each household type. Figure 5 shows the mean change in monthly rent only for those households whose payments toward rent have changed as a result of each reform option. Among these affected households, changes in rental payments would be similar across household types for some of the rent structure options. For example, if households were required to pay a $75 minimum rent, mean rental payments would increase by $30 for disabled households (on the high end) and $24 for elderly, disabled ho"
1883,"useholds (on the low end). However, if households were required to pay a $200 or higher minimum rent, families with children again would experience higher mean changes in rent than disabled and elderly households. Also as shown in figure 5, under the option where the rental payments are based on 35 percent of the fair market rent, some households will have to pay more in monthly rent, while others will pay less. Further, a higher proportion of affected households will see an increase in their rental payment"
1884,"s. Specifically, of the approximately 1.9 million total households whose monthly rental payments would change under this option, about 61 percent (approximately 1.2 million households) would experience an increase in their monthly payments and about 39 percent (755,000 households) would experience a decrease. Requiring households’ rental payments to be based on a percentage of the applicable fair market rent rather than 30 percent of adjusted income primarily would affect households living in high-cost (mos"
1885,"tly urban) areas and large families, as well as those at the lower end of the income scale. HUD’s fair market rents reflect market prices and unit sizes—thus, household rent shares will increase if they live in a more expensive fair market area or rent larger units in the same fair market rent area under a rent option based on percentage of fair market rents. Table 10 illustrates how fair market rents and household payments based on a percentage of the fair market rent can vary by location and unit size. In"
1886," addition, under an option where households’ rental payments are based on a percentage of the fair market rent, lower-income households would pay a larger percentage of their income toward rent than higher- income households. And while many of the lowest-income households would experience rent increases ($116 per month, on average for families with children), many of the highest-income households would experience rent decreases ($97 per month). Under each of these rent reform options, a small number of hous"
1887,"eholds might lose their subsidies—that is, their subsidy payments would be reduced to zero because their new, higher rental payments would fully cover the gross rent. For example, under the option where households pay 35 percent of their adjusted income in rent, we estimated that approximately 1.8 percent of households would lose their subsidies. Further, other affected households might leave the program because they would have to pay more in rent and no longer choose to participate in the program. However,"
1888," because the demand for rental assistance by low- income households generally exceeds the number of available vouchers, eligible household likely would replace the one that left because similar unassisted households have much higher rent burdens than assisted households. Consequently, these rent reform options likely would not result in a sharp decline in program participation rates. Rent structures that decrease the amount of subsidy households receive may discourage HUD’s deconcentration efforts, as well "
1889,"as household mobility. With less subsidy, households (especially those with lower incomes) may not have the means to move from neighborhoods of concentrated poverty to those with a diversity of people and opportunities. But HUD’s deconcentration goal presents its own trade-offs—chief among them that fewer households ultimately would be served, albeit with more generous subsidies. Among the rent reform structures we evaluated, all but one would decrease household subsidies. A rent structure under which house"
1890,"holds would pay 30 percent or less of the applicable fair market rent would increase subsidies for almost all households and thus could further HUD’s deconcentration and mobility goals. Two of the rent structures we evaluated—higher minimum rents and rents based on a percentage of the fair market rent—could create work incentives for households with little to no income. Under the current rent structure, and as previously discussed, a household with no income generally does not pay rent—HUD’s subsidy covers "
1891,"the gross rent. Consequently, some have argued that these households have little incentive to seek employment because, for every $1 they earn, their subsidies are reduced by 30 cents (for every $100 they earn on a monthly basis, they will pay $30 in rent). Rent structures that do not take into account household income may do more to encourage assisted households to find and retain employment.MTW program that have implemented these types of rent structures simultaneously have offered self-sufficiency trainin"
1892,"g and services to assisted households. Additionally, rent structures that eliminate household income from the rent equation may allow Congress and HUD to more accurately forecast funding needs. As we previously discussed, market rents and tenant incomes are two of the primary drivers of program costs, and predicting changes in market rents and incomes when developing budget proposals for future years is difficult. These types of rent structures also would encourage assisted households to make choices about "
1893,"housing consumption similar to unassisted households. For example, households would not have an incentive to over-consume housing because their share of the rent would increases with the size of the unit they rented. See GAO, HUD Rental Assistance: Progress and Challenges in Measuring and Reducing Improper Rent Subsidies, GAO-05-224 (Washington, D.C.: Feb. 18, 2005). approaches for statutory, regulatory, and administrative streamlining and simplification of its policies for determining subsidies. Finally, n"
1894,"early all of the housing agencies we contacted said that they supported some type of rent reform—among the most popular options were increasing minimum rents and increasing tenant rental payments to 35 percent of adjusted income. Some housing agencies have suggested that they have been successful in implementing rent reform under the MTW program with community support. Despite this, some industry groups have voiced concern about rent reform. For example, in commenting on a provision included in the draft Se"
1895,"ction 8 Savings Act of 2011 that would permit HUD to pursue a rent demonstration, the National Low Income Housing Coalition stated that the demonstration would put HUD-assisted households at risk of having significant rent burdens. The Coalition also said that any demonstration should include parameters that require HUD to monitor these burdens and stop or change the demonstration if it were found to harm assisted households. Based on our literature review and interviews with HUD and housing industry offici"
1896,"als, consolidation of voucher program administration under fewer housing agencies (administrative consolidation) could yield a more efficient oversight and administrative structure for the voucher program and cost savings for HUD and housing agencies; however, current information on the magnitude of these savings was not available. HUD spends considerable resources in overseeing housing agencies. More than 2,400 local housing agencies administer the voucher program on HUD’s behalf. According to a 2008 HUD s"
1897,"tudy, the department dedicated from more than half to two-thirds of its level of oversight to 10 percent of its units (generally those housing agencies that administer 400 or fewer vouchers), and an even lower level of risk in relation to the amount of subsidy funds they administered (about 5 percent of total program funds). According to agency officials, consolidating the administration of vouchers under fewer agencies would decrease HUD’s oversight responsibilities. According officials from HUD and some h"
1898,"ousing agencies with whom we spoke, administering the voucher program through small local housing agencies may be less cost effective, in part because of the differences in the economies of scale. For example, larger housing agencies can realize cost efficiencies in conducting large numbers of voucher unit inspections that smaller agencies cannot. Also, larger housing authorities collect sufficient fees to support fraud detection units to ensure that households report all of their income sources. Although t"
1899,"here are no current data on the comparative costs of administering the voucher program though small and large housing agencies, the current administrative fee structure recognizes that economies of scale exist in larger housing agencies. As previously discussed, HUD pays housing agencies a higher rate for the first 600 vouchers a housing agency has under lease and a lower rate for the remaining units under lease. Congress passed this two-tiered fee structure based in part on a 1994 HUD study that found that"
1900," flat fee rates were leading to administrative fee deficits in small housing agencies and large administrative fee reserves at larger housing agencies. HUD has acknowledged that oversight and administrative efficiencies could be realized. As previously discussed, in recent years, the department has advanced several proposals aimed at streamlining and simplifying administration of the voucher program. Several of these proposals have advocated administrative consolidation as a means of creating administrative"
1901," efficiencies. For example, HUD’s 2011 version of the Transforming Rental Assistance initiative was intended to streamline and improve the delivery and oversight of rental assistance across all of the department’s rental assistance programs by means such as promoting consortiums, consolidation, and other locally designed structures for administrative functions. In addition, HUD recently initiated changes to its housing agency consortium rule. The revised rule would treat all housing agencies in a consortium"
1902," as one entity—HUD’s current regulation requires that consortium members be treated separately for oversight, reporting, and other purposes. Some have argued that the current rule does not allow HUD or housing agencies to realize the full benefits of consolidation— less oversight (one versus multiple agencies) and shared and thus reduced administrative responsibilities—and therefore discourages the formation of consortiums. Since 1998, nine housing agencies that administer vouchers have formed four consorti"
1903,"ums. We evaluated the administrative consolidation in terms of its effect on assisted households and selected voucher program goals. More specifically, we looked at implications for, or likelihood of achieving (1) HUD’s mobility and deconcentration goals, (2) program administration, and (3) housing agency and industry support. Like the rent reform options we evaluated using similar criteria, consolidation has advantages over the current administrative structure, but also involves some trade-offs. Consolidat"
1904,"ion might help HUD more readily achieve deconcentration goals. Although vouchers theoretically allow recipients to use them anywhere in the United States, the current system of program administration creates numerous hurdles for households to move out of high-poverty, central city jurisdictions in which they typically live. Most housing agencies originally were established to construct and manage public housing developments. As a result, program administration does not always align with housing markets. In "
1905,"urban areas within the same market, several housing agencies may operate voucher programs with different admissions criteria and subsidy levels. A paper by researchers at the Brookings Institution argued that this “fragmentation of local program administration undermines the potential of the program as a mechanism for deconcentrating urban poverty.” Extending the jurisdiction of housing agencies (through consolidation, for example) likely would give assisted households access to more housing options, partic"
1906,"ularly in surrounding suburbs. On the other hand, regionalized administration of the voucher program may make it harder for households to make or maintain contact with program administrators when necessary—for example, assisted households may not have access to transportation or may have to travel long distances to meet with housing agency officials. Several states offer examples of regional or statewide administration. Thirty-one states have programs in which one housing agency administers a voucher progra"
1907,"m throughout a state. These housing agencies administer from less than one percent to all of their respective state’s total voucher allocation. In addition, as part of our work, we visited a number of housing agencies in the Boston, Massachusetts, metropolitan area. As a result of litigation in the mid-1990s, local housing agencies in the state are permitted to lease vouchers throughout the state (that is, outside their original jurisdictions, which typically align with city limits). Although all of the hou"
1908,"sing agencies with which we spoke suggested that it was important that housing agencies maintain local control of their programs, each leased at least one voucher outside their original jurisdiction. In Brookline—a city with relatively high housing costs compared with the surrounding area and the nation—more than half of voucher holders rent apartments outside the city limits. Although consolidation will not alleviate housing agencies’ current administrative burden, it may begin to address some of the issue"
1909,"s housing agencies and industry groups have raised about a particular policy—portability. Although portability is one of the hallmark objectives of the voucher program, almost all the housing agencies we contacted said that HUD’s portability polices should be revised or eliminated, noting that they are complicated and costly to administer. Under HUD’s portability rules, an assisted household may move to the jurisdiction of a different housing agency—the receiving agency either may bill the sending agency fo"
1910,"r assistance for the transferring household or absorb the household into its own program. According to the 2000 Brookings Institution report, because of the complexity of the portability process—for example, receiving agencies may calculate subsidy levels differently than sending agencies, or apply more rigorous screening criteria—many housing agencies do not fully explain portability to households and do not encourage them to consider moving. In addition, consolidated waiting lists and single points of con"
1911,"tact for housing assistance within a single housing market, region, or state may make the process of applying for and obtaining rental assistance less confusing and more transparent for households seeking assistance. For example, a large number of housing agencies in Massachusetts participate in a consolidated waiting list—households seeking assistance in the state need only put their name on one list and receive communications from one agency. HUD officials said that the department has been considering tak"
1912,"ing steps to maintain the waiting lists of each housing agency in a centralized system. Finally, housing agencies we contacted were split on the idea of consolidation—about one quarter supported it as a way to cut costs and introduce administrative efficiencies in the voucher program, while almost half were against it. Some housing industry groups and an academic with which we spoke argued that consolidation would not save money—one noted that the administrative fees that small housing agencies receive are "
1913,"relatively insignificant in terms of total program dollars—and would sacrifice local discretion and control of voucher programs. Others noted that administrative costs savings could result from the consolidation and single-source management of waiting lists and elimination or substantial reformation of the portability process; however, no data currently are available to assess this point. Over the past decade, Congress has responded to the increasing cost of vouchers by changing the way the program is funde"
1914,"d. Specifically, rather than providing funding based on the number of vouchers housing agencies are permitted to lease, Congress currently provides funding based on housing agencies’ prior-year subsidy expenses. Congress also has capped appropriations so that housing agencies do not always receive the amount of subsidy or administrative funding for which they are eligible based on the funding formulas Congress annually establishes. While this approach gives Congress some control over cost increases, it does"
1915," not directly address the market and policy factors we identified as contributing to increases in program costs. Although policy makers can do little to alter or control market changes such as changes in rents and tenant incomes, our analysis suggests that savings could continue to be realized (or, in some cases, more households could be served without additional program funding if Congress chooses to reinvest the funds in the program) if HUD provided Congress better information on housing agencies’ subsidy"
1916," reserves. Enhanced information would include the extent of housing agencies’ subsidy reserves, clear and consistent criteria for determining how much housing agencies would need to retain to help ensure effective program management, and how much could be rescinded in future appropriations. Without such information, HUD faces difficulties in effectively manage the funding Congress provides for the voucher program, including ensuring that funds disbursed to housing agencies are used to assist households rath"
1917,"er than remaining unused in reserve accounts. In tandem with providing information about the use of program funds, HUD also has an opportunity to advance proposals that would help increase the efficiency of program administration. In particular, HUD now has or will have richer, relevant experience and data from which to draw. In addition to previous reforms HUD has proposed, examples from the MTW program and HUD’s study on administrative fees can offer options to Congress for streamlining and simplifying ad"
1918,"ministrative activities and aligning the administrative fee structure with actual administrative expenses. For example, information and analyses from these sources could help identify all current administrative requirements, determine which of those actions are necessary and which could be eliminated or streamlined, and determine the cost of performing these activities—which could help reduce program costs in the future. Although Congress and HUD have taken several steps to control rising costs in the vouch"
1919,"er program, we have identified a range of options that offer the additional promise of managing program costs or increasing efficiency in the long term. These options would also be applicable to HUD’s other rental assistance programs and would have the potential to generate even greater savings. Implementing rent reform and administrative consolidation would require policymakers to consider some potential trade-offs—in the balance are issues such as the rent burden of assisted households, concentration of p"
1920,"overty, and the extent of local control over voucher programs. Nevertheless, these options have certain advantages over the current program structure. For example, these options could save money or streamline program administration—both of which are important objectives in a time of fiscal constraint. Currently Congress is considering a variety of measures to address some of these issues. To help reduce voucher program costs or better ensure the efficient use of voucher program funds, we recommend that the "
1921,"HUD Secretary provide information to Congress on (1) housing agencies’ estimated amount of excess subsidy reserves and (2) its criteria for how it will redistribute excess reserves among housing agencies so that they can serve more households. In taking these steps, the Secretary should determine a level of subsidy reserves housing agencies should retain on an ongoing basis to effectively manage their voucher programs. Further, the Secretary should consider proposing to Congress options for streamlining and"
1922," simplifying the administration of the voucher program and making corresponding changes to the administrative fee formula to reflect any new or revised administrative requirements. Such proposals should be informed by results of HUD’s ongoing administrative fee study and the experience of the MTW program. We provided a draft of this report to HUD for comment. In its written response, reproduced in appendix II, HUD neither agreed nor disagreed with our recommendations, but provided technical comments that we"
1923," have incorporated where appropriate. While the response noted that the draft report provided an accurate assessment of the program and its current outcomes, HUD identified several points for clarification and emphasis, including: HUD commented that the stated purpose of our report of identifying options for increasing efficiencies and simplifying program administration was inconsistent with our recommendations for agency action because some of the options do not result in both efficiencies and simplificati"
1924,"on. We clarified, where appropriate, that the focus of our report was to identify reform options that could reduce costs or create efficiencies. HUD also commented that the draft report’s discussion of growth in HUD’s outlays could be misleading because this growth reflects only a change in HUD’s disbursement policy and does not relate at all to changes in program costs. Specifically, HUD stated that starting in 2006, the program was required to disburse all eligible funds, instead of the department’s maint"
1925,"aining those reserves. HUD did not provide any support that outlays reflect only a change in HUD’s disbursement policy and do not relate at all to changes in program costs. While we recognize that disbursement policies may affect outlays, changes in program size and other factors would also affect outlays. Further, although the draft provides information on the trends in actual HUD outlays, it focuses on housing agencies’ expenditures because they are a better measure of what housing agencies are paying in "
1926,"subsidies to assisted households with vouchers. Therefore, we made no changes in response to this comment. HUD also commented that the draft report did not address HUD’s ongoing efforts to limit the accumulation of subsidy reserves. We added additional language to the report on these efforts, such as the assistance HUD provides to housing agencies in ensuring that all available voucher funds are utilized. HUD noted that it currently provides quarterly reports to the Congressional Budget Office on subsidy re"
1927,"serve levels. However, these quarterly reports do not include information on the estimated amount of housing agencies’ subsidy reserves that exceed prudent levels, as we are recommending. By providing the estimated amount of excess subsidy reserves, Congress will be better positioned to make informed funding decisions, as we illustrated in our draft report. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the re"
1928,"port date. At that time, we will send copies to the Secretary of Housing and Urban Development and other interested committees. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-8678 or sciremj@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed i"
1929,"n appendix III. The objectives of our review were to (1) determine the factors that have affected costs in the Housing Choice Voucher (voucher) program from 2003 through 2011 and the actions Congress and the Housing and Urban Department (HUD) took to manage these costs and (2) identify additional steps HUD, housing agencies, or policy makers can take to limit cost growth in the voucher program and more effectively provide decent, safe, and affordable housing. To determine the factors that have affected cost"
1930,"s in the voucher program from 2003 through 2011 and the actions Congress and HUD took to manage these costs, we reviewed and analyzed appropriations legislation, budget documents—including HUD budget proposals, Congressional Research Service reports, monthly statements from the Department of the Treasury, and the Office of Management and Budget SF-133 reports on budget execution and budget resources. We also reviewed HUD’s annual guidance on the allocation of the program’s appropriation to housing agencies."
1931," We used these sources to determine the annual appropriations and outlays over the period. The starting year for our analysis reflects the year when Congress began changing the voucher program’s funding formula. We analyzed program data that HUD prepared using information derived from multiple HUD systems including the Central Accounting and Program System (HUDCAPS) and Voucher Management System (VMS) to determine how much housing agencies’ expenditures changed from 2003 through 2010. Specifically, we asses"
1932,"sed the extent to which certain factors, such as subsidy paid to a landlord, program size (that is, the number of assisted households), and administrative expenses, contributed to the change in program expenditures over this period. We identified these factors by reviewing GAO, HUD, and stakeholder studies. We also reviewed prior work by GAO and others to describe what is known about the cost-effectiveness and characteristics of vouchers relative to other forms of rental housing assistance. To identify addi"
1933,"tional steps HUD, housing agencies, or policy makers can take to limit cost growth in the voucher program and more effectively provide decent, safe, and affordable housing, we identified and reviewed relevant legislation, draft legislation, and studies. We analyzed HUD’s VMS data on the Net Restricted Assets (NRA) balances (or subsidy reserves) of housing agencies as of September 30, 2011, to determine the extent of housing agencies’ “excess” subsidy reserves. To derive our estimates of the potential “exces"
1934,"s” balances, we used HUD’s 8.5 percent (about a month) threshold to estimate the excess NRA balance. Also, we analyzed HUD data to determine the number of housing agencies and amount of funding that Congress offset in fiscal years 2008 and 2009 and the additional funding Congress appropriated for and HUD provided to certain housing agencies in 2009. Further, we visited nine housing agencies in Massachusetts. We selected these housing agencies based on Massachusetts’ use of both local and regional housing ag"
1935,"encies to provide voucher assistance and the housing agencies’ proximity to one another. In addition, we interviewed 31 of the 35 housing agencies participating in the Moving to Work (MTW) demonstration program to identify the activities the agencies had implemented in their voucher programs to reduce program costs and introduce efficiencies in the program. For example, as part of these interviews, we identified alternate rent structures these agencies had implemented or proposed. We also evaluated the cost"
1936," and policy implications of three types of programmatic reforms to the voucher program: increasing minimum rents, changing the percent of income tenants pay toward rent, and requiring tenants to pay a percentage of fair market rent. In identifying and assessing these programmatic reforms, we reviewed proposals included in draft legislation and HUD, Congressional Budget Office, and housing industry group reports. We also considered reforms certain agencies have implemented. To estimate the effects of these a"
1937,"lternative approaches to calculating tenant payments on the subsidy levels that result, we analyzed a December 2010 extract of tenant records from HUD’s Public and Indian Housing Information Center (PIC). These records contain information about participating households, as of December 2010, including information on gross and adjusted income levels, housing unit size and rent, tenant contributions and housing assistance payments, as well as information on age, sex, and disability status of each household mem"
1938,"ber. To focus on the core of the assisted household population, we examined only those households with five or fewer members, and living in units with one, two or three bedrooms. We determined the elderly and disability status of each household. Specifically, we defined a household as an elderly household if either of the first two household members (the head of household and possibly a spouse or co-head) were age 62 or over, and we placed a household in disability status if any of the five members were ide"
1939,"ntified as having a disability. For the identified subsidy alternatives, we calculated an alternative tenant contribution using information on income and applicable fair market rent in the PIC file as appropriate, and calculated the resulting assistance payment. (The assistance payment is the difference between the lesser of the payment standard and gross rent, and the tenant payment, subject to any existing minimum tenant payments.) We did not consider the possible effects of any change in household behavi"
1940,"or, either in terms of continued participation in the voucher program or in choice of housing unit or rent level that could be induced by changes in tenant contributions. In conducting our work, we assessed the reliability of datasets provided by HUD, including data files derived from HUDCAPS, VMS, and PIC. Specifically, we performed basic electronic testing of relevant data elements, such as housing assistance payment amounts, total tenant payment, and unit months leased. We reviewed HUD’s data dictionarie"
1941,"s, instructions, and other relevant documentations. We also interviewed HUD officials knowledgeable about the data to obtain clarifications about key variables and calculation rules. Where possible, we compared our results with other sources to ensure the reasonableness of the information. We determined that the data were sufficiently reliable for the purpose of this report. Finally, for all of our objectives, we interviewed HUD officials and consulted with one academic and officials from various housing gr"
1942,"oups including the Center on Budget and Policy Priorities, Council of Large Public Housing Authorities, National Low-Income Housing Coalition, National Association of Housing Redevelopment Officials, Public Housing Authorities Directors Association, Quadel Consulting, and the Urban Institute. Further, we contacted 53 housing agencies that administer the voucher program. In selecting these housing agencies, we considered the number of authorized vouchers, location (that is, HUD-defined regions), and leasing "
1943,"and spending rates for the voucher program as of March 2011. We conducted this performance audit from February 2011 through March 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our "
1944,"audit objectives. In addition to the contact named above, Daniel Garcia-Diaz, Acting Director; Stephen Brown, William Chatlos, Karen Jarzynka-Hernandez, Cory Marzullo, John McGrail, Josephine Perez, and Barbara Roesmann made key contributions to this report."
1945,"The UI program was established by Title III of the Social Security Act in 1935 and is a key component in ensuring the financial security of America’s workforce. This complex program, which is administered jointly by the U.S. Department of Labor and the states, provides temporary cash benefits to workers who lose their jobs through no fault of their own. The program also serves to stabilize the economy in times of economic recession. Labor is responsible for overseeing the UI program to ensure that the state"
1946,"s operate an effective and efficient Unemployment Insurance Program. Labor is also responsible for monitoring state operations and procedures, providing technical assistance and training, as well as analyzing UI program data to diagnose potential problems. To oversee the program, Labor’s Employment and Training Administration maintains 10 offices in 6 geographic regions that are responsible for working with states in a specific geographic area (see fig.1). The regional offices are the states’ main point of "
1947,"contact with Labor and serve as a vital link between headquarters and the states for providing technical assistance and clarifying program policies, objectives, and priorities. Moreover, the regional offices have primary responsibility for overseeing the fiscal and management integrity of the UI program. Although Labor provides oversight and guidance to ensure that each state operates its program in a manner that is consistent with federal guidelines, the federal-state structure of UI places primary respons"
1948,"ibility for administering the program on the states. The states also have wide latitude to administer their UI programs in a manner that best suits their needs within the guidelines established by federal law. For example, to enhance the efficiency and cost-effectiveness of their UI systems, many states have established centralized service centers that allow claimants to apply for benefits by telephone, fax, or the Internet. The UI program is funded through federal and state taxes levied on employers. The s"
1949,"tates collect the portion of the tax needed to pay unemployment insurance benefits, whereas state and federal administrative costs and other related federal costs of the UI program are financed through the federal tax. Labor holds these funds in trust on behalf of the states in the Unemployment Trust Fund of the U.S. Treasury. To obtain annual UI administrative funding from Labor, states submit an annual request for funding as part of their State Quality Service Plan (SQSP). Labor reviews each state’s plan "
1950,"and subsequently determines if any adjustment in funding is required. The regional offices may also negotiate changes and revisions to the states’ funding requests before the final allocation is approved. In fiscal year 2001, Labor provided about $2.3 billion to states to administer their programs. To be eligible for UI benefits in most states, unemployed workers must fulfill five general conditions within overall federal guidelines. They must: have worked for a specified amount of time in a job that is cov"
1951,"ered by the unemployment insurance program; have left their prior jobs involuntarily (such as by employer layoff) or have quit their jobs for “good cause”; be currently “able and available” for work, and, in most states, actively enroll in employment services or job training programs (in some be legally eligible to work—for example, noncitizens must be lawfully admitted to work in the United States, or lawfully present for other reasons. Each state’s laws provide specific requirements for claimants to meet "
1952,"these general conditions, and each state determines individual eligibility, the amount and duration of benefits, and disqualification provisions. Because Labor provides states with the flexibility to design their own UI program, the eligibility policies and laws governing the administration of the UI program vary from one state to another. In general, however, claimants apply for UI benefits over the telephone, via computer using the Internet, or in person at a local office. State claims representatives are"
1953," responsible for determining each claimant’s eligibility for UI benefits by gathering and (when possible) verifying important information, such as their identity, employment history, why they no longer are working, and other sources of income they may have. Once the claim has been submitted for processing, the state sends forms to the claimant’s employer(s) requesting them to verify the claimant’s wages and the reason they are no longer working. If the individual’s claim for UI is approved, the state then d"
1954,"etermines the amount of UI benefits, depending on the individual’s earnings during the prior year and other factors. UI benefits may be mailed to a claimant’s home or post office box, or sent electronically to a bank account. In general, most states are expected to provide the first benefits to the claimant within 21 days of the date the state determined that the claimant was entitled to benefits. Labor funds two principal kinds of activities for detecting and measuring UI overpayments at the state level—Be"
1955,"nefit Payment Control and Benefit Accuracy Measurement. Each state is required to operate a benefit payment control division that is responsible for detecting and recovering overpayments. This process also involves reporting the reason for the overpayment—such as wages that the claimant failed to report. Each state is required to report overpayments along with other data to Labor on a quarterly basis. By contrast, Labor’s benefit accuracy measurement data are an estimate of the total overpayments in the UI "
1956,"program—in each state and the nation as a whole—based on a statistically valid examination of a sample of paid and denied claims. Benefit accuracy measurement is one of the main quality assurance systems that Labor uses to measure payment accuracy in the program. Of the $30 billion in UI benefits paid nationwide in 2001, Labor estimates that about $2.4 billion in UI overpayments occurred. About one-quarter of these overpayments ($577 million) were identified as fraud, according to its quality assurance data"
1957,". Overpayments may occur because individuals work while receiving benefits, fail to register for employment services, fail to look for a new job, or misrepresent their identity. Other sources of overpayments include agency errors and inaccurate or untimely information provided by employers. Of the $2.4 billion in projected overpayments, Labor estimates that about $1.3 billion could have potentially been detected and/or recovered in 2001 given existing state procedures and policies. In contrast, the states r"
1958,"eported that $650 million in overpayments were made in 2001, of which $370 million was actually recovered. Overall, Labor’s overpayment estimate is about three times higher than that reported by the states. The difference in the overpayment figures produced by the two systems can be attributed to the fact that Labor’s quality assurance estimate is based on a more comprehensive examination of individual UI claims than the states’ benefit payment control activities can generally produce. Our analysis suggests"
1959," that Labor’s quality assurance system estimate is a more complete assessment of the true level of overpayments in the UI program, partly because the system documents overpayments that often cannot be detected in many states using their existing benefit payment control procedures. Over the past 10 years, the annual overpayment rate estimated by Labor’s quality assurance system has remained fairly constant as a percentage of total benefits paid—ranging from a low of 8.0 percent in 2001 to 9.2 percent in 1999"
1960, and averaging about 8.5 percent during that period. Overpayments averaged about $1.8 billion per year and reaching a high of about $2.4 billion in 2001. (See fig. 2.) The slight increase in overpayments estimated by the quality assurance system in 2001 is likely related to the overall increase in total UI benefits paid that year. The overpayments estimated by Labor’s quality assurance data fall into a number of categories. Some overpayments result from errors in claimants’ reporting or the state agency’s r
1961,"ecording of important eligibility information, such as wages or other sources of income that a claimant obtained while receiving UI benefits (“benefit year earnings” violations). (See table 1.) Overpayments also occur because claimants are not able and/or available to work, fail to register for employment services as required by their state, or fail to look for a new job as required (“eligibility” violations). (See app. I.) The quality assurance data also classify overpayments as being “fraud” or “nonfraud”"
1962,". Fraud can occur when claimants intentionally misrepresent eligibility information, employers file fraudulent claims, or state UI program personnel abuse sensitive information such as social security numbers for personal gain. Of the total overpayments estimated by Labor in 2001, about $577 million (24 percent) were attributed to fraud. Although this estimate takes into account each state’s individual laws, we found that the states differ substantially in how they define fraud. For example, some states may"
1963," include overpayments resulting from unreported earnings as fraud, while other states do not. Thus, state-to-state comparisons of the level of fraud in the UI program and the activities that constitute fraud are difficult to make. Overall, the largest overpayment categories in 2001 were attributed to eligibility issues (35 percent), benefit year earnings (31 percent), and separation issues (21 percent). Federal and state officials told us that some categories of overpayments are more difficult to detect tha"
1964,"n others. For example, some officials told us that it can be difficult for states to accurately determine, in a cost-effective manner, if a claimant is actively searching for a job (an eligibility requirement in some states). In particular, there is not a readily available source of information that states can access for information on whether each claimant is actively looking for employment. Work search requirements vary considerably from state to state, and can have a substantial impact on state payment a"
1965,"ccuracy rates. Moreover, states generally lack sufficient resources to permit their benefit payment control personnel to conduct in-depth examinations of each claimant’s activities to determine if they are eligible. States that have only a limited work search requirement (or no requirement at all) may not establish overpayments for UI claimants who fail to look for a new job. In contrast, states with rigorous work search policies are more likely to establish overpayments for claimants who do not meet this r"
1966,"equirement. Although some categories of overpayments are more difficult than others to detect or recover, Labor’s analysis suggests that the states could have potentially detected and recovered about $1.3 billion (54 percent) of the $2.4 billion in estimated overpayments in 2001. This estimate is based on Labor’s analysis of the types of overpayment errors the states’ benefit payment control operations were most likely to be able to identify and recover given their current policies and procedures. (See tabl"
1967,"e 2.) In particular, states’ benefit payment control activities tend to focus on detecting overpayments that result from unreported income (benefit year earnings or base wage period violations) and payments to individuals who are not entitled to UI benefits due to the circumstances under which they became unemployed (separation issues). For example, benefit payment control staff may use the “Wage/Benefit Crossmatch” to identify and examine claimants who received UI benefits during a week in which they appea"
1968,"r to have earned wages. Labor’s analysis also suggests that other types of overpayments are likely to be detected by most states given their current policies and procedures. These include unreported or underreported income from social security programs, illegal aliens claiming benefits, and unreported vacation or severance pay. Furthermore, based on Labor’s analysis, we believe that a substantial proportion of the overpayments detected by the states could be recovered using commonly available procedures suc"
1969,"h as offsetting claimants’ current and future benefits and intercepting other sources of income such as state tax refunds. Labor determined that the remaining $1.1 billion in estimated overpayments could probably not be detected or recovered by the states due to limitations in their existing policies and procedures. For example, overpayments caused by state agency errors are generally not pursued for recovery. In contrast to Labor’s estimate, the states reported about $653 million in overpayments in 2001—ro"
1970,"ughly half the total that Labor’s quality assurance system identified. Moreover, at the time of our review, the states reported that they had recovered about $370 million of this amount. The quality assurance and the benefit payment control systems differ in the scope and the methods of the activities they use to identify overpayments. On the basis of our analysis as well as analysis performed by Labor’s Division of Performance Management, we believe that Labor’s quality assurance system data represent a mo"
1971,"re complete assessment of the true level of UI overpayments than the benefit payment control figure reported by the states. In particular, the quality assurance system is able to estimate all the potential overpayments that have occurred in each state’s UI program because it is based on a statistically valid sample of UI claims from each state. Moreover, quality assurance investigators are able to conduct a more detailed, comprehensive analysis of each case they review than is typically possible for most st"
1972,"ates’ benefit payment control operations. For example, the investigator is generally able to identify many types of overpayments because they can spend more time verifying the accuracy of the information provided to the state by personally contacting employers, claimants, and third parties. In addition, investigators typically spend between 5 and 8 hours examining a single case, which allows them to perform a relatively in-depth review of a claimant’s eligibility. By contrast, the states’ benefit payment co"
1973,"ntrol activities are often affected by operational and policy factors that limit their ability to detect and/or recover overpayments. These factors include limited staffing and funding, cost-benefit considerations (e.g., the costs associated with recovering an overpayment may be greater than the overpayment amount), and a lack of access to timely data sources. Moreover, benefit payment control personnel are required to quickly examine thousands of cases to identify overpayments, thus potentially limiting th"
1974,"eir ability to thoroughly review cases for payment accuracy. We identified various management and operational practices at both the state and federal level that contribute to UI overpayments. At the state level, we found that a number of states place primary emphasis on quickly processing and paying UI claims and may not take the necessary steps to adequately verify claimants’ initial and continuing eligibility for benefits. In particular, five of the six states we visited were not fully staffing their bene"
1975,"fit payment control operations and had moved staff to claims processing activities. In addition, while some of the states we visited use automated data sources to determine if claimants are working or obtaining other benefits while receiving UI, others rely heavily on self-reported information from claimants to make payment decisions. States also tend to establish UI program policies and priorities in response to direction from the Department of Labor, which in some instances may contribute to overpayments."
1976," For example, the performance measures that Labor uses to gauge states’ operations tend to emphasize payment timeliness more heavily than payment accuracy. In addition, Labor has been reluctant to link the states’ performance on payment accuracy to the annual administrative funding process as a way of holding states accountable for performance. Labor has taken some actions to improve UI program integrity, such as working to obtain additional automated data sources that could help states make more accurate e"
1977,"ligibility decisions and developing a payment accuracy performance measure. However, Labor and the states have not placed sufficient emphasis on balancing the often competing priorities of quickly processing and paying UI claims, with the need to ensure that only eligible individuals receive benefits. The emphasis that an agency places on critical program activities can be measured, in part, by the level of staff and other resources devoted to those activities. Most of the states we visited placed primary e"
1978,"mphasis on quickly processing and paying UI claims, with less attention given to program integrity operations. In particular, we found that program managers commonly moved staff assigned to program integrity activities (such as benefit payment control) to claims processing positions in response to increases in the number of UI claims being filed. For example, one state was using only 4 of the 16 positions (25 percent) it was allotted by Labor for benefit payment control. Only one of the six states we visite"
1979,"d was fully staffing its benefit payment control operations. The remaining states had transferred staff into other positions, including claims processing. Another state stopped drawing its quality assurance sample for a period of time and moved staff responsible for these operations into claims processing positions when unemployment claims increased during the third quarter of 2001. Many federal and state officials we interviewed told us that states move staff into claims processing roles from other positio"
1980,"ns because they lack adequate funding to properly administer all the necessary activities of their UI programs. In this regard, some state officials told us that they anticipated additional funding from the federal government which they could use to increase the resources and staff dedicated to benefit payment control and other program integrity operations. However, a number of officials told us that historically the UI program’s primary objective has been to pay claimants in the most expeditious manner pos"
1981,"sible, and that this would continue to be a guiding principle of the program. While states differed in the level of staff and resources devoted to program integrity activities, we also found variation in the processes and tools they used to verify information that could affect a claimant’s eligibility for UI benefits. The most important information requiring verification generally includes an individual’s wages and employment status, receipt of other federal or state benefits, identity, and citizenship stat"
1982,"us. All of the states we visited conduct basic computer matches that help them to detect potential UI overpayments due to unreported earnings. For example, each state regularly conducts a Wage/Benefit Crossmatch that compares the database of UI claimants with the state’s database of individuals’ wages to identify UI recipients who may have unreported income in the same state in which they are receiving UI benefits. Labor and the states generally view this match as an effective tool for identifying claimants"
1983," who may have unreported wages within the state. However, because state wage data are only available quarterly, the crossmatch relies on information that may be several months old by the time the match is conducted. This delay allows some overpayments to remain undetected for a long period of time. Officials at Labor and in some states emphasized that overpayments are more likely to be recovered if they can be detected quickly. In general, the states tend to recover a substantial proportion of the overpayme"
1984,nts they detect by offsetting a claimant’s current and future UI benefits. Because UI benefits tend to be paid out over a relatively short period of time—about 14 weeks on average—overpayment detection and recovery activities may begin long after individuals leave the UI rolls. This inability to obtain timely eligibility information places the program at substantial risk for overpayments that may never be recovered. More timely sources of data than the Wage/Benefit Crossmatch exist to verify a claimant’s em
1985,"ployment status, such as the State Directory of New Hires (referred to as the “state new hires database”). The states’ new hires databases can provide information on individuals’ current employment status, and have been found to be effective in preventing or reducing the amount of UI overpayments. However, we found that this data source is not routinely used in all states. For example, two of the states we visited do not currently use their new hires database to verify claimants’ earnings or employment stat"
1986,"us. Officials in one state told us that they currently lacked access to the state’s new hires database (but are seeking access), while those in another state questioned the cost- effectiveness of its use. However, other states that use this data source have reported that it is helpful in detecting overpayments more quickly than the Wage/Benefit crossmatch. For example, one state reported that because the new hires data detects overpayments earlier than other detection methods, the size of its average overpa"
1987,"yment at the time of detection has been reduced from about $2,800 to roughly $750. Moreover, the same state reported that it detected about 6,700 overpayments totaling over $4 million using its new hire database between July 2000 and December 2001. Overall, use of the new hire database in this state accounted for more than 35 percent of all instances of overpayments detected during that period. Another state reported increased overpayment collections of about $19 million over 4 years, in part due to earlier"
1988," detections from the new hires database. Labor’s OIG has identified the new hire database as a potentially useful tool for detecting overpayments resulting from unreported income, which makes up a substantial portion of the total overpayments estimated by the quality assurance system each year. Although Labor has encouraged each state to use its own new hires database for purposes of administering their UI program, we found that nationally a number of states still do not use this data source. While the stat"
1989,"es’ directory of new hires data are useful for verifying claimants’ employment status, a main limitation is that they only identify this information for claimants within a given state. To detect unreported or underreported wages in other states, some states also use various types of interstate matches that are facilitated by Labor. One match (called the “Interstate Crossmatch”) is conducted quarterly by most states for all UI claims and is designed to detect claimants who may have wages in another state. Ho"
1990,"wever, this match typically relies on wage data that are typically about 4 to 6 months old and, therefore, is of limited use in determining claimants’ initial eligibility for benefits. The states may also use another type of match called the “Interstate Inquiry.” This system allows a UI claims representative to check a claimant’s UI and employment status in other states. However, officials at Labor and the states we visited told us that this system is generally only used if the claims representative is susp"
1991,"icious about the validity of the claim. Moreover, the system can only be used to check individual claimants and is not designed to verify the status of large numbers of claimants simultaneously. Finally, two of the states we visited periodically conduct their own matches with bordering states. However, this method generally requires individual states to develop formal data sharing agreements with one another, which can be time-consuming and cumbersome. To enhance the ability of states to verify the status o"
1992,"f claimants who could be working or receiving UI benefits in other states, many of the officials we spoke with advocated giving states access to the Office of Child Support Enforcement’s National Directory of New Hires (NDNH). The NDNH is a comprehensive source of unemployment insurance, wage, and new hires data for the whole nation. However, current law limits access to the NDNH and does not permit individual states to obtain data from it for purposes of verifying claimants’ eligibility for UI. Moreover, o"
1993,"ur prior work examining the NDNH has revealed concern among some federal officials that wider access to the database could jeopardize the security and confidentiality of the information it contains. One possible alternative to the NDNH suggested by federal and state officials for tracking interstate wages and UI benefit receipt is the Department of Labor’s Wage Record Interchange System (WRIS). This system, which was developed in response to the Workforce Investment Act (WIA) of 1998, is a “data clearinghou"
1994,"se” that makes UI wage records available to states seeking employment and wage information on individuals in other states. Certain federal officials and others familiar with WRIS told us that with some modification—such as incorporating the more timely new hires data from the states—WRIS could be a logical alternative to the NDNH because the computer network for sharing data among the states already exists. However, one official familiar with the system noted that while it contains the necessary data to sho"
1995,"w whether a claimant is earning wages in another participating state, it currently lacks important pieces of information (such as states’ new hires data) that would make it most useful as an interstate verification tool. Moreover, in a recent report, we noted that some states have been reluctant to become involved with WRIS, partly because of concerns about the cost of administering the system. Furthermore, we noted that if not all states participate, the value of WRIS will be diminished—even for participat"
1996,"ing states—because no data will be available from nonparticipating states’ UI wage records. This is an area where Labor could potentially play a larger role. In particular, Labor could explore options for enhancing WRIS as an overpayment detection tool and facilitating states’ participation in any modified system. Although modifying existing systems and obtaining access to new, more timely data sources may entail additional costs for Labor and the states, our review and prior work in other programs suggests"
1997," that the potential savings in program funds could outweigh these costs. Claimants’ eligibility for UI benefits may be affected if they are receiving benefits from other state or federal programs. For example, claimants in some states are ineligible for UI benefits, or they may receive reduced benefits if they are receiving workers’ compensation. Overpayments can occur if claimants do not accurately report the existence or amount of such benefits when they apply for UI, or if the state employment security a"
1998,"gency fails to verify the information in a timely manner. Only two of the six states we visited verify claimants’ receipt of workers’ compensation using independent sources of information. Moreover, at least one of these states only checks for receipt of workers’ compensation if the claimant self-reports that he or she is currently receiving such benefits. Similarly, receipt of some federal benefits such as cash payments from Social Security programs may affect a UI claimant’s eligibility for or amount of b"
1999,"enefits. For example, one state’s policy manual requires claims representatives to ask claimants if they are currently receiving Social Security Disability Insurance (DI) or Old Age and Survivors Insurance (OASI) benefits, which could reduce or eliminate the amount of UI benefits they are eligible to receive. If a claimant states that he or she is not receiving DI benefits, then no further actions are taken to independently verify this information. Labor’s quality assurance data estimates that in 2001, abou"
2000,"t $35 million in UI overpayments were due to unreported social security benefits, such as DI. To ensure that UI benefits are paid only to individuals who are eligible to receive them, it is important that states verify claimants’ identity and whether they are legal residents. However, states may be vulnerable to fraud and overpayments because they rely heavily on claimants to self- report important identity information such as their social security number (SSN) or are unable to verify such information in a "
2001,"timely manner. Prior investigations by Labor’s OIG demonstrate that the failure or inability of state employment security agencies to verify claimants’ identity have likely contributed to millions of dollars in UI overpayments stemming from fraud. One audit conducted in four states (Florida, Georgia, North Carolina, and Texas) revealed that almost 3,000 UI claims totaling about $3.2 million were paid to individuals using SSNs that did not exist or belonged to deceased individuals. Furthermore, the OIG concl"
2002,"uded that illegal aliens filed a substantial proportion of these claims. We found that vulnerabilities remain with regard to verifying claimants’ identity and citizenship status. For example, none of the six states we visited have access to the Social Security Administration’s (SSA) State Online Query (SOLQ) system, which can be used to verify the identity of claimants applying for UI by matching their name, date of birth, and SSN in real time. At the time of our review, only two states (Utah and Wisconsin)"
2003," had access to this system because they were participating in a pilot project with SSA. The states we visited generally use a batch file method in which large numbers of SSNs are periodically sent to SSA for verification. This process tends to be less timely than online access for verifying claimants’ initial eligibility for benefits. However, one state we visited reported that it does not perform any verification of the SSNs that UI claimants submit because a prior system it used for verifying SSNs identif"
2004,"ied only a small number of potential violations. This state decided that its resources could be better used to support other key work priorities, including claims processing. In addition, all six states we visited rely mainly on claimants to accurately self-report their citizenship status when they first apply for UI benefits. State officials told us that they do not verify this information with the Immigration and Naturalization Service if the claimant states that he or she is a citizen. The results of our"
2005," review suggest that the inability of some states to accurately verify whether claimants’ are lawfully present in U.S., and thus their eligibility for UI, has contributed to program overpayments. Labor estimates that about $30 million of the $1.3 billion in overpayments that were deemed to be the most readily detected and recovered by the states in 2001 were due to illegal alien violations. (See table 2.) Even if individuals do not misrepresent their identity or citizenship status to illegally obtain UI ben"
2006,"efits, the potential for fraud and abuse may still exist. For example, one state we visited revealed that it, along with a bordering state, identified nine SSNs that are currently being illegally used by over 700 individuals as proof of eligibility for employment. Upon further investigation, we determined that these SSNs were being used in at least 29 states, and seven of the SSNs belonged to deceased individuals. Although we did not find any instances in which UI benefits were obtained by those individuals"
2007," earning wages under these numbers, both state and federal officials agreed that the potential for these individuals to fraudulently apply for and receive UI benefits in the future was possible. Given the potential for fraudulent receipt of UI or other benefits, and the apparently widespread misuse of social security numbers, our Office of Special Investigations has initiated an investigation into this matter in coordination with the Social Security Administration and the Immigration and Naturalization Serv"
2008,"ice. To varying degrees, officials from all of the six states we visited told us that employers or their agents do not always comply in a timely manner with state requests for information needed to determine a claimant’s eligibility for UI benefits. For example, one state UI Director reported that about 75 percent of employers fail to respond to requests for wage information in a timely manner. In addition, an audit conducted between 1996 and 1998 by Labor’s OIG revealed that 22 out of 53 states experienced"
2009," a non-response rate of 25 percent or higher for wage requests sent to employers. A more in-depth review of seven states in this audit also showed that $17 million in overpayments occurred in four of the states because employers did not respond to the states’ request for wage information. We discussed these issues with an official from a national employer representative organization. After consulting a broad cross- section of employers that are members of the organization, the official told us that some emp"
2010,"loyers may resist requests to fill out paperwork from states because they view the process as cumbersome and time-consuming. In addition, some employers apparently indicated that they do not receive feedback on the results of the information they provided to the states and, therefore, cannot see the benefit of complying with the requests. It is also difficult for some employers to see how UI overpayments and fraud may affect them. In particular, because employers are unlikely to experience an immediate incr"
2011,"ease in the UI taxes they pay to the state as a direct result of overpayments, they do not see the benefit in complying with state requests for wage data in a timely manner. Although Labor has taken some limited actions to address this issue, our work to date shows that failure of employers to respond to requests for information in a timely manner is still a problem. While most states recover a large proportion of their overpayments by offsetting claimants’ current or future benefits, some of the states we "
2012,"visited have additional overpayment recovery tools for individuals who are no longer receiving UI. These tools include state tax refund offset, wage garnishment, and use of private collection agencies. Some of these procedures, such as the state tax refund offset, are viewed as particularly effective. For example, one state reported overpayment collections of about $11 million annually between 1998 and 2000 resulting from this process. Other states have increased overpayment collections by allowing more agg"
2013,"ressive criminal penalties for individuals who are suspected of UI fraud. For example, one state prosecutes UI fraud cases that exceed a minimum threshold as felonies instead of misdemeanors. Officials in this state reported that by developing agreements with local district attorneys, the state OIG has been able to use the threat of imprisonment to encourage claimants’ suspected of fraud to make restitution for UI overpayments. According to state officials, this initiative has resulted in $37 million in add"
2014,"itional overpayment collections in calendar years 2000 and 2001. However, other states we visited lacked many of these tools. For example, one state relied heavily on offsets against current UI claims to recover overpayments because its laws and policies did not permit the use of many of the tools that other states have found to be effective for collecting overpayments from individuals who have left the UI rolls. In general, Labor’s approach to managing the UI program has emphasized quickly processing and p"
2015,"aying UI claims, with only limited attention to overpayment prevention, detection, and collection. This approach is most evident in the priorities that are emphasized in Labor’s recent annual performance plans, the UI program’s performance measurement system, and the limited use of quality assurance data to correct vulnerabilities in states’ UI operations. For example, Labor’s recent annual performance plans required under the Government Performance and Results Act of 1993 have not included strategies or go"
2016,"als to improve payment accuracy in state UI programs. In addition, we found that Labor’s system for measuring and improving operational performance in the UI program is primarily geared to assess the timeliness of various state operations.Most of the first 12 performance measures (called Tier I) assess whether states meet specified timeframes for certain activities, such as the percentage of first payments made to claimants within 14 to 35 days and the percentage of claims appeals decided within 45 days. Ho"
2017,"wever, none of the Tier I measures gauge the accuracy of UI payments. Labor also gives Tier I measures more weight than the remaining measures (called Tier II ), which assess other aspects of state performance, including fraud and nonfraud collections. Labor has developed national criteria specifying the minimum acceptable level of performance for most Tier I measures. States that fail to meet the minimum established criteria are required to take steps to improve their performance. Generally, states are req"
2018,"uired to submit a “Corrective Action Plan” to Labor as part of the annual SQSP.Moreover, Labor has stated that it could withhold the administrative funding of states that continue to perform below specified Tier I criteria over an extended period of time, although this rarely occurs. By contrast, the Tier II measures do not have national minimum performance criteria, and are generally not enforced as strictly by Labor. For example, a state that fails to meet Tier II measures may be encouraged to submit a “C"
2019,"ontinuous Improvement Plan” discussing how it will address performance problems. However, Labor generally does not require a state to submit such a plan and does not withhold administrative funds as an incentive to ensure state compliance with Tier II measures. Officials from most of the states we visited also told us that the Tier I and Tier II measures make the UI program complex to administer, and may contribute to an environment in which overpayments are more likely. In particular, these officials told "
2020,"us that because the measures are so numerous and are designed to monitor a wide range of activities related to administering the UI program, it is difficult to place sufficient emphasis on more fundamental management issues, such as payment accuracy. There are currently more than 70 Tier I and Tier II measures that gauge how states perform in terms of the timeliness, quality, and accuracy of benefit decisions. These include the timeliness of first payments, the timeliness of wage reports from employers, the"
2021," quality of appeals decisions, the number of employers that were audited, and the amount of fraud and non-fraud collections. A number of state officials we spoke with told us that it is difficult for states to adequately balance the attention they give to each of the measures because they are so numerous and complex. For example, some states tend to focus most of their staff and resources on meeting certain measures such as payment timeliness, but may neglect other activities such as those dealing with prog"
2022,"ram integrity in the process. Some officials suggested reducing or revising the current measures to make them more manageable. We raised this issue with Labor officials during our review. However, the officials were unable to comment on potential revisions to the measures because a previously scheduled assessment of Labor’s performance measurement system was still ongoing. Labor indicated that revisions could potentially occur based on their ongoing review of the performance management system. In addition t"
2023,"o the problems we identified with its performance measures, Labor has been reluctant to hold states accountable by linking their performance in areas such as payment accuracy to the annual administrative budget process. One tool Labor possesses to influence state behavior is the ability to withhold the state’s annual administrative grant.However, this sanction is rarely used because it is generally intended to address instances of serious, sustained noncompliance by a state and is widely viewed as defeating"
2024," the purpose of the program. Thus, many federal and state officials we interviewed perceive that Labor has few, if any practical tools to compel state compliance with federal program directives. Compounding this problem is the existence of “bottom line authority”—an administrative decision made by Labor in 1986 that gave states greater flexibility over their expenditures and reduced federal monitoring of administrative expenditures. In particular, bottom line authority permits states to move resources among"
2025," cost categories—such as from benefit payment control activities to claims processing—and across quarters within a fiscal year, as well as use UI administrative resources based on state assessment of its needs. Some officials we spoke with suggested that over time the existence of bottom line authority has hindered Labor’s ability to effectively oversee the program. Given its current administrative authority to oversee the UI program, Labor has not done enough in recent years to encourage states to balance "
2026,"payment timeliness with the need for payment accuracy in a manner that does not require the complete withholding of administrative funds. For example, our review found that in the past, Labor linked the quality assurance process to the budget process and required states to meet specified performance levels as a condition of receiving administrative grants. Moreover, under federal regulations covering grants to states, Labor may temporarily withhold cash payments, disallow costs, or terminate part of a state"
2027,"’s administrative grant due to noncompliance with grant agreements or statutes. Withholding or delaying a portion of the grant funds is one way Labor can potentially persuade states to implement basic payment control policies and procedures. In addition, during the annual budget process, Labor reviews states’ requests for funds necessary to administer their UI programs and ensures an equitable allocation of funds among states. While completing those reviews, Labor could prioritize administrative funding to "
2028,"states to help them achieve or surpass agreed upon payment accuracy performance levels. However, we found that Labor is only using such tools to a limited degree to help states enhance the integrity of their UI program operations. In addition to its overall emphasis on quickly processing and paying UI claims, Labor has been reluctant to use its quality assurance data as a management tool to encourage states to place greater emphasis on program integrity. According to the UI Performs Calendar Year 2000 Annua"
2029,"l Report and Labor officials, quality assurance data should be used to identify vulnerabilities in state program operations, measure the effectiveness of efforts to address these vulnerabilities, and help states develop mechanisms that prevent overpayments from occurring.However, as currently administered, Labor’s quality assurance system does not achieve all of these objectives. In particular, Labor lacks an effective mechanism to link its quality assurance data with specific improvements that are needed i"
2030,"n states’ operations. For example, over the last decade, payment errors due to unreported income have consistently represented between 20 and 30 percent of annual UI overpayments. While Labor’s quality assurance system has repeatedly identified income reporting as a vulnerable area, it has not always played an active role in helping states develop specific strategies for improving their performance in this area. Of particular concern to us is that the overpayment rate for the nation has shown little improve"
2031,"ment over the last 10 years. This suggests that Labor and some of the states are not adequately using quality assurance data to address program policies and procedures that allow overpayments to occur. According to its fiscal year 2003 performance plan, Labor intends to provide states with additional data from its quality assurance system on the sources of overpayments to assist them in crafting better front-end procedures for preventing overpayments. However, unless Labor uses the data to help states ident"
2032,"ify internal policies and procedures that need to be changed, it is unclear what impact Labor’s efforts will have on improving the integrity of states’ UI programs. Finally, Labor has given limited attention to overpayment collections. Currently, Labor evaluates states’ collection activities using a set of measures called Desired Levels of Achievement (DLA). States are expected to collect at least 55 percent of all the overpayments they establish annually through their benefit payment control operations. Th"
2033,"is 55 percent performance target has not been modified since 1979 despite advancements in technology over the last decade such as online access to wage and employment information that could make overpayment recovery more efficient. At the time of our review, 34 out of 53 states met or exceeded the minimum standard of 55 percent. The average rate of collections nationwide in that year was about 57 percent. A small number of federal and state officials told us that states tend to devote the minimum possible r"
2034,"esources to meet it each year. For example, one state official told us that over time, UI program managers are able to reasonably calculate the number of staff that they must devote to benefit payment control activities in order to meet the minimum level for overpayment recoveries each year. Any additional staff are likely to be moved to claims processing activities. Some officials also indicated that the DLA for collections should be increased. However, our work shows that Labor has not actively sought to "
2035,"improve overpayment collections by requiring states to incrementally increase the percentage of overpayments they recover each year. Labor is taking steps to address some of the vulnerabilities we identified. At the time of our review, Labor was continuing to implement a series of actions that are designed to help states with the administration of their UI programs. These include the following: States use the Information Technology Support Center (ITSC) as a resource to obtain technical information and best"
2036," practices for administering their UI programs. The ITSC is a collaborative effort involving the Department of Labor, state employment security agencies, private sector organizations, and the state of Maryland. The ITSC was created in 1994 to help states adopt more efficient, timely, and cost-effective service for their unemployment service claimants. Labor provides technical assistance and training for state personnel, as well as coordination and support for periodic program integrity conferences. For exam"
2037,"ple, for the last three years, Labor has conducted at least 4 national training sessions focusing on the quality of UI eligibility decisions, including payment accuracy. Labor requests funding for the states earmarked for program integrity purposes. For example, in 2001, Labor allocated about $35 million for states to improve benefit overpayment detection and collection, eligibility reviews, and field tax audits. Labor also plans to continue its program of offering competitive grants to improve program inte"
2038,"grity. For example, Labor awarded the state of Maryland a competitive grant to develop a technical assistance guide on methods for detecting overpayments. Similarly, Labor awarded California a grant in 1998 to develop a guide on best practices for recovering overpayments. In both cases, these guides were made available to all states to help them improve the integrity of their UI programs by identifying sources of information and methods that some states have found to be effective. To facilitate improved pay"
2039,"ment accuracy in the states’ UI programs, Labor recently included an indicator in its Annual Performance Plan for FY 2003 that will establish a baseline measurement for benefit payment accuracy during 2002. Labor also plans to provide states with additional quality assurance data on the nature and cause of overpayments to help them better target areas of vulnerability and identify more effective means of preventing overpayments. At the time of our review, Labor was also developing a legislative proposal to "
2040,"give state employment security agencies access to the NDNH to verify UI claimants’ employment and benefit status in other states. Our analysis suggests that use of this data source could potentially help states reduce their exposure to overpayments. For example, if the directory had been used by all states to detect claimants’ unreported or underreported income, it could have helped prevent or detect hundreds of millions of dollars in overpayments in 2001 alone. In addition, Labor is working to develop an a"
2041,"greement with the Social Security Administration that would grant states access to the SSA’s SOLQ system. States that used this system would be able to more quickly validate the accuracy of each claimant’s SSN and identity at the time of application for UI benefits. Despite the various efforts by Labor and some states to improve the integrity of the UI program, problems still exist. The vulnerabilities that we have identified are partly attributable to a management approach in Labor and many states that doe"
2042,"s not adequately balance the need to quickly process and pay UI claims with the need to control program payments. While we recognize the importance of paying UI benefits to eligible claimants in a timely manner, this approach has likely contributed to the consistently high level of overpayments over time, and as such, may have increased the burden placed on some state UI trust funds. As the number of UI claimants has risen over the last year, many states have felt pressured to quickly process and pay additi"
2043,"onal claims. The results of our review suggest that, in this environment, the potential for errors and overpayments is likely. Labor is taking some positive steps to improve UI program integrity by helping enhance existing state operations. However, absent a change in the current approach to managing the UI program at both the federal and state level, it is unlikely that the deficiencies we identified will be addressed. In particular, without more active involvement from Labor in emphasizing the need to bal"
2044,"ance payment timeliness with payment accuracy, states may be reluctant to implement the needed changes in their management philosophy and operations. States are also unlikely to voluntarily increase their overpayment recovery efforts. As discussed in this report, Labor already possesses some management and operational tools to facilitate changes in the program. For example, with an increased emphasis on payment accuracy, Labor’s system of performance measures could help encourage states to place a higher pr"
2045,"iority on program integrity activities. However, an effective strategy to help states control benefit payments will require use of its quality assurance data to identify areas for improvement and work with the states to implement changes to policies and procedures that allow overpayments to occur. Labor could also play a more active role in helping states obtain additional automated tools to verify factors affecting claimants’ UI eligibility, such as identity, employment status, and income, as well as ensur"
2046,"ing that these tools are actually used. Key to this is sustaining its efforts to expand state access to SSA’s online database for verifying the accuracy of SSNs and developing more efficient automated means to help states verify claimants’ employment status and any income they may be receiving in other states. Also, Labor already possesses systems such as WRIS that, with some modification, could potentially help states verify claimants’ eligibility information in other states more efficiently. While impleme"
2047,"nting changes to existing systems would likely entail some additional administrative costs for Labor and the states, the results of this review and our prior work in other programs suggests that the savings that result from enhanced payment accuracy procedures (such as online access to important data sources) and increased attention to preventing and detecting overpayments could outweigh these costs. Finally, Labor must be willing to link state performance in the area of program integrity to tangible incent"
2048,"ives and disincentives, such as through the annual administrative funding process. As currently designed and administered, the UI program remains vulnerable to overpayments and fraud. This vulnerability extends to the billions of dollars in additional federal funds recently distributed to the states by Congress. Thus, a coordinated effort between Labor and the states is needed to address the weaknesses we have identified and reduce the program’s exposure to improper payments. Without such an effort, Labor r"
2049,"isks continuing the policies and procedures that have contributed to consistently high levels of UI overpayments over the last decade. To facilitate a change in Labor’s management approach that will help to improve UI program integrity, we recommend that the Secretary of Labor develop a management strategy to ensure that the UI program’s traditional emphasis on quickly processing and paying UI claims is balanced with the need for payment accuracy. Such a strategy should include the following actions: Revise"
2050, program performance measures to ensure increased emphasis on payment accuracy. Use the annual administrative funding process or other funding mechanisms to develop incentives and sanctions that will encourage state compliance with payment accuracy performance measures. Use its quality assurance data more intensively to help states identify internal policies and procedures that need to be changed to enhance payment accuracy. Develop a plan to help states increase the proportion of UI overpayments that are r
2051,"ecovered each year. Study the potential for using the WRIS as an interstate eligibility verification tool. Labor generally agreed with our findings and our recommendations. In particular, Labor agreed that existing performance measures emphasize payment timeliness more heavily than payment accuracy, and noted that it is currently in the process of reviewing these measures. Labor also stated that our report does not sufficiently acknowledge the challenges that are inherent in assuring payment accuracy and th"
2052,"e current and planned efforts by Labor and the states to address program integrity. We believe that this report fairly characterizes the challenges that states face in balancing the need to make timely payments with the need for payment accuracy. In particular, the report acknowledges the fact that some types of overpayments are more difficult for states to detect and prevent than others, and therefore present additional challenges for states in ensuring payment accuracy. We also list several initiatives th"
2053,"at Labor and the states are planning, or are currently implementing to enhance payment accuracy in the UI program. In addition, Labor provided a number of technical comments on our report, which we have incorporated where appropriate. Furthermore, Labor raised one issue in its comments that we believe requires additional explanation. Labor questioned our assessment that it has not fully utilized its quality assurance data to improve state operations. Labor noted that it was responsible for the development o"
2054,"f the wage/benefit crossmatch system in the 1970s, and more recently has promoted the states’ use of their state directory of new hires. While these initiatives demonstrate areas where Labor has played a more active role in facilitating the use of better verification tools, Labor’s response does not directly address our finding that it is not systematically using its quality assurance data to identify and correct vulnerabilities in states’ systems. As our report notes, the overpayment rate estimated by the "
2055,"quality assurance system has not significantly improved over the last 10 years. Thus, we continue to believe that Labor and some of the states are not adequately using the quality assurance data to address program policies and procedures that allow overpayments to occur. The entire text of Labor’s comments appears in appendix II. We are sending copies of this report to the Secretary of Labor, the Assistant Secretary of Employment and Training, and other interested parties. Copies will be made available to o"
2056,"thers upon request. This report is also available at no charge on GAO’s homepage at http://www.gao.gov. If you have any questions concerning this report please contact me at (202) 512-7215, or Daniel Bertoni at (202) 512-5988. Other major contributors are listed in appendix III. Appendix I: Categories of Overpayments Estimated by Labor’s Quality Assurance System (U.S. Totals for 2001) In addition to those named above, Richard Burkard, Cheryn Powell, Frank Putallaz, Daniel Schwimer, John Smale, and Salvatore"
2057," Sorbello made key contributions to this report. Workforce Investment Act: Improvements Needed in Performance Measures to Provide a More Accurate Picture of WIA’s Effectiveness. GAO-02-275. Washington, D.C.: February 1, 2002. Strategies to Manage Improper Payments: Learning from Public and Private Sector Organizations. GAO-02-69G. Washington, D.C.: October 2001. Department of Labor: Status of Achieving Key Outcomes and Addressing Major Management Challenges. GAO-01-779. Washington, D.C.: June 15, 2001. Unem"
2058,"ployment Insurance: Role as Safety Net for Low-Wage Workers is Limited. GAO-01-181. Washington, D.C.: December 29, 2000. Benefit and Loan Programs: Improved Data Sharing Could Enhance Program Integrity. GAO/HEHS-00-119. Washington, D.C.: September 13, 2000. Supplemental Security Income: Action Needed on Long-Standing Problems Affecting Program Integrity. GAO/HEHS-98-158. Washington, D.C.: September 14, 1998. Supplemental Security Income: Opportunities Exist for Improving Payment Accuracy. GAO/HEHS-98-75. Wa"
2059,"shington, D.C.: March 27, 1998. Supplemental Security Income: Administrative and Program Savings Possible by Directly Accessing State Data. GAO/HEHS-96-163. Washington, D.C.: August 29, 1996."
2060,"Through special use permits, the Forest Service authorizes a variety of rights-of-way across the lands it administers. These include commercial uses such as pipelines and power lines and noncommercial uses such as driveways, roads, and trails. In total, there are about 13,000 permits for all rights-of-way. This report focuses on three commercial uses—oil and gas pipelines, power lines, and communications lines. In 1995, there were about 5,600 permits for these uses, which generated about $2.2 million in fee"
2061,"s to the government. According to federal law, 25 percent of the fees generated from these permits is returned to the states where they were generated. The remaining 75 percent goes to the U.S. Treasury. The Forest Service administers about 191.6 million acres of land—roughly the size of California, Oregon, and Washington combined. The networks of oil and gas pipelines, power lines, and communications lines that cross the nation frequently go through national forest lands. Where these lands are located near"
2062," population centers, the demand for land is higher, which thereby increases the value of a right-of-way. In order to best serve their customers, businesses that operate oil and gas pipelines, power lines, and communications lines frequently need to gain access to many miles of land in strips usually 20 to 50 feet wide. These companies negotiate with numerous landowners—both public and private—to gain rights-of-way across their lands. The Federal Land Policy and Management Act (FLPMA) of 1976 and the Mineral"
2063," Leasing Act (MLA) generally require federal agencies to obtain fair market value for the use of federal lands for rights-of-way. In addition, title V of the Independent Offices Appropriation Act of 1952, as amended in 1982, requires the federal government to levy fair fees for the use of its services or things of value. Under the Office of Management and Budget’s (OMB) Circular A-25, which implements the act, the agencies are normally to establish user fees on the basis of market prices. While there are ex"
2064,"ceptions to this practice, they are generally reserved for federal, state, and local government agencies and nonprofit organizations. The Forest Service’s current fees for commercial rights-of-way for oil and gas pipelines, power lines, and communications lines frequently do not reflect fair market value. Before 1986, the Forest Service used a variety of techniques to establish fees for rights-of-way. These fees were based on appraisals, negotiations, a small percentage of the permittees’ investment in the "
2065,"land, or a small percentage of the estimated value of the land. However, in 1986 the Forest Service implemented a fee schedule to address the problems that the agency was having in administering the fees for rights-of-way. Agency officials told us that the 1986 fee schedule reflected land values representing the low end of the market. As a result, when the fee schedule was implemented, the fees for rights-of-way near some urban areas were significantly reduced from pre-1986 levels. Before 1986, the Forest S"
2066,"ervice did not have a consistent system to establish fees for oil and gas pipelines, power lines, or communications lines. The agency’s field staff used different methods for developing the fees for rights-of-way. Some used a percentage of the estimated value of the land or a percentage of the permittees’ investment in the land, while others used appraisals and negotiations with the permittees to set the fees. However, in addition to being inconsistent, these practices resulted in unpredictable fees and app"
2067,"raisals that were subject to an appeals process. At that time, agency officials thought that moving to a fee schedule based on fair market value would resolve these problems. To develop a fee schedule based on fair market value, Forest Service officials, as well as officials from the Department of the Interior’s Bureau of Land Management (BLM), collected market data on raw land values throughout the country. On the basis of these data, the Forest Service and BLM produced a fee schedule in 1986 which charged"
2068," annual per acre fees that were based on the location and type of the right-of-way. The rates in the fee schedule were indexed to the Implicit Price Deflator to account for future inflation. However, according to Forest Service officials, the agency’s management and the industry viewed the rates as being too high. As a result, the fees in the 1986 schedule were reduced by 20 percent for oil and gas pipelines and 30 percent for power lines and communications lines. Before the reductions, the fees represented"
2069," average raw land values for federal lands. These values did not consider several factors that are critical to establishing land values that reflect fair market value. Specifically, they did not reflect what the land was being used for, the “highest and best” use of the land, or the values of any urban uses. For example, if these factors are not considered, land located near a large metropolitan area, which might otherwise be used for a residential housing development, would be valued as if it were being us"
2070,"ed for livestock grazing—a use that would result in a considerably lesser value. As such, according to Forest Service officials, the data used to generate the land values used in the fee system represented the “bottom of the market” and did not reflect fair market value. Nonetheless, the fee schedule established in 1986 is the basis for current fees. The Forest Service officials in the agency’s Lands Division, which is responsible for the rights-of-way program at a national level, estimated that many of the"
2071," current fees for rights-of-way may be only about 10 percent of the fair market value—particularly for lands near large urban areas. However, agency officials acknowledged that this estimate is based on their professional judgment and program experience and that there are no national data to support it. Because the fee schedule did not reflect several critical factors for determining fair market value, the fees for many rights-of-way, especially in forests near urban areas, were reduced when the fee schedul"
2072,"e was implemented in 1986. For example, in the San Bernardino National Forest near Los Angeles, the annual fee for a fiber-optic cable was $465.40 per acre before the fee schedule was implemented and $11.16 afterwards. In the same forest, the annual fee for a power line was $72.51 per acre before the fee schedule and $8.97 afterwards. While these examples are among the most notable, the fees at forests that were not near urban areas frequently were also reduced. For example, in the Lolo National Forest in M"
2073,"ontana, the fees for a communications line right-of-way went from $19.88 per acre to $17.23 per acre. Overall, at four of the six national forests where we collected detailed information, we found examples of fees that were reduced when the agency moved to a fee schedule in 1986. The Forest Service and BLM use the same fee schedule for rights-of-way. In March 1995, the Department of the Interior’s Inspector General issued a report which found that BLM’s fee system did not collect fair market value for right"
2074,"s-of-way. In the report, the Inspector General estimated that BLM could be losing as much as $49 million (net present value ) during the terms of the current rights-of-way by charging less than fair market value. At the time of the report, the agency had authorized 30,600 rights-of-way subject to rental payments. To determine how the Forest Service’s fees compare with those charged by nonfederal landowners, we collected and analyzed information on charges for rights-of-way by states and private landowners. "
2075,"We found that state and private landowners frequently charge higher fees than the Forest Service. However, because our analysis is based on a judgmental sample of forests, it is important to note that our findings may not be representative of the situation for the nation as a whole. To compare the Forest Service’s fees with those charged by nonfederal landowners, we collected available data on fees charged by nonfederal landowners in the same states as the forests that we visited. These forests included the"
2076," San Bernardino National Forest and Angeles National Forest in California, the Arapaho/Roosevelt National Forest in Colorado, the Lolo National Forest in Montana, the Washington/Jefferson National Forest in Virginia, and the Mount Baker/Snoqualmie National Forest in Washington. Our objective was to include forests from different parts of the country, some of which are near urban areas and some of which are in rural areas. Since most nonfederal landowners charge a one-time fee either in perpetuity or for an "
2077,"extended term, such as 30 years, we used a net present value analysis to convert the Forest Service’s annual fees to an equivalent one-time fee, which could then be compared with the one-time fee charged by nonfederal landowners. Table 1 compares the Forest Service’s fees at the six forests we sampled with those charged by nonfederal landowners in the general vicinity of that forest. As table 1 shows, the Forest Service’s fees are frequently less than fees charged by nonfederal landowners for similar rights"
2078,"-of-way. This was the case in 16 of the 17 examples we found during our review. In over half (10) of the examples, the Forest Service’s fees were over $500 per acre less than the fees charged by nonfederal landowners. For example, in 1993 a power company negotiated with a private landowner in Virginia to obtain a right-of-way to run a power line. The power company agreed to pay a one-time fee of $42,280 for 30.2 acres of land, or $1,400 per acre. The Forest Service’s annual fee in 1993 for that part of Virg"
2079,"inia was $22.01 per acre. Our use of net present value techniques showed that the right-of-way operator’s annual payment to the Forest Service of $22.01 per acre was equivalent to a one-time payment of $546 per acre. Thus, the Forest Service’s one-time fee was $854 per acre less than the fee charged by the private landowner. Another example from the table shows that in 1995, a natural gas pipeline in California paid a one-time fee of $130,726 per acre for a right-of-way on state land. As the table shows, th"
2080,"e Forest Service’s comparable fee is over $129,000 less than the state of California’s fee. While this difference is atypical of other examples we found, it nonetheless demonstrates how a unique parcel of land can have a considerable value. Furthermore, it is an example of how difficult it is to design a fee schedule that can reflect the fair market value of all lands managed by the Forest Service. In addition to collecting comparable data on fees in the same states as the six national forests we visited, w"
2081,"e also gathered examples of the rates paid to state and private landowners by the Bonneville Power Administration (BPA)—an electric utility operating in the northwestern United States. BPA runs power lines across hundreds of miles of land owned by the federal government, states, and private entities. We included BPA in our review because during the course of our work, we learned that this utility had extensive data on the rates it was paying for rights-of-way. Therefore, it was a good source of data on fees"
2082,". The data in table 2 are based on a sample from a database of fees that BPA paid to state and private landowners. The table compares the rates BPA paid to state and private owners with the rates charged by the Forest Service in that area. As table 2 shows, in 12 out of 14 examples, the fees charged by nonfederal landowners were higher than those charged by the Forest Service and in most cases were significantly higher—$100 or more per acre. In 6 of the 14 examples, the fees charged by nonfederal landowners"
2083," were over $1,000 per acre higher than the fees charged by the Forest Service in the area. For example, in 1990 BPA negotiated with a private landowner in Montana to gain a right-of-way for a power line. BPA and the landowner agreed to a one-time payment of $11,106 for 5.03 acres of land, or about $2,208 per acre. In comparison, in 1990 the Forest Service’s fee schedule produced an annual fee of $14.88 per acre for land located in the same county as the private land. Our use of net present value techniques "
2084,"showed that the annual payment received by the Forest Service of $14.88 per acre was equivalent to a one-time payment of $369 per acre. Thus, the Forest Service’s one-time fee was $1,839 per acre less than the fee charged by the private landowner. In order to meet the requirements of FLPMA, MLA, and OMB Circular A-25, the Forest Service needs to revise and update its current fee system to establish fees that more closely reflect fair market value. The way to accomplish this task is to develop a system that "
2085,"is based on data that reflect current land values. However, each of the several available options for developing such a system has costs and benefits that need to be considered. Many of the industry representatives we spoke with acknowledged that nonfederal landowners generally charge higher fees than the Forest Service. Furthermore, these representatives indicated that they would be willing to pay higher market-based fees if the Forest Service improves its administration of the program by using more market"
2086,"-like business practices. Both the industry representatives and Forest Service officials suggested several changes that, if implemented, could improve the efficiency of the program for both the Forest Service and the industry. The Forest Service has several options available to revise its fee system for rights-of-way to reflect fair market value. Among them are three basic options: (1) develop a new fee schedule based on recent appraisals and local market data; (2) develop a new fee schedule, as noted above"
2087,", but allow agency staff the alternative of obtaining site-specific appraisals when the fee schedule results in fees that do not adequately reflect the fair market value of a right-of-way; or (3) eliminate the fee schedule and establish fees for each individual right-of-way based on a site-specific appraisal or local market data. The first option involves developing a new fee schedule based on recent appraisals and local market data. This option would include performing some site-specific appraisals of Fore"
2088,"st Service rights-of-way and developing an inventory of the rates charged by nonfederal landowners for various types of rights-of-way in the area. These data would be used to formulate a new, more up-to-date fee schedule that would set annual fees for identified areas within a forest. The fee schedule would be used in the same way that the current schedule is used. In this way, the Forest Service could, for the most part, charge annual fees that broadly reflect the fair market value of a right-of-way for an"
2089," area. The advantage of having a fee schedule, and one of the reasons the agency originally decided to use a fee schedule, is that it is both easy to use and generates fees that are consistent and predictable for the industry. The disadvantage of a fee schedule is that it does not take into account the unique characteristics that may affect the value of a particular parcel of land. Therefore, instances may arise when a fee schedule will charge fees that are significantly different from fair market value—as "
2090,"our analysis has shown. Furthermore, performing appraisals and collecting market data to develop a new fee schedule will cost the agency time and money. However, these additional costs may be offset by the additional revenue that would be generated from the increased fees. Another disadvantage of using a fee schedule is that it carries the administrative burden and cost of having to bill and collect fees every year. A second option available to the Forest Service is a variation of the first option. It too w"
2091,"ould involve developing a new fee schedule based on recent appraisals and market data. However, under this approach, the fees in the schedule would be used as minimum fees. When it appears that the fees from this schedule do not properly value a right-of-way, the agency would be permitted to obtain an individual site appraisal to determine the fair market value of the site. The fee would then be based on the appraisal instead of the fee in the schedule. This option would offer the ease of use provided by a "
2092,"fee schedule combined with an accounting of the unique characteristics of individual parcels of land as provided for in appraisals. If the agency decided to use this option in developing a new fee system, it would have to develop meaningful criteria for when field staff should seek an appraisal. Otherwise, agency field staff may not seek to obtain appraisals when they are justified. For example, the Forest Service’s current fee schedule contains a provision that permits Forest Service field staff to obtain "
2093,"appraisals. However, basing a fee on an appraisal can only occur when fair market value is 10 times greater than the fee from the fee schedule. This “10-times” rule is viewed by Forest Service officials in headquarters and in the field as being too high and, as a result, serves as a disincentive to obtaining appraisals. In fact, Forest Service headquarters and field staff could recall only one occasion in the past 10 years when this 10-times rule was used. A third option available to the Forest Service is t"
2094,"o eliminate the fee schedule and establish fees for each individual right-of-way based on a site-specific appraisal or local market data. Appraisals are a technique commonly used in the marketplace for determining fair market value. By performing site-specific appraisals, the Forest Service could charge fees reflective of the fair market value for each individual permit. The fees could also be based on local market data. This method would be the most appropriate when agency staff are familiar with the fees "
2095,"being charged for nonfederal lands or when recent appraisal data are available from nearby lands. The obvious advantage of obtaining site-specific appraisals is that the practice would result in fees that would accurately reflect the fair market value for each individual permit throughout the Forest Service. As such, it would meet the requirements of FLPMA, MLA, and OMB Circular A-25. Like the other options, the downside of using appraisals is that they could be costly and/or time-consuming and could likely"
2096," be subject to appeals because of their inherent subjectivity. In addition, this approach could be more difficult to administer than a fee schedule because of the need to perform appraisals on thousands of right-of-way permits across the nation. However, to mitigate this burden, the agency could require the users of rights-of-way to pay for any needed appraisals—something the industry representatives we spoke to agreed with. Industry officials we talked to representing a large segment of the users of rights"
2097,"-of-way indicated that, from their perspective, the value of rights-of-way on Forest Service lands is generally less than the value of similar nonfederal lands because of the administrative problems the prospective permittees may encounter in obtaining Forest Service permits. However, most of the industry representatives we spoke with told us that if the Forest Service improves its administration of the rights-of-way program by using more market-like administrative practices, they would be willing to pay fa"
2098,"ir market value for rights-of-way on Forest Service lands. While revising its fee system, the Forest Service can do several things to improve the administration of permits for rights-of-way. These include (1) using a more market-like instrument, such as an easement instead of a permit, to authorize rights-of-way; (2) billing less frequently or one time over the term of an authorization instead of annually; (3) providing consolidated billing for operators that have more than one right-of-way permit in a fore"
2099,"st or region; and (4) making more timely decisions when processing new authorizations. These improvements would both reduce the agency’s cost of administering rights-of-way and bring about the use of industry practices commonly found in the market. The Forest Service has the authority to make most of these changes. However, MLA requires annual payments for rights-of-way for oil and gas pipelines. Thus, changing fee collection from an annual payment to a one-time payment would require legislative action from"
2100," the Congress. Instead of employing special use permits to grant right-of-way authorizations, one improvement the Forest Service could make is to grant authorizations using an instrument, such as an easement, that is more commonly found in the market. Special use permits convey rights that are similar to those of easements but not equal to them. Special use permits are revocable. In other words, during the term of a permit, if the agency decides that a right-of-way is no longer consistent with management’s "
2101,"goals for an area of a forest, the agency can revoke the permit and require the operator to remove his investment in the land and leave. Because of this situation, banks do not recognize a permit as granting a value in the land equivalent to that granted by an easement, which is not revocable but can be terminated if the operator breaches the terms and conditions of the easement. The constraint on special use permits affects the users of rights-of-way when they are trying to obtain financing for a project. "
2102,"With a permit, the permittee is also at risk if the Forest Service decides to trade or exchange the land that the right-of-way crosses. In such instances, the permittee must renegotiate a right-of-way with the new landowner. If the Forest Service is going to revise its fee system to reflect fair market value, then the agency also needs a comparable instrument that conveys rights similar to those commonly found in the marketplace. This comparability could best be achieved by issuing easements instead of perm"
2103,"its. Permits have been viewed by agency officials as giving the Forest Service more flexibility because it can terminate them if the use is no longer consistent with management’s objectives in a forest. In practice, agency officials indicated that rarely has this flexibility been used to revoke a permit. Another improvement available to the agency in administering rights-of-way is to revise its billing system to eliminate the annual billing of permit fees. Instead, the agency could bill only once for the 20"
2104,"- or 30-year term of an authorization, or perhaps reduce billing to every 5 or 10 years. The agency has the authority to make this change for power lines and communications lines, but it would need to seek authority to do so for oil and gas pipelines. In addition, the agency can consolidate billing for operators that have multiple permits within the same forest or region. One-time billing and consolidated billing would reduce costs to both the agency and the permittee. For example, the Forest Service estima"
2105,"tes that it costs the agency an average of about $40 to mail a bill and collect payment for a permit. Over the life of a 30-year permit, the agency’s costs would be $1,200. With 5,600 rights-of-way permits for oil and gas pipelines, power lines, and communications lines, the potential savings for the program could be substantial—roughly $6.7 million ($1,200 x 5,600 permits) over a 30-year term. (The potential savings of $6.7 million has a net present value of about $3.9 million.) If the agency moved to a on"
2106,"e-time payment, it would substantially reduce the costs of processing bills in the future. These costs can be further reduced by consolidating billing for multiple permits issued to the same operator within a forest or region. While the agency has made progress in consolidating some bills into “master permits,” industry officials indicated that there remain more opportunities for consolidation. Both one-time billing and consolidated billing are commonly found in the marketplace, and both are supported by in"
2107,"dustry representatives. Furthermore, moving to a one-time billing process has significant cost-savings implications if and when the Forest Service attempts to increase its fees to reflect fair market value. Specifically, if the Forest Service decides to move to site-specific appraisals to establish fees, as described in the third option, the agency would have to do thousands of appraisals to determine the fees for the current permits. As we noted, under current conditions, this additional workload could be "
2108,"both costly and time-consuming. However, if the agency moved to a one-time billing process and based its fees on site-specific appraisals, then the agency would need to perform an appraisal on each permit only once over a 20- to 30-year authorization period. While the agency would spend more of its resources on appraisals, agency officials indicated that the cost savings of moving to one-time billing would more than cover the additional appraisal costs. Furthermore, the agency can largely negate these costs"
2109, by requiring the users to pay for any needed appraisals. The industry representatives that we spoke to had no problem with paying for the necessary appraisals as long as the agency also moved to easements and one-time billing. Another improvement to the agency’s administration of rights-of-way is to reduce the time the agency takes to reach a decision on whether to approve a new right-of-way. Industry representatives indicated that it frequently takes months and occasionally years for the Forest Service to
2110," reach a decision on whether to approve an application for a new right-of-way permit. Generally, delays in approving applications are the result of a lack of agency staff to perform environmental studies and inconsistent requirements among Forest Service units. Forest Service headquarters officials acknowledged that applications for permits are not processed in a timely manner, and they are now trying to identify opportunities for streamlining the agency’s practices to help address this issue. It is their v"
2111,"iew that the industry should assume a greater share of the costs of both processing applications for new rights-of-way and administering existing rights-of-way. Industry representatives we spoke with indicated a willingness to pay for application and administration costs. Both agency and industry representatives have been working together to implement and resolve this issue. The Forest Service needs to update its current fees to fair market value for rights-of-way used by operators of oil and gas pipelines,"
2112," power lines, and communications lines. In most cases, nonfederal landowners charge higher fees for similar rights-of-way. In attempting to arrive at fees based on fair market value, the agency has several options. Each of these options has a number of advantages and disadvantages. The initial costs of developing a new fee system could be substantial because of the need to perform appraisals and collect the market data needed to establish fair market value. These costs could be mitigated, and in some cases "
2113,"negated, with some administrative improvements to the program. Given the tight budgets and resource constraints that all federal land management agencies are experiencing, one option appears to be the most advantageous—obtaining site-specific appraisals that are paid for by the users of rights-of-way. However, to implement this option, a number of other changes would have to be made to the program to make it more market-like and more efficient to administer. To meet the requirements of FLPMA, MLA, and OMB C"
2114,"ircular A-25, we recommend that the Secretary of Agriculture direct the Chief of the Forest Service to develop a fee system that ensures that fair market value is obtained from companies that have rights-of-way to operate oil and gas pipelines, power lines, and communications lines across Forest Service lands. While there are a number of options available to accomplish this goal, the option of establishing fees based on local market data or site-specific appraisals paid for by the users of rights-of-way app"
2115,"ears to be the most attractive because it collects fair market value for each right-of-way and also reduces the agency’s administrative costs. We also recommend that the Secretary improve the administration of the program by (1) authorizing rights-of-way with a more market-like instrument—specifically, easements; (2) billing once during the term of an authorization or, at a minimum, reducing the frequency of the billing cycle; and (3) consolidating the billing of multiple permits issued to the same operator"
2116," in a forest or region. To the extent that the agency needs additional authority to charge one-time fees, we recommend that the Secretary seek that authority from the Congress. In addition, we also recommend that the Forest Service continue its efforts to streamline its practices for processing applications for right-of-way authorizations. We provided a draft of this report to the Forest Service and the Western Utility Group—an industry group representing a large number of users of rights-of-way—for their r"
2117,"eview and comment. We met with officials from the Forest Service—including the Acting Director of the Division of Lands—and with officials from the Western Utility Group, including its Chairman. Both the agency and the Western Utility Group agreed with the factual content, conclusions, and recommendations in the report. While the Forest Service officials agreed with the report’s recommendations, they noted that the recommendations should also include having the Forest Service (1) look for ways to operate mo"
2118,re efficiently and (2) manage the rights-of-way program in a more business-like manner. We are not including these points because we believe they are already inherent in our recommendations. The Forest Service officials also stated that the industry should assume a greater share of the costs of both processing applications for new rights-of-way and administering existing rights-of-way. We have revised the report to reflect this comment. Officials from the Western Utility Group provided us with some clarific
2119,"ations on technical issues, which have been included in the report as appropriate. They also noted that while they currently pay nonfederal landowners higher fees for rights-of-way, it is their view that they get more from these landowners than they do from the Forest Service because nonfederal landowners (1) generally use easements, instead of permits, to authorize rights-of-way and (2) are more timely than the Forest Service in responding to requests for rights-of-way. We conducted our review from April 1"
2120,"995 through March 1996 in accordance with generally accepted government auditing standards. We performed our work at Forest Service headquarters and field offices. We also contacted nonfederal landowners and representatives of companies that operate oil and gas pipelines, power lines, and communications lines on federal lands. Appendix II contains further details on our objectives, scope, and methodology. As arranged with your office, unless you publicly announce its contents earlier, we plan no further dis"
2121,"tribution of this report until 30 days after the date of this letter. At that time, we will send copies to the Secretary of Agriculture, the Chief of the U.S. Forest Service, and the Director of the Office of Management and Budget. We will also make copies available to others on request. Should you have questions about this report or need more information, please call me at (202) 512-3841. Major contributors to this report are listed in appendix III. We were asked by the Chairman, Subcommittee on Oversight "
2122,"of Government Management and the District of Columbia, Senate Committee on Governmental Affairs, to determine (1) whether the fees currently charged to users of Forest Service rights-of-way that operate oil and gas pipelines, power lines, and communications lines reflect fair market value, (2) how the Forest Service’s fees compare with fees charged by nonfederal landowners, and (3) what, if any, changes are needed to the Forest Service’s fee system to ensure that fees reflect fair market value. Our review i"
2123,"ncluded rights-of-way managed by the U.S. Department of Agriculture’s Forest Service. Our work addressed the major commercial users of rights-of-way: oil and gas pipelines, power lines, and communications lines. To determine how the Forest Service establishes fees for rights-of-way, we reviewed the laws and implementing regulations governing rights-of-way. Because the Forest Service and the Bureau of Land Management (BLM) worked together to develop the joint 1986 fee schedule for rights-of-way, we reviewed "
2124,"the methods these agencies used to develop the schedule. However, we did not verify the accuracy of the data or the computations used by the agencies in developing this fee schedule. To determine whether the current federal fees reflect fair market value, we reviewed applicable laws and regulations, along with the Department of Agriculture’s requirements for obtaining fair market value on lands it administers. We interviewed representatives of nonfederal entities (states, counties, private companies, and pr"
2125,"ivate landowners) to obtain information on commonly accepted techniques for determining fair market value. We also interviewed officials at Forest Service headquarters and field locations. We reviewed rights-of-way in six national forests: the Angeles National Forest and the San Bernardino National Forest in California, the Arapaho/Roosevelt National Forest in Colorado, the Lolo National Forest in Montana, the Washington/Jefferson National Forest in Virginia, and the Mount Baker/Snoqualmie National Forest i"
2126,"n Washington. We selected these sites to obtain broad geographical representation and to encompass a high volume of commercial rights-of-way. To determine how federal fees compare with fees charged on nonfederal land, we compared the fee determination methods used by the Forest Service and BLM to those used by states, counties, private companies, and private landowners. For example, we interviewed state and county officials responsible for rights-of-way agreements in California, Colorado, Montana, Virginia,"
2127," and Washington. We also interviewed commercial land managers who manage private lands in Montana and Virginia. Furthermore, we reviewed the Bonneville Power Administration’s (BPA) settlement records for rights-of-way in Montana and Washington states. In addition, state and county officials, private land managers, and BPA administrators told us what they charged and/or were charged for various types of rights-of-way agreements. Using net present value techniques, we compared these fees with those charged by"
2128," the federal government. In order to compute the net present value of future payments to the Forest Service, we deflated future payments by 4.2 percent per year. We obtained this number by subtracting expected inflation from the 30-year government bond rate. As of March 21, 1996, the 30-year government bond rate was 6.65 percent, and the WEFA Group’s forecast for inflation was 2.45 percent. (The WEFA Group is a commonly cited, private economic forecasting organization that produces estimates of the long-ter"
2129,"m economic outlook, including expected inflation.) To obtain views on potential changes to the Forest Service’s fee schedule, we met with officials of the Western Utility Group. This organization represents over 25 major companies that operate oil and gas pipelines, power lines, and communications lines. These companies represent about 75 percent of the energy and communications business in 11 western states. About 74 percent of all the land in the Forest Service is within these 11 western states. (For a li"
2130,"st of member organizations of the Western Utility Group, see app. I.) In addition, we interviewed private landowners and Forest Service personnel in each of the states we visited. Finally, we interviewed several BLM field staff to obtain their viewpoints on the fee schedule. Joseph D. Kile The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, wh"
2131,"en necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimon"
2132,"y. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists."
2133,"UASs can be categorized by both size and mission, as shown in figure 1. For the purposes of this report, in terms of size, we use the broad categories of “small” and “large” UASs. Small UASs typically weigh less than 55 pounds and can be used for a variety of commercial purposes including photography and package delivery. According to an industry association, small UASs are expected to comprise the majority of UASs that will operate in the national airspace system. Large UASs, depending on their size and pu"
2134,"rpose, generally fly at higher altitudes and are used for the purposes of surveillance, data gathering, and communications relay. UAS operations are also categorized by how they are being used— their mission—within line of sight of the operator or beyond the line of sight of the operator. For UAS operations within the operator’s line of sight—for example a real estate agent taking photographs of a house—the operator relies only on their vision to avoid colliding with other objects. On the other hand, UAS op"
2135,"erations occurring beyond the line of sight of the operator—for example conducting rail or pipeline inspections—requires that FAA segregate the airspace or that the UAS needs instruments to sense other aircraft and obstacles and avoid those obstacles, as well as, other technologies that will keep the aircraft safely operating during its mission. The FAA plays two major roles in integrating UASs into the national airspace—a regulator and a service provider. As the regulator, the FAA seeks to ensure the safet"
2136,"y of persons and property in the air and on the ground in part by requiring that UAS operators and manufactures follow specific operation and manufacturing standards. As the service provider, the FAA is responsible for providing safe and efficient air-traffic control services in the national airspace system and the other portions of global airspace. In addition to FAA, many federal and private sector entities have roles in the effort to integrate UAS into the national airspace system. See table 1 for UAS st"
2137,"akeholders and their responsibilities. FAA also partners with a range of industry, federal research entities, universities, and international organizations for research and development on UAS issues. Federally Funded Research and Development Centers and Cooperative Research and Development Agreements typically require an agency, organization, or company to perform specific research and provide FAA with data in exchange for funding. FAA uses these types of agreements to support research and development in cr"
2138,"itical technologies needed for UAS integration including “detect and avoid” and “command and control” as well as for the dedicated radio- frequency spectrum and “human factors.” Some other partnerships use Other Transaction Agreements to establish the research and development relationship.these take many forms and are subject to requirements that may differ from the federal laws and regulations that apply to contracts, grants, or cooperative agreements, and therefore might not include a requirement to share"
2139," research results with FAA. Currently, most UAS operations must remain within visual line of sight of the UAS operator. FAA’s long-term goal is to pursue research and development that will advance technology in these critical areas, such as detect and avoid, and supporting beyond-visual-line-of-sight operations. These types of operations, according to an industry group, have the most potential for commercial purposes. In response to the 2012 Act, FAA has been planning for UAS integration into the national a"
2140,"irspace and has been taking steps toward increasing UAS operations. The 2012 Act outlined 17 date specific requirements and set deadlines for FAA to achieve safe UAS integration by September 2015. These requirements included developing two planning documents - UAS Comprehensive Plan and the UAS Roadmap. FAA has completed these two requirements in addition to naming six test sites where research and development will occur. However, we found in December 2014 that several other requirements, some key ones, inc"
2141,"luding the publication of a final rule on small UAS operations, had not been completed (see app. II). As part of its role in supporting UAS integration, FAA authorizes all UAS operations (access to the airspace as well as the aircraft itself) in the national airspace system—military; public (academic institutions and, federal, state, and local governments including law enforcement organizations); and civil (non-government including commercial). Depending on the type of user, public or civil, the process for"
2142," accessing the airspace may be different (see table 2). Currently, since a final rulemaking is not yet completed, FAA only approves UASs access to the national airspace on a case-by-case basis. FAA provides this approval through three different means: Public or Civil Certificates of Waiver or Authorization (COA): A COA is an authorization, generally for up to 2 years, issued by the FAA to an operator for a specific UAS activity. Public entities, including FAA- designated test sites (described in more detail"
2143," later), and civil entities may apply for a COA to obtain authorized access to the airspace. FAA has a goal to review and approve all COAs within 60 days of being received. Section 333 exemptions: Since September 2014, commercial entities have applied to FAA for exemptions under section 333 of the 2012 Act, Special Rules for Certain Unmanned Aircraft Systems. This exemption requires the Secretary of Transportation to determine if certain UASs may operate safely in the national airspace system prior to the c"
2144,"ompletion of UAS rulemakings. Special Airworthiness Certificates in the Experimental Category and the Restricted Category (Experimental Certificate): Civil entities, including commercial interests, may apply for experimental certificates, which may be used for research and development, commercial operations, training, or demonstrations by manufacturers. While FAA has proceeded in planning for integration, foreign countries are also experiencing an increase in UAS use and planning for integration, and some h"
2145,"ave begun to allow commercial entities to fly UASs under limited circumstances. Some countries have already established regulations for flying UASs or formal processes for exemptions, while others have taken steps to completely ban all UAS operations. While some countries have worked independently to integrate UAS operations, some international groups, such as the ICAO, are working to harmonize UAS regulations and standards across borders. FAA has taken a number of steps to move toward further safe integrat"
2146,"ion of UAS in the national airspace in response to key requirements of the 2012 Act. FAA has developed the following planning documents: In November 2013, FAA issued the UAS Comprehensive Plan identifying six high-level strategic goals for integrating UAS into the national airspace, including routine public operation and routine civil operations. The Comprehensive Plan provides a phased-in approach for achieving these goals, which will initially focus on public UAS operations, but ultimately will provide a "
2147,"framework for civil UAS operations. According to the plan, each partner agency will work to achieve these national goals and may develop agency-specific plans that are aligned to the national goals and objectives. The DOD’s Unmanned Systems Integrated Roadmap and FAA’s UAS Integration Roadmap, described below, are examples of such plans. In November 2013, FAA also issued the UAS Integration Roadmap, which identified a broad three phase approach to UAS integration— accommodation, integration, and evolution—w"
2148,"ith associated priorities for each phase. These priorities provide insight into FAA’s near-, mid-, and far-term goals for UAS integration, as shown in figure 2. FAA intends to use this approach to facilitate further incremental steps toward its goal of seamlessly integrating UAS flight into the national airspace. Under this approach, FAA’s initial focus during the accommodation phase will be on safely allowing for the expanded operation of UASs by selectively accommodating some use and demonstrating progres"
2149,"s by increasing operations throughout the phase. In the integration phase, FAA plans to develop new operational rules, standards, and guidance, shifting its emphasis toward moving beyond case-by-case approval for UAS use, once technology can support safe operations. Finally, in the evolution phase, FAA plans to focus on revising its regulations, policy, and standards based on the changing needs of the airspace. This phased approach has been supported by stakeholders across both academia and industry. The 20"
2150,"12 Act requires the Roadmap to be updated annually, but as of May 2015 FAA has only issued one version of the Roadmap. FAA intends to update the Roadmap by September 2015 and send it to the Office of Management and Budget for additional review before it is publicly released. While these planning documents provide a broad framework for integration, FAA is still in process of developing an implementation plan for integrating UASs. FAA’s Comprehensive Plan and Roadmap provide broad plans for integration, but a"
2151,re not detailed implementation plans that predict with any certainty when full integration will occur and what resources will be needed. The Department of Transportation’s Inspector General issued a report in June 2014 that recommended FAA develop an implementation plan. Two reports—one from the UAS Aviation Rulemaking Committee and a second internal FAA report—have discussed the importance of an implementation plan and information to include as part of such a plan. The UAS Aviation Rulemaking Committee has
2152," emphasized that FAA needs an implementation plan that would identify the means, necessary resources, and schedule to safely and expeditiously integrate civil UAS into the national airspace. The proposed implementation plan contains several hundred tasks and other activities needed to complete the UAS integration process, including: identifying gaps in current UAS technologies, regulations, standards, policies, or procedures; developing new technologies, regulations, standards, policies, and procedures that"
2153," would support safe UAS operations; and identifying necessary activities to advance routine UAS operations in the national airspace, including the development of guidance materials, training, and procedures for certification of aircraft. An internal FAA report from August 2014 prepared by MITRE Corporation (MITRE) was intended to assist FAA’s development of the key components of an implementation plan.among other actions FAA’s implementation plan should: identify the tasks necessary, responsibilities, resou"
2154,"rces, and expected time frames for incremental expansion of UAS operations; clarify the priorities for aligning internal resources in support of near- term and long-term integration efforts and provide consistent communication with external stakeholders on the expected progress, cost, and extent of UAS integration during these time periods; align resources supporting UAS integration including allocation of FAA personnel and funds used for contracts and to acquire systems and services in support of integrati"
2155,"on; and establish the operational, performance, and safety data needed and also the associated infrastructure for collecting, storing, disseminating, and analyzing data, actions that could be a component of an implementation plan. According to FAA, it continues to work with MITRE developing the foundation for a detailed implementation plan. FAA expects MITRE to complete this by September 2015 and FAA to enact the plan by December 2015. According to FAA, the agency used the Aviation Rulemaking Committee’s re"
2156,"port when writing the Roadmap and is applying the report prepared by MITRE to help develop the detailed implementation plan. In February 2015, FAA made progress toward the 2012 Act’s requirement to issue a final rule for the operations of small UASs—those weighing less than 55 pounds—by issuing a Notice of Proposed Rulemaking (NPRM) that could, once finalized, allow greater access to the national airspace.To mitigate risk, the proposed rule would limit small UASs to daylight-only operations, confined areas "
2157,"of operation, and visual-line-of-sight operations. This proposed rule also addressed other issues pertinent to UAS operations including aircraft registration, operations in the national airspace, and operator certification. See table 3 for a summary of the rule’s major provisions. FAA’s release of this proposed rule for small UAS operations started the process of addressing remaining requirements of the 2012 Act. FAA’s proposed rule also sought comments on a potential micro-UAS classification (4.4 pounds or"
2158," less) that would apply to very small UAS being used for authorized purposes. This classification would be based on the UAS Aviation Rulemaking Committee’s recommendations, as well as approaches adopted in other countries, that a separate set of regulations for micro-UASs be created. FAA is considering provisions for micro-UASs classification such as limiting operation airspeed to 30 knots, limiting flight to within visual line of sight, and having aircraft made out of materials that break on impact. The pr"
2159,"oposed rule would not apply to model aircraft—unmanned aircraft that are flown for hobby or recreational purposes, capable of sustained flight in the atmosphere, and flown within visual line of site of the person who is operating the aircraft—as specified in the 2012 Act. Whether or not a UAS is considered a model aircraft or a small UAS depends upon its operation. For example, if the operator is flying an unmanned aircraft for recreational purposes the unmanned aircraft is considered a model aircraft. If t"
2160,"he exact same type of unmanned aircraft is being operated for an authorized purpose such as a search and rescue mission, it is considered a small UAS. The 2012 Act specifically prohibits FAA from promulgating rules regarding model aircraft that meet specific criteria, including model aircraft flown strictly for hobby or recreational use and operated in a manner that does not interfere with and gives way to any manned aircraft. However, the proposed rule would incorporate the 2012 Act provisions that preserv"
2161,"e FAA’s authority to pursue enforcement against persons operating model aircraft who endanger the safety of the national airspace system. According to FAA, it may take 16 months to process the comments it receives on the NPRM and develop and issue the final rule for small UAS operations. If FAA takes 16 months, the final rule would be issued in late 2016 or early 2017, about two years beyond the requirement in the 2012 Act. However, during the course of our work, FAA told us that the time needed to respond "
2162,"to a large number of comments could further extend the time to issue a final rule. When the comment period closed on April 24, 2015 FAA had received over 4,500 comments. FAA officials told us that it has taken a number of steps to develop a framework to efficiently process the comments it expects to receive. Specifically, they said that FAA has a team of employees assigned to lead the effort with contractor support to track and categorize the comments as soon as they are received. FAA has also met the requi"
2163,"rement from the 2012 Act to create UAS test sites for research and development. Specifically, in December 2013 FAA selected six UAS test site locations, which all became operational between April 2014 and August 2014. According to FAA, these sites were chosen based on a number of factors including geography, climate, airspace use, and a proposed research portfolio that was part of the application. Under FAA policy, all UAS operations at a test site must be authorized by FAA through either the use of a COA o"
2164,"r an experimental certificate. In addition, FAA does not provide funding to support the test sites. Thus, these sites rely upon revenue generated from entities, such as those in the UAS industry that are using the sites for UAS flights. The 2012 Act authorized the test sites to operate until February 14, 2017. FAA stated it is too early to assess the test sites’ results and effectiveness and thus whether the test sites should be extended. According to FAA officials, FAA does not object to extending the test"
2165," sites but may need additional resources if that happens. Although it still relies on case-by-case approvals, FAA has increased UAS operations during the accommodation phase of UAS integration. As we have previously noted, UAS operators can only gain access to the national airspace by obtaining a COA, an experimental certificate, or a section 333 exemption. From 2010 to 2014, the total number of COAs approved for public operations has increased each year, with FAA issuing 403 COAs thus far this year, as sho"
2166,"wn in table 4. Similarly, from 2011 to 2014, the total number of experimental certificates has increased each year, with FAA issuing 6 thus far this year. In September 2014, FAA granted the first section 333 exemptions; at that time 6 total exemptions were granted for commercial UAS operations to movie and TV production companies. As of June 9, 2015, FAA had granted 548 section 333 exemptions to companies for a variety of additional commercial operations supporting the real estate, utility, and agriculture "
2167,"industries, among others. See figure 3 for examples of commercial uses, including some approved under section 333 exemptions. FAA has taken steps to make access easier for those operating UASs under a section 333 exemption. On March 23, 2015, FAA established an interim policy to speed up authorizations for certain commercial unmanned aircraft operators that request Section 333 exemptions. According to FAA, the new policy helps bridge the gap between the past “case-by-case” approval process, which evaluated "
2168,"every commercial UAS operation individually, and future operations after they publish a final version of the proposed small UAS rule. Under the new policy, the FAA will grant a COA for flights at or below 200 feet to any commercial UAS operator with a Section 333 exemption for aircraft that weigh less than 55 pounds, operate during the daytime, operate within visual line of sight of the pilots, and stay certain distances away from airports or heliports. According to FAA, the “blanket” 200-foot COA allows fl"
2169,"ights anywhere in the country except restricted airspace and other areas, such as major cities, where the FAA prohibits commercial UAS operations.expects the new policy will allow companies and individuals who want to use UAS within these limitations to start flying much more quickly than before. A company wanting to operate above 200 feet, or outside the other rules set up by FAA, must obtain a separate COA. FAA took additional steps in May 2015 to work with industry to safely expand UAS operations. FAA an"
2170,"nounced its Pathfinder Program that will partner FAA with companies to perform research in support of UAS integration. These companies will focus on using UAS for specific applications, such as news gathering and surveying crops. In addition, two will focus on applications for beyond the visual line of sight of the operator. One industry stakeholder stated the next step would be to develop additional mechanisms to allow UAS operations beyond the visual line of sight of the operator once technology supports "
2171,"greater use. While accommodating UAS access, FAA and industry have taken steps to educate UAS operators on how to safely operate. UAS industry stakeholders and FAA have begun an educational campaign that provides prospective users with information and guidance on flying safely and responsibly. Specifically, they launched an informational website for UAS operators to ease public concerns about privacy and support safer UAS operations in the national airspace.announced plans to develop the “B4UFLY” smartphone"
2172," application designed to help UAS users, both model aircraft and recreational UAS operators, know where it is safe and legal to fly. The application is designed to let an operator know if it is safe and legal to fly in a specific location. FAA has worked with federal and industry stakeholders to coordinate federal activities in support of conducting research and development and creating UAS standards to facilitate UAS integration. As with other large government-wide initiatives, achieving results for the na"
2173,"tion increasingly requires that federal agencies and others work together. FAA has worked with the UAS Executive Committee to facilitate federal UAS activities and RTCA Special Committee 228, ASTM International Committee F38, and the UAS Aviation Rulemaking Committee to develop safety, reliability, and performance standards for UAS. Each collaborative group has defined different long-term goals in support of UAS integration and has made progress toward the achieving these goals. The Executive Committee’s lo"
2174,"ng-term goals involve working to solve the broad range of technical, procedural, and policy issues affecting UAS integration into the national airspace. In support of this objective, the Executive Committee agencies, other public agencies, and industry have also developed processes and procedures to safely demonstrate small UAS operations in remote areas of the Arctic, including beyond-line-of-site operations. The UAS demonstration occurred in domestic and international airspace on and off the coast of Alas"
2175,"ka. RTCA Special Committee 228 has set out its own goals across two phases. Currently working toward completion of the first phase, RTCA is developing minimum operational performance standards for detect and avoid and command and control technologies for UASs. RTCA has made progress toward this goal with help from the Executive Committee. Specifically, the Executive Committee’s Science and Research Panel developed a definition of “well clear” to help inform RTCA Special Committee 228’s work. The UAS Aviatio"
2176,"n Rulemaking Committee has a goal to develop a report for FAA on its efforts to provide direction for UAS operational criteria, among other tasks, by April 18, 2016. ASTM International F38’s long-term goal involves developing and publishing voluntary consensus standards for small and large UASs as FAA requests them. ASTM International Committee F38 has developed standards and recommendations to support FAA’s small UAS rulemaking that cover elements such as systems design, construction, and testing. FAA has "
2177,"applied other interagency collaborative methods in support of UAS integration including memorandums of understanding or agreement (MOU) and conferences. FAA entered into MOUs with DOD and NASA to expedite the COA process and ensure the availability of DOD’s data. According to FAA officials, the MOUs eased collaboration with DOD and NASA because the MOUs established roles and responsibilities for each agency as well as procedures for DOD to obtain COAs. In addition, FAA convenes meetings with test site offic"
2178,"ials and attends conferences where UAS issues are discussed. For example, FAA regularly holds conference calls and convenes technical interchange meetings with test site officials to address test site issues. According to FAA, the technical interchange meetings are opportunities for FAA to provide updates to the test sites and discuss common areas of research interest. The manager of the FAA’s UAS Integration Office has presented information about its UAS efforts during industry conferences, such as the Ass"
2179,"ociation for Unmanned Vehicle Systems International’s annual meeting. These conferences allow FAA to provide guidance and updates directly to the industry and public. Since being named in December 2013, the six designated test sites have become operational, applying for and receiving authorization from FAA to conduct test flights. Specifically, from April through August 2014, each of the six test sites became operational and signed an Other Transaction Agreement with FAA, establishing their research and dev"
2180,"elopment relationship. All flights at a test site must be authorized under the authority of a COA or an experimental certificate approved by FAA. Since becoming operational, five of the six test sites received 48 COAs and one experimental certificate in support of UAS operations resulting in over 195 UAS flights across the five test sites. These flights provide the operations and safety data to FAA as required by the COA. While there are only a few contracts with industry thus far, according to test site op"
2181,"erators, these will be important if the test sites are to generate sufficient revenue to remain in operation. Table 5 provides an overview of test-site activity since the sites became operational. According to all test sites, FAA approval for access to the airspace can be a lengthy process taking 90 days or even longer. FAA and the test sites have found ways to allow quicker access to the test site airspace and relieve some administrative burden from FAA. In February 2015, FAA awarded the Northern Plains Te"
2182,"st Site in North Dakota four broad area COAs that were aircraft specific. According to a test site official, these COAs allowed designated aircraft to fly over nearly the entire state of North Dakota and will make it easier to accommodate industry for research. Furthermore, these COAs were a positive step in allowing quicker access to the airspace at test sites. Reducing FAA’s role in the process creates more certainty regarding how long it will take an operator to access airspace at the test sites. Specifi"
2183,"cally, the test site representative indicated FAA’s role was reduced because there was a process that allowed aircraft to be added to these existing COAs that was simpler than applying for individual COAs. In May 2015, FAA approved a “blanket” COA allowing the test sites to conduct UAS operations at or below 200 feet anywhere in the national airspace, similar to the authority provided to Section 333 exemptions. In particular, these COAs will be for small UAS operations, during the day, within line of sight "
2184,"of the operator, and the operations cannot occur in restricted airspace and areas close to airports. According to FAA, this will help improve UAS access allowing more operations in support of research that can further the UAS integration process. Previously, all UASs needed their own COA when operating at a test site but this action by FAA will allow any small UASs to operate at the test sites within the COA’s requirements. The use of designated airworthiness representatives by the test sites to review and "
2185,"approve experimental certificates may be quicker for industry and relieve some of FAA’s workload. Industry benefits from not having to lease its aircraft to the test site, as all test sites are operated by public entities (academic institutions or federal, state, or local governments) and thus all aircraft must be public aircraft, unless they are operating under a special certificate. In addition, any industry group working with the test site would not have to go through FAA to receive the experimental cert"
2186,"ificate. The Nevada test site has affiliated itself with a designated airworthiness representative, who has approved an aircraft to operate under an experimental certificate for the Nevada test site. According to FAA, the use of a designated airworthiness representative allows it to better leverage its resources. FAA officials and some test site officials told us that progress has been made in part because of FAA’s and test sites’ efforts to work together. Test site officials meet every 2 weeks with FAA off"
2187,"icials to discuss current issues, challenges, and progress. According to meeting minutes, these meetings have been used to discuss many issues from training for designated airworthiness representatives to processing of COAs. In addition, the six test sites have developed operational and safety processes that have been reviewed by FAA. Thus, while FAA has no funding directed to the test sites to specifically support research and development activities, FAA dedicates time and resources to supporting the test "
2188,"sites, and FAA staff we spoke to believe test sites are a benefit to the integration process and worth this investment. Despite the progress made since they began operating, according to test site operators, they faced a number of challenges in the first year of operations: Guidance on research: According to FAA, because the test sites receive no federal funding, FAA can neither direct specific research to be conducted nor direct the test sites to share specific research data, other than the operations and "
2189,"safety data required by the COA. The Other Transaction Agreement for each test site defines the purpose of the test sites as a place to conduct research and testing under FAA safety oversight to support UAS integration into the national airspace. The Other Transaction Agreement indicates the test sites will provide FAA with UAS research and operational data to support the development of procedures, standards, and regulations. However, FAA officials told us that the Antideficiency Act may prevent the agency "
2190,"from directing specific test site activities without providing compensation. In October 2014, FAA provided a list of potential research areas to the test sites to guide the research that each test site may conduct. According to FAA, this document was not to be construed as a directive but more as guidance for possible research areas. However, three test sites told us this document was too broad to be considered guidance for the research test sites should conduct. Companies Conducting Beyond- Visual-Line-of-"
2191,"Sight Testing Overseas Insitu, Inc., a Boeing subsidiary, conducted beyond-visual-line-of-sight testing in Denmark in May, 2015 with a ScanEagle UAS. The flights took place in cooperation with the Danish Transport Authority as part of an agreement signed by Boeing and the airport to develop a UAS Test Center in Denmark, which is used for training, testing, and development. The activity included members of the public and private sector, including the UAS Denmark Consortium, a group of companies, government o"
2192,"rganizations, and other entities supporting UAS industry development. The testing demonstrated capabilities for a variety of industries, including agriculture and aerial surveying, emergency and natural-disaster response, and defense and Arctic surveillance. aircraft, meaning that civil operators still have to lease the aircraft to the test site for operations. But, as one test site representative stated a broad area COA, allowing civil operations at the test site would be even more beneficial. Another test"
2193," site representative indicated that they will continue to work with FAA to make access easier allowing flights at higher altitude with different aircraft. Maintaining operations: While all the test sites had some level of initial funding, from either private industry or state legislatures, to become operational, they must attract UAS industry to the test sites to generate enough revenue to maintain operations. However, test site operators reported that test sites have additional requirements as opposed to o"
2194,"perating outside the test sites, including leasing the aircraft to the test site to operate under the public COA. While test sites have signed 22 contracts, there is a chance that some test sites will not survive due to the financial burden. Some companies have made a decision to go to other countries to conduct UAS testing because they believe it takes less time to be approved for test flights. For example, Amazon has reported it has testing under way in multiple countries outside the United States, includ"
2195,"ing a site in Canada. In an effort to attract some industry operators, the Pan Pacific Test Site has a location in Iceland where, according to the Director, review and approval for test flights can happen much faster, in as few as 10 days, relative to over 90 days a COA may take in this country. In addition, the UAS industry is conducting tests in this country outside the test sites. For example, CNN worked with Georgia Institute of Technology. FAA has used cooperative research and development agreements, f"
2196,"ederally funded research and development centers, and grants to conduct other UAS research and development. These agreements for research are similar to the Other Transaction Agreement that directs the purpose and goals of the relationship between FAA and the research entities. However, unlike the Other Transaction Agreement in place for the test sites, according to FAA, many of these agreements have language specifically addressing the sharing of research and data. The following are examples of other resou"
2197,rces FAA has devoted to UAS integration research and development: Cooperative research and development agreement: New Mexico State University has had a flight test center operating for several years under a cooperative research and development agreement with FAA. The center serves a similar purpose to the designated test sites but has been operating since 2007. The flight test center has conducted research in many areas including nighttime flying and more recently research into long-endurance UAS flights op
2198,"erating between 10,000 and 17,000 feet. According to an official, the New Mexico State University’s flight test center has challenges with getting access to the airspace for customers because the process to receive a COA can be lengthy. In addition, this official told us the flight test center would like authority to approve COAs to operate at the test center because the FAA is backlogged and therefore approvals are delayed. Finally, according to the flight test center operators, FAA can get data from the r"
2199,"esearch being conducted at the test site but does not direct them what to provide. While the flight test center has operated under a Cooperative Research and Development Agreement since 2007, in May 2015 the Flight Test Center switched to an Other Transaction Agreement to continue UAS testing. Federally funded research and development center: MITRE manages federal funded research and development centers for multiple federal agencies including FAA and DOD. MITRE has ongoing work supporting FAA’s UAS integrat"
2200,"ion effort by supporting UAS standards and rulemaking and supporting research planning and progress, among other efforts. MITRE brings together the federal agencies— FAA, NASA, DOD, DHS, and others—to advance UAS integration. In its role, according to MITRE officials, one of the biggest challenges is how to integrate all the UAS-related work across the federal government, academia, and private sector. Grants: In August 2014, FAA awarded two grants to Georgia Tech Research Corporation and the University of N"
2201,"orth Dakota to conduct literature reviews of UAS issues. Georgia Tech is collecting information on research being conducted on the effect of UAS collisions on other airborne and ground based objects. The University of North Dakota is looking at the UAS safety criteria and particularly if UASs could be deadly. According to FAA, both studies will support ongoing UAS research and help determine the applicability of past studies. Center of Excellence: In May 2015, FAA selected a team led by Mississippi State Un"
2202,"iversity as the Center of Excellence for UAS.According to FAA, the goal of the Center of Excellence will be to create a cost-sharing relationship among academia, industry, and government that will focus on the primary research areas needed to support UAS integration. FAA hopes the center could provide both short- and long-term research through testing and analysis. In support of it serving this purpose, the Center of Excellence has an annual $500,000 budget for the next 10 years. FAA also has additional res"
2203,"ources to support the UAS integration, including facilities working on research and development and management of FAA’s other research and development efforts for UAS integration. FAA’s William J. Hughes Technical Center houses staff in charge of supporting and managing FAA’s designated test sites. While the test sites do not have specific funding, FAA has dedicated resources located at Hughes Technical Center to support the set up and ongoing operations of the test sites. For example, COA data are collecte"
2204,"d and analyzed at the Hughes Technical Center. In addition, FAA has participated in the twice-a-year technical interchange meetings with the test sites. These meetings have brought together the test sites and FAA to address issues in the set-up and operation of the test sites. Furthermore, FAA has staff supporting the test sites through review of test site operation and safety procedures and manuals to support the monthly reporting of the operational and safety data required by each COA. The William J. Hugh"
2205,"es Technical Center is located in Atlantic City, New Jersey, and contains laboratories supporting aviation research, development, testing, and evaluation of air traffic control and aircraft safety among other aviation areas. It also serves as the primary facility supporting the Next Generation Air Traffic System. According to numerous studies and stakeholders we interviewed, many countries around the world, have been allowing commercial UAS operations in their airspace for differing purposes. We also identi"
2206,"fied a number of countries that allow commercial UAS operations and have done so for years. Specifically, Canada and Australia have regulations pertaining to UAS that have been in place since 1996 and 2002, respectively. According to a recent MITRE study, the types of commercial operations allowed vary by country and include aerial surveying, photography, and other lines of business. For example, Japan has allowed UAS operations in the agriculture industry since the 1980’s to help apply fertilizer and pesti"
2207,"cide. EASA is the European Union Authority in aviation safety. The main activities of the organization include the strategy and safety management, the certification of aviation products and the oversight of approved organizations and EU Member States. require a risk assessment of the proposed operation and an approval to operate under restrictions specific to the operation. The final proposed category, certified operations, would be required for those higher-risk operations, specifically when the risk rises"
2208," to a level comparable to manned operations. This category goes beyond FAA’s proposed rules by proposing regulations for large UAS operations and operations beyond the pilot’s visual line of sight. As other countries work toward integration, standards organizations from Europe and the United States are coordinating to try and ensure harmonized standards. Specifically, RTCA and the European Organization for Civil Aviation Equipment (EUROCAE) have joint committees focused on harmonization of UAS standards. We"
2209," studied the UAS regulations of Australia, Canada, France, and the United Kingdom and found that these countries impose similar types of requirements and restrictions on commercial UAS operations. For example, all these countries except Canada require government-issued certification documents before UASs can operate commercially.addition, each country requires that UAS operators document how they ensure safety during flights and their UAS regulations go into significant detail on subjects such as remote pil"
2210,"ot training and licensing requirements. For example, the United Kingdom has established “national qualified entities” that conduct assessments of operators and make recommendations to the Civil Aviation Authority as to whether to approve that operator. Similar regulations in these countries continue to evolve. In November 2014, Canada issued new rules creating exemptions for commercial use of small UASs weighing 4.4 pounds or less and from 4.4 pounds to 55 pounds. UASs in these categories can commercially o"
2211,"perate without a government-issued certification but must still follow operational restrictions, such as a height restriction and a requirement to operate within line of sight. Transport Canada officials told us this arrangement allows them to use scarce resources to regulate situations In of relatively high risk. Australia, in similar fashion, is considering relieving UASs lighter than 4.4 pounds from its requirement to obtain a UAS Operator’s certificate. France’s regulation describes 4 weight-based categ"
2212,"ories of UAS as well as 4 operational scenarios of increasing complexity. The regulations then discuss which UAS categories can operate in each scenario. FAA, by electing to focus on UASs up to 55 pounds in its Small UAS NPRM, has taken a similar risk-based approach. The United States has not yet finalized regulations specifically addressing its small UAS operations, but if UASs were to begin flying today in the national airspace system under the provisions of FAA’s proposed rules, their operating restricti"
2213,"ons would be generally similar to regulations in these other four countries. However, there would be some differences in the details. For example, FAA proposes altitude restrictions of below 500 feet, while Australia, Canada, and the United Kingdom restrict operations to similar but slightly lower altitudes. Other proposed regulations require that FAA certify UAS pilots prior to commencing operations, while Canada and France do not require pilot certification in certain low risk scenarios. While FAA continu"
2214,"es to finalize the small UAS rule—a process that could take until late 2016 or early 2017—other countries continue to move ahead with UAS integration. Thus, when the rule is finalized the operating restrictions in this country may be well behind what exists in other countries if the final rule reflects the proposed rule. Table 6 shows how FAA’s proposed rules compare with the regulations of Australia, Canada, France, and the United Kingdom. While regulations in these countries generally require that UAS ope"
2215,"rations remain within the pilot’s visual line of sight, some countries are moving toward allowing limited operations beyond the pilot’s visual line of sight. For example, according to Australian civil aviation officials, they are developing a new UAS regulation that would allow operators to request a certificate allowing beyond-line-of-sight operations. However, use would be very limited and allowed only on a case-by-case basis. Similarly, according to a French civil aviation official, France approves on a "
2216,"case- by-case basis, very limited beyond-line-of-sight operations. Finally, in the United States, there have been beyond-line-of-sight operations in the Arctic, and NASA, FAA and the UAS industry have successfully demonstrated detect-and-avoid technology, which is necessary for beyond line-of-sight operations. Like the United States, Australia, Canada, France, and the United Kingdom distinguish between recreational model aircraft and commercial UASs and have issued guidelines for safe operation. For example"
2217,", the United Kingdom defines model aircraft as any small unmanned aircraft, weighing less than 44 pounds, or large unmanned aircraft weighing more than 44 pounds, that is used for sporting and recreational purposes. Australia makes no practicable distinction between a small UAV and a model aircraft except that of use—model aircraft are flown only for the sport of flying them. However, Australia also defines a giant model aircraft as one weighing between 55 pounds and 331 pounds. Approvals for commercial UAS"
2218," operations have increased in these four countries and some allow more commercial operations. Since 2011 the number of approvals for commercial operations in France has increased every year. According to a Civil Aviation Authority official, in 2014, there were about 3,600 commercial UAS operators. In Canada, according to a Transport Canada official, there were over 1,600 approvals for commercial and research related UAS operations in 2014. As previously mentioned, certain commercial operations in Canada do "
2219,"not need approval as of November 2014 and there may be even more UAS operations. The United Kingdom’s Civil Aviation Authority attributes the growth to UASs in their country to the UASs’ becoming less expensive and simpler to operate. In the United Kingdom, as of February 2015, there were 483 commercial UAS operators, and this number has increased every year since 2010. Similar to the United Kingdom, Australia has seen an increase in commercial UAS operators since 2010 with currently over 200 approved comme"
2220,"rcial operators. Australia’s Parliament attributes the growth to improvements in UASs’ piloting and control technologies, as well as reductions in UAS prices. With FAA’s approvals for commercial exemptions exceeding 500 as of June 9, 2015, the United States has closed the gap with some other countries’ level of commercial use. Other countries face challenges that are common across some countries, including the United States, trying to integrate UAS operations. Specifically, some of the challenges are: Techn"
2221,"ology shortfalls and unresolved spectrum issues. Technology needs and concerns about available spectrum constrain full integration of UASs into airspace with manned aircraft in the United States and in countries around the world. UASs’ current inability to detect and avoid other aircraft, the lack of a standard for command and control systems, and no dedicated and secure frequency spectrum are technical challenges preventing full UAS integration into the national airspace. However, organizations around the "
2222,"world are looking to address these technology issues and develop standards to support safe UAS operations. At the worldwide level, the International Civil Aviation Organization is addressing how UAS integration would affect its existing standards. At the European level, the European UAS Roadmap contains a strategic research and development plan that describes anticipated deliverables along with key milestones, timelines, and resources needed. Separate from the international organizations, researchers in ind"
2223,"ividual countries are also addressing these challenges. For example, in February 2014, Australian researchers achieved what was then believed to be a world-first breakthrough for small UASs by developing an onboard system that has enabled a UAS to detect another aircraft using vision while in flight. Safe operations by recreational users. Countries around the world also face challenges in ensuring that UAS purchasers operate them safely. As UASs become more affordable, and increasingly available some indivi"
2224,"duals are conducting unsafe or illegal UAS operations. In July 2014, Australia’s Parliament reported on testimony, from several witnesses, that UASs are being flown by operators who unknowingly break safety rules, thereby posing a safety risk to manned aircraft and persons on the ground. In response to unsafe operations, a few countries have placed outright bans on UAS operations. For example, in India, in response to the surge in interest for commercial and recreational use, the government placed an outrig"
2225,"ht ban on any UAS use until its civil aviation agency issues regulations. Similar to the “Know Before You Fly” education campaign in this country, other countries have sought to educate operators. For example, the United Kingdom has developed and distributed a brochure describing safe flying practices. In Australia, UAS purchasers receive a similar document when they purchase the product. Canada has launched a national safety awareness campaign for UASs, which aims to help Canadians better understand the ri"
2226,"sks and responsibilities of flying UASs. In addition, Transport Canada has set up a web page that provides safe guidelines for flying UASs and answers frequently asked questions While countries face some UAS integration challenges that are similar to the United States, other challenges such as airspace complexity and ease of regulatory change, can make integration in this country more difficult. Airspace complexity is one aspect in which the United States differs from other countries. According to FAA, the "
2227,"U.S. airspace is the busiest and most complex in the world, where UASs, after integration, would share with more than 300,000 general aviation aircraft, ranging from amateur-built aircraft, rotorcraft, and balloons, to highly sophisticated Introducing potentially large numbers of UAS turbojets (executive jets).by hobbyists, farmers, law enforcement agencies, and others would add to this complexity. In contrast, according to a study by MITRE, other countries have fewer aviation aircraft, a situation that may"
2228," make integrating UAS easier. For example, the U.K. has about 20,000 registered general aviation aircraft, while Australia has around 8,400. A study conducted by MITRE for FAA indicated this factor as one that can affect the speed of change and adaptation in various aviation environments. We provided a draft of this report to Department of Transportation (DOT) for review and comment. In comments, which were provided in an email, DOT stated that the report addresses many of the challenges of UAS integration "
2229,"but does not address any environmental concerns and that the report should state that it did not examine the environmental considerations of UAS integration. DOT further noted that FAA is conducting research to understand the environmental impacts of UAS integration, the role that UASs play in National Environmental Policy Act compliance, and the applicability of noise standards regulations to UASs.integration. The discussion of challenges in the report does not mention environmental concerns because it foc"
2230,"uses on challenges the test sites faced during their first year of operation, as reported by the test site operators. We did clarify in our scope and methodology description that we did not cover environmental considerations of UAS integration. DOT also provided technical comments on the draft that we incorporated as appropriate. We did not examine the environmental considerations of UAS As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distrib"
2231,"ution until 30 days from the report date. At that time, we will send copies to the Secretary of Transportation and the appropriate congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 or dillinghamg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who ma"
2232,"de key contributions to this report are listed in appendix III. This report focuses on FAA’s efforts to develop procedures to allow UAS use within the national airspace system. Specifically, we reviewed (1) the status of FAA’s progress toward safe integration of UAS into the national airspace, (2) research and development support from FAA’s test sites and other resources, and (3) how other countries have progressed toward UAS integration into their airspace for commercial purposes. To address the three obje"
2233,"ctives, we reviewed and synthesized a range of published reports from GAO and FAA that included general background information on a variety of related issues, such as FAA’s framework for UAS integration, efforts to accommodate ongoing research and commercial UAS use, and UAS technology challenges. We reviewed other relevant background literature on related issues, including results from databases, such as ProQuest® and Nexis®, trade publications, literature from industry stakeholder groups, and information "
2234,"from the Internet. We also reviewed provisions of the FAA Modernization and Reform Act of 2012, and the Notice of Proposed Rulemaking for small UAS operations. In addition, we reviewed more detailed and specific documentation related to the different objectives, as described below. To determine FAA’s progress toward safe integration of UAS into the national airspace, we: Reviewed documents provided by officials and conducted semi- structured interviews with officials at federal agencies, including the FAA’s"
2235," Unmanned Aircraft Systems Integration and Research and Development Offices, the Department of Defense (DOD), the National Aeronautics and Space Administration (NASA), and the Department of Homeland Security. We reviewed FAA’s Comprehensive Plan and Roadmap for UAS integration. Interviewed representatives from FAA’s Joint Planning and Development Office, the UAS Aviation Rulemaking Committee, RTCA, and MITRE Corporation as well as voluntary standards development organization ASTM International. We interview"
2236,"ed representatives from the Association for Unmanned Vehicle Systems International, Aircraft Owners and Pilots Association, American Institute of Aeronautics and Astronautics, and the Academy of Model Aeronautics. We also obtained information on the Federal Modernization and Reform Act of 2012 Section 333 exemptions FAA granted from FAA and http://www.regulations.gov2014 to May 2015. Reviewed documents provided by and interviewed federal and industry representatives from the collaborative groups—the Executi"
2237,"ve Committee, RTCA Special Committee 228, UAS Aviation Rulemaking Committee, and ASTM International Committee F38—and industry groups that are involved in FAA’s efforts to integrate UAS into the national airspace system To identify research and development support from FAA’s test sites and other resources, we: Reviewed and analyzed documents from each of the six test sites where FAA has recently allowed UAS operations including the applications submitted by the selected test sites and quarterly reports prov"
2238,"ided to FAA. Conducted semi-structured interviews with officials from the test sites, including the State of Nevada, the University of Alaska, the North Dakota Department of Commerce, Griffiss International Airport, the Virginia Polytechnic Institute & State University, and Texas A&M University Corpus Christie to determine the issues encountered in an effort to become operational, conduct research, share the research results with FAA, and receive support or guidance from FAA. Spoke with representatives from"
2239," other universities with centers of research on UAS technology and issues, including New Mexico State University, Massachusetts Institute of Technology Lincoln Laboratory, the Humans and Autonomy Lab at Duke University, and the Georgia Institute of Technology to obtain information about the resources FAA has dedicated to conducting other UAS research and development. To identify how the United States compares to other countries in the progress and development of UAS use for commercial purposes, we: Develope"
2240,"d case studies for four countries that have made progress in integrating UASs into their national airspace—France (Direction générale de l’aviation civile); the United Kingdom (UK Civil Aviation Authority); Australia (Australia Civil Aviation Safety Authority); and Canada (Transport Canada Civil Aviation). We selected these countries based on several factors including the status of regulatory requirements for commercial UASs, beyond-line-of-site activities, and whether the country allows non-military UAS to"
2241, operate in the airspace. We obtained the UAS regulations of each country and interviewed civil aviation authorities in each to obtain additional information about the issues encountered with UAS. Interviewed other stakeholders familiar with the UAS activities currently occurring in other countries to determine the factors that influenced their country’s policies regarding UASs including the International Civil Aviation Organization (ICAO). We conducted this performance audit from January 2014 to July 2015 
2242,"in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. FAA Modernization and Reform Act of 2012 requirement Enter into agreements with appropriate government agencies to si"
2243,"mplify the process for issuing Certificates of Waiver or Authorization (COA) or waivers for public unmanned aerial systems (UAS). Status of action In process—memorandum of agreement (MOA) with DOD signed Sept. 2013; MOA with Department of Justice signed Mar. 2013; MOA with NASA signed Mar. 2013; MOA with Department of Interior signed Jan. 2014; MOA with the Office of the Director, Operational Test and Evaluation (DOD) signed Mar. 2014; MOA with National Oceanic and Atmospheric Administration still in draft."
2244, Expedite the issuance of COAs for public safety entities Establish a program to integrate UASs into the national airspace at six test ranges. This program is to terminate 5 years after date of enactment. Develop an Arctic UAS operation plan and initiate a process to work with relevant federal agencies and national and international communities to designate permanent areas in the Arctic where small unmanned aircraft may operate 24 hours per day for research and commercial purposes. Determine whether certain
2245, UAS can fly safely in the national airspace before the completion of the Act’s requirements for a comprehensive plan and rulemaking to safely accelerate the integration of civil UASs into the national airspace or the Act’s requirement for issuance of guidance regarding the operation of public UASs including operating a UAS with a COA or waiver. Develop a comprehensive plan to safely accelerate integration of civil UASs into national airspace. Issue guidance regarding operation of civil UAS to expedite COA 
2246,"process; provide a collaborative process with public agencies to allow an incremental expansion of access into the national airspace as technology matures and the necessary safety analysis and data become available, until standards are completed and technology issues are resolved; facilitate capability of public entities to develop and use test ranges; provide guidance on public entities’ responsibility for operation. Make operational at least one project at a test range. Approve and make publically availab"
2247,"le a 5-year road map for the introduction of civil UAS into national airspace, to be updated annually. Submit to Congress a copy of the comprehensive plan. Publish in the Federal Register the Final Rule on small UAS. FAA Modernization and Reform Act of 2012 requirement Publish in the Federal Register a Notice of Proposed Rulemaking to implement recommendations of the comprehensive plan. Publish in the Federal Register an update to the Administration’s policy statement on UAS in Docket No. FAA-2006-25714. Ac"
2248,"hieve safe integration of civil UAS into the national airspace. Publish in the Federal Register a Final Rule to implement the recommendations of the comprehensive plan. Develop and implement operational and certification requirements for public UAS in national airspace. In addition to the contact named above, the following individuals made important contributions to this report: Brandon Haller, Assistant Director; Geoffrey Hamilton, Daniel Hoy, Eric Hudson, Bonnie Pignatiello Leer, Ed Menoche, Josh Ormond, "
2249,"Amy Rosewarne, Andrew Stavisky, and Sarah Veale."
2250,"Since 1996, Congress has taken important steps to increase Medicare program integrity funding and oversight, including the establishment of the Medicare Integrity Program. Table 1 summarizes several key congressional actions. CMS has made progress in strengthening provider enrollment provisions, but needs to do more to identify and prevent potentially fraudulent providers from participating in Medicare. Additional improvements to prepayment and postpayment claims review would help prevent and recover improp"
2251,"er payments. Addressing payment vulnerabilities already identified could further help prevent or reduce fraud. PPACA authorized and CMS has implemented new provider enrollment procedures that address past weaknesses identified by GAO and HHS’s Office of Inspector General (OIG) that allowed entities intent on committing fraud to enroll in Medicare. CMS has also implemented other measures intended to improve existing procedures. Specifically, to strengthen the existing screening activities conducted by CMS co"
2252,"ntractors, the agency added screenings of categories of provider enrollment applications by risk level, contracted with new national enrollment screening and site visit contractors, and began imposing moratoria on new enrollment of certain types of providers. Screening Provider Enrollment Applications by Risk Level: CMS and OIG issued a final rule in February 2011 to implement many of the new screening procedures required by PPACA. CMS designated three levels of risk—high, moderate, and limited—with differe"
2253,"nt screening procedures for categories of Medicare providers at each level. Providers in the high-risk level are subject to the most rigorous screening. Based in part on our work and that of OIG, CMS designated newly enrolling home health agencies and suppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) as high risk, and designated other providers as lower risk levels. Providers at all risk levels are screened to verify that they meet specific requirements established by Med"
2254,"icare, such as having current licenses or accreditation and valid Social Security numbers. High- and moderate-risk providers are also subject to unannounced site visits. Further, depending on the risks presented, PPACA authorizes CMS to require fingerprint-based criminal history checks. Last month, CMS awarded a contract that will enable the agency to access Federal Bureau of Investigation information to help conduct those checks of high-risk providers and suppliers. PPACA also authorizes the posting of sur"
2255,"ety bonds for certain providers. CMS has indicated that the agency will continue to review the criteria for its screening levels and will publish changes if the agency decides to update the assignment of screening levels for categories of Medicare providers. Doing so could become important because the Department of Justice (DOJ) and HHS reported multiple convictions, judgments, settlements, or exclusions against types of providers not currently at the high-risk level, including community mental health cente"
2256,"rs and ambulance providers. CMS’s implementation of accreditation for DMEPOS suppliers, and of a competitive bidding program, including in geographic areas thought to have high fraud rates, may be helping to reduce the risk of DMEPOS fraud. While continued vigilance of DMEPOS suppliers is warranted, other types of providers may become more problematic in the future. Specifically, in September 2012, we found that a range of providers have been the subjects of fraud investigations. According to 2010 data from"
2257," OIG and DOJ, over 10,000 providers that serve Medicare, Medicaid, and Children’s Health Insurance Program beneficiaries were involved in fraud investigations, including not only home health agencies and DMEPOS suppliers, but also physicians, hospitals, and pharmacies.In addition, the provider type constituting the largest percentage of subjects in criminal health care fraud investigations was medical facilities—including medical centers, clinics, or practices—which constituted almost a quarter of subjects "
2258,"in such investigations. DMEPOS suppliers make up a little over 16 percent of subjects. National Enrollment Screening and Site Visit Contractors: CMS contracted with two new types of entities at the end of 2011 to assume centralized responsibility for two functions that had been the responsibility of multiple contractors. One of the new contractors is conducting automated screenings to check that existing and newly enrolling providers and suppliers have valid licensure, accreditation, and a National Provider"
2259," Identifier (NPI), and are not on the OIG list of providers and suppliers excluded from participating in federal health care programs. The second contractor conducts site visits of providers to determine whether sites are legitimate and the providers meet certain Medicare standards. implementation of the PPACA screening requirements, the agency had revoked over 17,000 suspect providers’ ability to bill the Medicare program. Site visits for DMEPOS suppliers are to continue to be conducted by the contractor r"
2260,"esponsible for their enrollment. In addition, CMS at times exercises its authority to conduct a site visit or request its contractors to conduct a site visit for any Medicare provider or supplier. Moratoria on Enrollment of New Providers and Suppliers in Certain Areas: CMS suspended enrollment of new home health providers and ambulance suppliers in certain fraud “hot spots” and other geographic areas. In July 2013, CMS first exercised its authority granted by PPACA to establish temporary moratoria on enroll"
2261,"ing new home health agencies in Chicago and Miami, and new ambulance suppliers in Houston. In January 2014, CMS extended its first moratoria and added enrollment moratoria for new home health agency providers in Fort Lauderdale, Detroit, Dallas, and Houston, and new ground ambulance suppliers in Philadelphia. These moratoria are scheduled to be in effect until July 2014, unless CMS extends or lifts them. CMS officials cited areas of potential fraud risk, such as a disproportionate number of providers and su"
2262,"ppliers relative to beneficiaries and extremely high utilization as rationales for suspending new enrollments of home health providers or ground ambulance suppliers in these areas. We are currently examining the ability of CMS’s provider enrollment system to prevent and detect the continued enrollment of ineligible or potentially fraudulent providers in Medicare. Specifically, we are assessing the process used to enroll and verify the eligibility of Medicare providers in Medicare’s Provider Enrollment, Chai"
2263,"n, and Ownership System (PECOS) and the extent to which CMS’s controls are designed to prevent and detect the continued enrollment of ineligible or potentially fraudulent providers in PECOS. Although CMS has taken many needed actions, we and OIG have found that CMS has not fully implemented other enrollment screening actions authorized by PPACA. These actions could help further reduce the enrollment of providers and suppliers intent on defrauding the Medicare program. They include issuing a rule to implemen"
2264,"t surety bonds for certain providers, issuing a rule on provider and supplier disclosure requirements, and establishing the core elements for provider and supplier compliance programs. Surety Bonds: PPACA authorized CMS to require a surety bond for certain types of at-risk providers and suppliers. Surety bonds may serve as a source for recoupment of erroneous payments. DMEPOS suppliers are currently required to post a surety bond at the time of enrollment. CMS reported in April 2014 that it had not schedule"
2265,"d for publication a proposed rule to implement the PPACA surety bond requirement for other types of at-risk providers and suppliers—such as home health agencies and independent diagnostic testing facilities. In light of the moratoria that CMS has placed on enrollment of home health agencies in fraud “hot spots,” implementation of this rule could help the agency address potential concerns for these at-risk providers across the Medicare program. Providers and Suppliers Disclosure: CMS has not yet scheduled a "
2266,"proposed rule for publication for increased disclosures of prior actions taken against providers and suppliers enrolling or revalidating enrollment in Medicare, as authorized by PPACA, such as whether the provider or supplier has been subject to a payment suspension from a federal health care program. Agency officials had indicated that developing the additional disclosure requirements has been complicated by provider and supplier concerns about what types of information will be collected, what CMS will do "
2267,"with it, and how the privacy and security of this information will be maintained. Compliance Program: CMS has not established the core elements of compliance programs for providers and suppliers, as required by PPACA. We previously reported that agency officials indicated that they had sought public comments on the core elements, which they were considering, and were also studying criteria found in OIG model plans for possible inclusion.had not yet scheduled a proposed rule for publication. Medicare uses pr"
2268,"epayment review to deny claims that should not be paid and postpayment review to recover improperly paid claims. As claims go through Medicare’s electronic claims payment systems, they are subjected to prepayment controls called “edits,” most of which are fully automated; if a claim does not meet the criteria of the edit, it is automatically denied. Other prepayment edits are manual; they flag a claim for individual review by trained staff who determine whether it should be paid. Due to the volume of claims"
2269,", CMS has reported that less than 1 percent of Medicare claims are subject to manual medical record review by trained personnel. Increased use of prepayment edits could help prevent improper Medicare payments. Our prior work found that, while use of prepayment edits saved Medicare at least $1.76 billion in fiscal year 2010, the savings could have been greater had prepayment edits been used more widely. Based on an analysis of a limited number of national policies and local coverage determinations (LCD), we "
2270,identified $14.7 million in payments in fiscal year 2010 that appeared to be inconsistent with four national policies and therefore improper. We also found more than $100 million in payments that were inconsistent with three selected LCDs that could have been identified using automated edits. Thus we concluded that more widespread implementation of effective automated edits developed by individual Medicare administrative contractors (MAC) in other MAC jurisdictions could also result in savings to Medicare. 
2271,"CMS has taken steps to improve the development of other types of prepayment edits that are implemented nationwide, as we recommended. For example, the agency has centralized the development and implementation of automated edits based on a type of national policy called national coverage determinations. CMS has also modified its processes for identifying provider billing of services that are medically unlikely to prevent circumvention of automated edits designed to identify an unusually large quantity of ser"
2272,"vices provided to the same patient. We also evaluated the implementation of CMS’s Fraud Prevention System (FPS), which uses predictive analytic technologies as required by the Small Business Jobs Act of 2010 to analyze Medicare fee-for-service (FFS) claims on a prepayment basis. FPS identifies investigative leads for CMS’s Zone Program Integrity Contractors (ZPIC), the contractors responsible for detecting and investigating potential fraud. Implemented in July 2011, FPS is intended to help facilitate the ag"
2273,"ency’s shift from focusing on recovering potentially fraudulent payments after they have been made, to detecting aberrant billing patterns as quickly as possible, with the goal of preventing these payments from being made. However, in October 2012, we found that, while FPS generated leads for investigators, it was not integrated with Medicare’s payment-processing system to allow the prevention of payments until suspect claims can be determined to be valid. As of April 2014, CMS reported that while the FPS f"
2274,"unctionality to deny claims before payment had been integrated with the Medicare payment processing system in October 2013, the system did not have the ability to suspend payment until suspect claims could be investigated. In addition, while CMS directed the ZPICs to prioritize alerts generated by the system, in our work examining the sources of new ZPIC investigations in 2012, we found that FPS accounted for about 5 percent of ZPIC investigations in that year. A CMS official reported last month that ZPICs "
2275,"are now using FPS as a primary source of leads for fraud investigations, though the official did not provide details on how much of ZPICs’ work is initiated through the system. Our prior work found that postpayment reviews are critical to identifying and recouping overpayments. The use of national recovery audit contractors (RAC) in the Medicare program is helping to identify underpayments and overpayments on a postpayment basis. CMS began the program in March 2009 for Medicare FFS. CMS reported that, as of"
2276," the end of 2013, RACs collected $816 million for fiscal year 2014. PPACA required the expansion of Medicare RACs to Parts C and D. CMS has implemented a RAC for Part D, and CMS said it plans to award a contract for a Part C RAC by the end of 2014. Moreover, in February 2014, CMS announced a “pause” in the RAC program as the agency makes changes to the program and starts a new procurement process for the next round of recovery audit contracts for Medicare FFS claims. CMS said it anticipates awarding all fiv"
2277,"e of these new Medicare FFS recovery audit contracts by the end of summer 2014. Other contractors help CMS investigate potentially fraudulent FFS payments, but CMS could improve its oversight of their work. CMS contracts with ZPICs in specific geographic zones covering the nation. We recently found that the ZPICs reported that their actions, such as stopping payments on suspect claims, resulted in more than $250 million in savings to Medicare in calendar year 2012. However, CMS lacks information on the time"
2278,"liness of ZPICs’ actions—such as the time it takes between identifying a suspect provider and taking actions to stop that provider from receiving potentially fraudulent Medicare payments—and would benefit from knowing whether ZPICs could save more money by acting more quickly. Thus, in October 2013, we recommended that CMS collect and evaluate information on the timeliness of ZPICs’ investigative and administrative actions. CMS did not comment on our recommendation. We are currently examining the activities"
2279," of the CMS contractors, including ZPICs, that conduct postpayment claims reviews. Our work is reviewing, among other things, whether CMS has a strategy for coordinating these contractors’ postpayment claims review activities. CMS has taken steps to improve use of two CMS information technology systems that could help analysts identify fraud after claims have been paid, but further action is needed. In 2011, we found that the Integrated Data Repository (IDR)—a central data store of Medicare and other data n"
2280,"eeded to help CMS program integrity staff and contractors detect improper payments of claims—did not include all the data that were planned to be incorporated by fiscal year 2010, because of technical obstacles and delays in funding. As of March 2014, the agency had not addressed our recommendation to develop reliable schedules to incorporate all types of IDR data, which could lead to additional delays in making available all of the data that are needed to support enhanced program integrity efforts and achi"
2281,"eve the expected financial benefits. However, One Program Integrity (One PI)—a web-based portal intended to provide CMS staff and contractors with a single source of access to data contained in IDR, as well as tools for analyzing those data—is operational and CMS has established plans and schedules for training all intended One PI users, as we also recommended in 2011. However, as of March 2014, CMS had not established deadlines for program integrity contractors to begin using One PI, as we recommended in 2"
2282,"011. Without these deadlines, program integrity contractors will not be required to use the system, and as a result, CMS may fall short in its efforts to ensure the widespread use and to measure the benefits of One PI for program integrity purposes. Having mechanisms in place to resolve vulnerabilities that could lead to improper payments, some of which are potentially fraudulent, is critical to effective program management, but our work has shown weaknesses in CMS’s processes to address such vulnerabilitie"
2283,"s. Both we and OIG have made recommendations to CMS to improve the tracking of vulnerabilities. In our March 2010 report on the RAC demonstration program, we found that CMS had not established an adequate process during the demonstration or in planning for the national program to ensure prompt resolution of vulnerabilities that could lead to improper payments in Medicare; further, the majority of the most significant vulnerabilities identified during the demonstration were not addressed. In December 2011, O"
2284,"IG found that CMS had not resolved or taken significant action to resolve 48 of 62 vulnerabilities reported in 2009 by CMS contractors specifically charged with addressing fraud. We and OIG recommended that CMS have written procedures and time frames to ensure that vulnerabilities were resolved. CMS has indicated that it is now tracking vulnerabilities identified from several types of contractors through a single vulnerability tracking process, and the agency has developed some written guidance on the proce"
2285,"ss. We recently examined that process and found that, while CMS informs MACs about vulnerabilities that could be addressed through prepayment edits, the agency does not systematically compile and disseminate information about effective local edits to address such vulnerabilities. Specifically, we recommended that CMS require MACs to share information about the underlying policies and savings related to their most effective edits, and CMS generally agreed to do so. In addition, in 2011, CMS began requiring M"
2286,"ACs to report on how they had addressed certain vulnerabilities to improper payment, some of which could be addressed through edits. We also recently made recommendations to CMS to address the millions of Medicare cards that display beneficiaries’ Social Security numbers, In August which increases beneficiaries’ vulnerability to identity theft.2012, we recommended that CMS (1) select an approach for removing Social Security numbers from Medicare cards that best protects beneficiaries from identity theft and"
2287," minimizes burdens for providers, beneficiaries, and CMS and (2) develop an accurate, well-documented cost estimate for such an option. In September 2013, we further recommended that CMS (1) initiate an information technology project for identifying, developing, and implementing changes for the removal of Social Security numbers and (2) incorporate such a project into other information technology initiatives. HHS concurred with our recommendations and agreed that removing the numbers from Medicare cards is "
2288,"an appropriate step toward reducing the risk of identity theft. However, the department also said that CMS could not proceed with changes without agreement from other agencies, such as the Social Security Administration, and that funding was also a consideration. Thus, CMS has not yet taken action to address these recommendations. We are currently examining other options for updating and securing Medicare cards, including the potential use of electronic-card technologies. In addition, we and others have ide"
2289,"ntified concerns with CMS oversight of fraud, waste, and abuse in Medicare’s prescription drug program, Part D, including the contractors tasked with this work. To help address potential vulnerabilities in that program, we are examining practices for promoting prescription drug program integrity, and the extent to which CMS’s oversight of Medicare Part D reflects those practices. Although CMS has taken some important steps to identify and prevent fraud, the agency must continue to improve its efforts to red"
2290,"uce fraud, waste, and abuse in the Medicare program. Identifying the nature, extent, and underlying causes of improper payments, and developing adequate corrective action processes to address vulnerabilities, are essential prerequisites to reducing them. As CMS continues its implementation of PPACA and Small Business Jobs Act provisions, additional evaluation and oversight will help determine whether implementation of these provisions has been effective in reducing improper payments. We are investing resour"
2291,"ces in a body of work that assesses CMS’s efforts to refine and improve its fraud detection and prevention abilities. Notably, we are currently assessing the potential use of electronic-card technologies, which can help reduce Medicare fraud. We are also examining the extent to which CMS’s information system can help prevent and detect the continued enrollment of ineligible or potentially fraudulent providers in Medicare. Additionally, we have a study underway examining CMS’s oversight of fraud, waste, and "
2292,"abuse in Medicare Part D to determine whether the agency has adopted certain practices for ensuring the integrity of that program. We are also examining CMS’s oversight of some of the contractors that conduct reviews of claims after payment. These studies are focused on additional actions for CMS that could help the agency more systematically reduce potential fraud in the Medicare program. Chairman Brady, Ranking Member McDermott, and Members of the Subcommittee, this concludes my prepared remarks. I would "
2293,"be pleased to respond to any questions you may have at this time. For further information about this statement, please contact Kathleen M. King at (202) 512-7114 or kingk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Karen Doran, Assistant Director; Stephen Robblee; Lisa Rogers; Eden Savino; and Jennifer Whitworth were key contributors to this statement. Medicare: Second Year Update for CMS’s Durable Medical Equipment C"
2294,"ompetitive Bidding Program Round 1 Rebid. GAO-14-156. Washington, D.C.: March 7, 2014. Medicare Program Integrity: Contractors Reported Generating Savings, but CMS Could Improve Its Oversight. GAO-14-111. Washington, D.C.: October 25, 2013. Medicare Information Technology: Centers for Medicare and Medicaid Services Needs to Pursue a Solution for Removing Social Security Numbers from Cards. GAO-13-761. Washington, D.C.: September 10, 2013 Health Care Fraud and Abuse Control Program: Indicators Provide Inform"
2295,"ation on Program Accomplishments, but Assessing Program Effectiveness Is Difficult. GAO-13-746. Washington, D.C.: September 30, 2013. Medicare Program Integrity: Increasing Consistency of Contractor Requirements May Improve Administrative Efficiency. GAO-13-522. Washington, D.C.: July 23, 2013. Medicare Program Integrity: Few Payments in 2011 Exceeded Limits under One Kind of Prepayment Control, but Reassessing Limits Could Be Helpful. GAO-13-430. Washington, D.C.: May 9, 2013. 2013 Annual Report: Actions N"
2296,"eeded to Reduce Fragmentation, Overlap, and Duplication and Achieve Other Financial Benefits. GAO-13-279SP. Washington, D.C.: April 9, 2013. Medicare Fraud Prevention: CMS Has Implemented a Predictive Analytics System, but Needs to Define Measures to Determine Its Effectiveness. GAO-13-104. Washington, D.C.: October 15, 2012. Medicare Program Integrity: Greater Prepayment Control Efforts Could Increase Savings and Better Ensure Proper Payment. GAO-13-102. Washington, D.C.: November 13, 2012. Medicare: CMS N"
2297,"eeds an Approach and a Reliable Cost Estimate for Removing Social Security Numbers from Medicare Cards. GAO-12-831. Washington, D.C.: August 1, 2012. Health Care Fraud: Types of Providers Involved in Medicare, Medicaid, and the Children’s Health Insurance Program Cases. GAO-12-820. Washington, D.C.: September 7, 2012. Program Integrity: Further Action Needed to Address Vulnerabilities in Medicaid and Medicare Programs. GAO-12-803T. Washington, D.C.: June 7, 2012. Follow-up on 2011 Report: Status of Actions "
2298,"Taken to Reduce Duplication, Overlap, and Fragmentation, Save Tax Dollars, and Enhance Revenue. GAO-12-453SP. Washington, D.C.: February 28, 2012. Medicare: The First Year of the Durable Medical Equipment Competitive Bidding Program Round 1 Rebid. GAO-12-733T. Washington, D.C.: May 9, 2012. Medicare: Review of the First Year of CMS’s Durable Medical Equipment Competitive Bidding Program’s Round 1 Rebid. GAO-12-693. Washington, D.C.: May 9, 2012. Medicare: Important Steps Have Been Taken, but More Could Be D"
2299,"one to Deter Fraud. GAO-12-671T. Washington, D.C.: April 24, 2012. Medicare Program Integrity: CMS Continues Efforts to Strengthen the Screening of Providers and Suppliers. GAO-12-351. Washington, D.C.: April 10, 2012. Improper Payments: Remaining Challenges and Strategies for Governmentwide Reduction Efforts. GAO-12-573T. Washington, D.C.: March 28, 2012. 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue. GAO-12-342SP. Washington, D.C.:"
2300," February 28, 2012. Fraud Detection Systems: Centers for Medicare and Medicaid Services Needs to Expand Efforts to Support Program Integrity Initiatives. GAO-12-292T. Washington, D.C.: December 7, 2011. Medicare Part D: Instances of Questionable Access to Prescription Drugs. GAO-12-104T. Washington, D.C.: October 4, 2011. Medicare Part D: Instances of Questionable Access to Prescription Drugs. GAO-11-699. Washington, D.C.: September 6, 2011. Medicare Integrity Program: CMS Used Increased Funding for New Act"
2301,"ivities but Could Improve Measurement of Program Effectiveness. GAO-11-592. Washington, D.C.: July 29, 2011. Improper Payments: Reported Medicare Estimates and Key Remediation Strategies. GAO-11-842T. Washington, D.C.: July 28, 2011. Fraud Detection Systems: Additional Actions Needed to Support Program Integrity Efforts at Centers for Medicare and Medicaid Services. GAO-11-822T. Washington, D.C.: July 12, 2011. Fraud Detection Systems: Centers for Medicare and Medicaid Services Needs to Ensure More Widespre"
2302,"ad Use. GAO-11-475. Washington, D.C.: June 30, 2011. Improper Payments: Recent Efforts to Address Improper Payments and Remaining Challenges. GAO-11-575T. Washington, D.C.: April 15, 2011. Medicare and Medicaid Fraud, Waste, and Abuse: Effective Implementation of Recent Laws and Agency Actions Could Help Reduce Improper Payments. GAO-11-409T. Washington, D.C.: March 9, 2011. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington,"
2303," D.C.: March 1, 2011. Improper Payments: Progress Made but Challenges Remain in Estimating and Reducing Improper Payments. GAO-09-628T. Washington, D.C.: April 22, 2009. Medicare: Thousands of Medicare Providers Abuse the Federal Tax System. GAO-08-618. Washington, D.C.: June 13, 2008. Medicare: Competitive Bidding for Medical Equipment and Supplies Could Reduce Program Payments, but Adequate Oversight Is Critical. GAO-08-767T. Washington, D.C.: May 6, 2008. Improper Payments: Status of Agencies’ Efforts to"
2304," Address Improper Payment and Recovery Auditing Requirements. GAO-08-438T. Washington, D.C.: January 31, 2008. Improper Payments: Federal Executive Branch Agencies’ Fiscal Year 2007 Improper Payment Estimate Reporting. GAO-08-377R. Washington, D.C.: January 23, 2008. Medicare: Improvements Needed to Address Improper Payments for Medical Equipment and Supplies. GAO-07-59. Washington, D.C.: January 31, 2007. Medicare: More Effective Screening and Stronger Enrollment Standards Needed for Medical Equipment Supp"
2305,"liers. GAO-05-656. Washington, D.C.: September 22, 2005. Medicare: CMS’s Program Safeguards Did Not Deter Growth in Spending for Power Wheelchairs. GAO-05-43. Washington, D.C.: November 17, 2004. Medicare: CMS Did Not Control Rising Power Wheelchair Spending. GAO-04-716T. Washington, D.C.: April 28, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission fro"
2306,"m GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately."
2307,"The IRS and tax administrators worldwide generally use similar administrative practices. Information reporting. Information reporting is a widely accepted practice for increasing taxpayer compliance. Under U.S. law, some types of transactions are required to be reported to the IRS by third parties who make payments to, or sometimes receive payments from, individual taxpayers. Typically, information returns represent income paid to the taxpayer, such as wages or bank account interest. After tax returns are f"
2308,"iled, the IRS then matches the amounts reported on information returns to the amounts reported on the taxpayer’s return. For any differences, the IRS may send a notice to the taxpayer requesting an explanation. If the taxpayer does not respond to the notice, the IRS may make an additional assessment. For fiscal year 2010, the IRS received over 2.7 billion information returns, sent 5.5 million notices on differences between information returns and tax returns, and assessed an additional $20.7 billion in taxe"
2309,"s, interest, and penalties. Withholding. Withholding is a widely accepted practice to increase taxpayer compliance. Under U.S. law, employers must withhold income tax from the wages paid to employees. Withholding from salaries requires wage earners to pay enough tax during the tax year to assure that they will not face a large payment at year end. Also, withholding can be required as a backup to information reporting if a payee fails to furnish a correct taxpayer identification number (TIN). If the payee re"
2310,"fuses to furnish a TIN, the payer generally withholds 28 percent of the amount of the payment— for example, interest payments on a bank account—and remits that amount to the IRS. Electronic tax administration. Many tax administrators in the United States and worldwide have increasingly used electronic tax administration to improve services and reduce costs. The IRS has focused its electronic tax administration on filing tax returns over the Internet, providing taxpayer assistance through its Web site, and p"
2311,"roviding telephone assistance. To accept electronically filed tax returns, IRS has authorized preapproved e-file providers to submit the returns. IRS cannot accept electronically filed returns directly from taxpayers. Through its Web site, IRS provides taxpayers with publications explaining tax law and IRS administrative procedure. The Web site also provides automated services such as “Where’s My Refund?” During the 2010 filing season, the IRS Web site had 239 million total visits and 277 million searches. "
2312,"IRS also received 77 million telephone calls of which IRS phone assistors answered about 24 million calls. Tax enforcement. The U.S. tax system, as well as many other tax systems worldwide, is based on some degree of self-reporting and voluntary compliance by taxpayers. Tax administrations worldwide have enforcement programs to ensure that tax returns are accurate and complete and taxes are paid. Among others, IRS uses two principal enforcement programs. After tax returns have been filed, the Automated Unde"
2313,"rreporter Program matches data on information returns (usually on income) provided by employers, banks, and other payers of income to data reported on taxpayers’ tax returns. IRS may contact taxpayers about any differences. The Examination Program relies on IRS auditors to check compliance in reporting income, deductions, credits, and other issues on tax returns by reviewing the documents taxpayers provided to support their tax return. IRS, like revenue agencies in many countries, administers tax expenditur"
2314,"es. Tax expenditures are tax provisions that grant special tax relief for certain kinds of behavior by taxpayers or for taxpayers in special circumstances. Tax expenditures reduce the amount of taxes owed and therefore are seen as resulting in the government forgoing revenues. These provisions are viewed by many analysts as spending channeled through the tax system. For fiscal year 2010, the U.S. Department of the Treasury reported 173 tax expenditures costing, in aggregate, more than $1 trillion. Tax expen"
2315,"ditures are often aimed at policy goals similar to those of federal spending programs, such encouraging economic development in disadvantaged areas and financing postsecondary education. In 2005, we reported that all U.S. federal spending and tax policy tools, including tax expenditures, should be reexamined to ensure that they are achieving their intended purposes and designed in the most efficient and effective manner. The following examples illustrate how New Zealand, Finland, the European Union (EU), th"
2316,"e United Kingdom (UK), Australia, and Hong Kong have addressed well-known tax administration issues. Our work does not suggest that these practices should or should not be adopted by the United States. New Zealand, like the United States, addresses various national objectives through a combination of tax expenditures and discretionary spending programs. In New Zealand, tax expenditures are known as tax credits. New Zealand has overcome obstacles to evaluating these related programs at the same time to bette"
2317,"r judge whether they are working effectively. Rather than doing separate evaluations, New Zealand completes integrated evaluations of tax expenditures and discretionary spending programs to analyze their combined effects. Using this approach, New Zealand can determine, in part, whether tax expenditures and discretionary spending programs work together to accomplish government goals. One example is the Working For Families (WFF) Tax Credits program, which is an entitlement for families with dependent childre"
2318,"n to promote employment. Prior to the introduction of WFF in 2004, New Zealand’s Parliament discovered that many low-income families were not better off from holding a low-paying job, and those who needed to pay for childcare to work were generally worse off in low-paid work compared to receiving government benefits absent having a job. This prompted Parliament to change its in-work incentives and financial support including tax expenditures. The WFF Tax Credits program differs from tax credit programs in t"
2319,"he United States in that it is an umbrella program that spans certain tax credits administered by the Inland Revenue Department (IRD) as well as discretionary spending programs administered by the Ministry of Social Development (MSD). IRD collects most of the revenue and administers the tax expenditures for the government. Being responsible for collecting sensitive taxpayer information, IRD must maintain tax privacy and protect the integrity of the New Zealand tax system. MSD administers the WFF’s program f"
2320,"unds and is responsible for collecting data that include monthly income received by its beneficiaries. Given different responsibilities, IRD and MSD keep separate datasets, making it difficult to assess the cumulative effect of the WFF program. Therefore, to understand the cumulative effect of changes made to the WFF program and ensure that eligible participants were using it, New Zealand created a joint research program between IRD and MSD that ran from October 2004 to April 2010. The joint research progra"
2321,"m created linked datasets between IRD and MSD. Access to sensitive taxpayer information was restricted to IRD employees on the joint research program and to authorized MSD employees only after they were sworn in as IRD employees. The research provided information on key outcomes that could only be tracked through the linked datasets. The research found that the WFF program aided the transition from relying on government benefits to employment, as intended. It also found that a disproportionate number of tho"
2322,"se not participating in the program faced barriers to taking advantage of the WFF. Barriers included the perceived stigma from receiving government aid, the transaction costs of too many rules and regulations, and the small amounts of aid for some participants. On the basis of these findings, Parliament made changes to WFF that provided an additional NZ$1.6 billion (US$1.2 billion) per year in increased financial entitlements and in-work support to low- to middle-income families. Appendix II provides more d"
2323,"etails on New Zealand’s evaluation of tax expenditures as well as similarities and differences to the U.S. system. Finland encourages accurate withholding of taxes from taxpayers’ income, lowers its costs, and reduces taxpayers’ filing burdens through Internet- based electronic services. In 2006, Finland established a system, called the Tax Card, to help taxpayers estimate a withholding rate for the individual income tax. The Tax Card, based in the Internet, covers Finland’s national tax, municipality tax, "
2324,"social security tax, and church tax. The Tax Card is accessed through secured systems in the taxpayer’s Web bank or an access card issued by Finland’s government. The Tax Card system enables taxpayers to update their withholding rate as many times as needed throughout the year, adjusting for events that increase or decrease their income tax liability. When completed, the employer is notified of the changed withholding tax rate through the mail or by the employee providing a copy to the employer. According t"
2325,"o the Tax Administration, about a third of all taxpayers using the Tax Card—about 1.6 million people—change their withholding percentages at least annually. Finland generally refunds a small amount of the withheld funds to taxpayers (e.g., it refunded about 8 percent of the withheld money in 2007). Finland also has been preparing income tax returns for individuals since 2006. The Tax Administration prepares the return for the tax year ending on December 31st based on third-party information returns, such as"
2326," reporting by employers on wages paid or by banks on interest paid to taxpayers. During April, the Tax Administration mails the preprepared return for the taxpayer’s review. Taxpayers can revise the paper form and return it to the Tax Administration in the mail or revise the return electronically online. According to Tax Administration officials, about 3.5 million people do not ask to change their tax return and about 1.5 million will request a tax change. Electronic tax administration is part of a governme"
2327,"ntwide policy to use electronic services to lower the cost of government and encourage growth in the private sector. According to Tax Administration staff, increasing electronic services to taxpayers helps to lower costs. Overall, the growth of electronic services, according to Finnish officials, has helped to reduce Tax Administration staff by over 11 percent from 2003 to 2009 while improving taxpayer service. According to officials of the Finnish government as well as public-interest and trade groups, the"
2328," Tax Card and preprepared return systems were established under a strong culture of national cooperation. For the preprepared return system to work properly, Finland’s business and other organizations that prepare information returns had to accept the burden to comply in filing accurate returns promptly following the end of the tax year. Finland’s tax system is positively viewed by taxpayers and industry groups, according to our discussions with several industry and taxpayer groups. They stated that Finland"
2329," has a simple, stable tax system which makes compliance easier to achieve. As a result, few individuals use a tax advisor to help prepare and file their annual income tax return. Appendix III provides more details on Finland’s electronic tax administration system as well as a discussion of similarities to and differences from the U.S. system. The EU seeks to improve tax compliance through a multilateral agreement on the exchange of information on interest earned by each nation’s individual taxpayers. This a"
2330,"greement addresses common issues with the accuracy and usefulness of information exchanged among nations that have differing technical, language, and formatting approaches for recording and transmitting such information. Under the treaty, called the Savings Taxation Directive, adopted in June 2003, the 27 EU members and 10 other participants agreed to share information about income from interest payments made to individuals who are citizens in another member nation. With this information, the tax authoritie"
2331,"s are able to verify whether their citizens properly reported and paid tax on the interest income. The directive provides the basic framework for the information exchange, defining essential terms and establishing automatic information exchange among members. As part of the directive, 3 EU member nations as well as the 5 European nonmember nations agreed to apply a withholding tax with revenue sharing (described below) during a transition period through 2011, rather than automatically exchanging information"
2332,". Under this provision, a 15 percent withholding tax gradually increases to 35 percent by July 1, 2011. The withholding provision included a revenue-sharing provision, which authorizes the withholding nation to retain 25 percent of the tax collected and transfer the other 75 percent to the nation of the account owner. The directive also requires the account owner’s home nation to ensure that withholding does not result in double taxation. The directive does this by granting a tax credit equal to the amount "
2333,"of tax paid to the nation in which the account is located. A September 2008 report to the EU Council described the status of the directive’s implementation. During the first 18 months of information exchange and withholding, data limitations such as incomplete information on the data exchanged and tax withheld created major difficulties for evaluating the directive’s effectiveness. Further, no benchmark was available to measure the effect of the changes. According to EU officials, the most common administra"
2334,"tive issues, especially during the first years of implementation of the directive, have been the identification of the owner reported in the computerized format. It is generally recognized that a Taxpayer Identification Number (TIN) provides the best means of identifying the owner. However, the current directive does not require paying agents to record a TIN. Using names has caused problems when other EU member states tried to access the data. For example, a name that is misspelled cannot be matched. In add"
2335,"ition, how some member states format their mailing address may have led to data-access problems. Other problems with implementing the directive include identifying whether investors moved their assets into categories not covered by the directive (e.g., shifting to equity investments), and concerns that tax withholding provisions may not be effective because withholding rates were low until 2011 when the rate became 35 percent. The EU also identified problems with the definition of terms, making uniform appl"
2336,"ication of the directive difficult. Generally these terms identify which payments are covered by the directive, who must report under the directive, and who owns the interest for tax purposes. Nevertheless, EU officials stated that the quality of data has improved over the years. The EU officials have worked with EU member nations to resolve specific data issues, which has contributed to the effective use of the information exchanged under the directive. EU officials told us that the monitoring role by the "
2337,"EU Commission, the data-corrections process, and frequent contacts to resolve specific issues have contributed to effective use of the data received by EU member states. Appendix IV provides more details on the EU Saving Taxation Directive and related issues such as avoiding double taxation as well as a discussion of similarities to and differences from the U.S. system. The UK promotes accurate tax withholding and reduces taxpayers’ filing burdens by calculating withholding rates for taxpayers and requiring"
2338," that payers of certain types of income withhold taxes at standard rates. The UK uses information reporting and withholding to simplify tax reporting and tax payments for individual tax returns. Both the individual taxpayer and Her Majesty’s Revenue and Customs (HMRC)—the tax administrator—are to receive information returns from third parties that make payments to a taxpayer such as for bank account interest. A key element is the UK’s Pay As You Earn (PAYE) system. Under the PAYE system, HMRC calculates an "
2339,"amount of withholding from wages to meet a taxpayer’s liability for the current tax year based on information reporting from the employer and other income information employees may provide. According to HMRC officials, the individual tax system in the UK is simple for most taxpayers who are subject to PAYE. PAYE makes it unnecessary for wage earners to file a yearly tax return, unless special circumstances apply. For example, wage earners do not need to file a return unless income from interest, dividends, "
2340,"or capital gains exceeds certain thresholds or if deductions need to be reported. Therefore, a tax return may not be required because most individuals do not earn enough of these income types to trigger self-reporting. For example, the first £10,100 (US$16,239) of capital gains income is exempt from being reported on tax returns. PAYE also facilitates the reconciliation of tax liabilities for prior tax years through the use of withholding at source for wages. The withheld amount may be adjusted by HMRC to c"
2341,"ollect any unpaid taxes from previous years or refund overpayments. HMRC annually notifies the taxpayer and employer of the amount to withhold. HMRC also may adjust the withheld amount through information provided by taxpayers. If taxpayers provide the information on their other income such as self-employment earnings, rental income, or investment income, HMRC can adjust the PAYE withholding. Individuals not under the PAYE system are required to file a tax return after the end of the tax year based on their"
2342," records. In addition, HMRC uses information reporting and tax withholding as part of its two-step process to assess the compliance risks on filed returns. In the first step, individual tax returns are reviewed for inherent compliance risks because of the taxpayers’ income level and complexity of the tax return. For example, wealthy taxpayers with complex business income are considered to have a higher compliance risk than a wage earner. In the second step, information compiled from various sources—includin"
2343,"g information returns and public sources—is analyzed to identify returns with a high compliance risk. According to HMRC officials, these assessments have allowed HMRC to look at national and regional trends. HMRC is also attempting to uncover emerging compliance problems by combining and analyzing data from the above sources as well as others. Appendix V provides more details on the UK’s information reporting and withholding system as well as a discussion of similarities to and differences from the U.S. sys"
2344,tem. The Australian High Net Wealth Individuals (HNWI) program focuses on the characteristics of wealthy taxpayers that affect their tax compliance. High-wealth individuals often have complex business relationships involving many entities they may directly control or indirectly influence and these relationships may be used to reduce taxes illegally or in a manner that policymakers may not have intended. The HNWI program requires these taxpayers to provide information on these relationships and provides such
2345," taxpayers additional guidance on proper tax reporting. According to the Australian Taxation Office (ATO), in the mid-1990s, ATO was perceived as enforcing strict sanctions on the average taxpayers but not the wealthy. By 2008, ATO found that high-wealth taxpayers, those with a net worth of more than A$30 million (US$20.9 million), had substantial income from complex arrangements, which made it difficult for ATO to identify and assure compliance. ATO concluded that the wealthy required a different tax admin"
2346,"istration approach. ATO set up a special task force to improve its understanding of wealthy taxpayers, identify their tax planning techniques, and improve voluntary compliance. Due to some wealthy taxpayers’ aggressive tax planning, which ATO defines as investment schemes and legal structures that do not comply with the law, ATO quickly realized that it could not reach its goals for voluntary compliance for this group by examining taxpayers as individual entities. To tackle the problem, ATO began to view we"
2347,"althy taxpayers as part of a group of related business and other entities. Focusing on control over related entities rather than on just individual tax obligations provided a better understanding of wealthy individuals’ compliance issues. The HNWI approach followed ATO’s general compliance model. The model’s premise is that tax administrators can influence tax compliance behavior through their responses and interventions. For compliant wealthy taxpayers, ATO developed a detailed questionnaire and expanded t"
2348,"he information on business relationships that these taxpayers must report on their tax return. For noncompliant wealthy taxpayers, ATO is to assess the tax risk and then determine the intensity of ATO’s compliance interventions. According to 2008 ATO data, the HNWI program has produced financial benefits. From the establishment of the program in 1996 until 2007, ATO had collected A$1.9 billion (US$1.67 billion) in additional revenue and reduced revenue losses by A$1.75 billion (US$1.5 billion) through compl"
2349,"iance activities focused on highly wealthy individuals and their associated entities. ATO’s program focus on high-wealth individuals and their related entities has been adopted by other tax administrators. By 2009, nine other countries, including the United States, had formed groups to focus resources on high-wealth individuals. Appendix VI provides more details on Australia’s high-wealth program as well as similarities and differences to the U.S. system. Although withholding of taxes by payers of income is"
2350," a common practice to ensure high levels of taxpayer compliance, Hong Kong’s Salaries Tax does not require withholding by employers. Instead, tax administrators and taxpayers appear to find a semiannual payment approach effective. Hong Kong’s Salaries Tax is a tax on wages and salaries with a small number of deductions (e.g., charitable donations and mortgage interest). The Salaries Tax is paid by about 40 percent of the estimated 3.4 million wage earners in Hong Kong, while the other 60 percent are exempt "
2351,"from Salaries Tax. Rather than using periodic (e.g., biweekly or monthly) tax withholding by employers, Hong Kong collects the Salaries Tax through two payments by taxpayers for a tax year. Since the tax year runs for April 1st through March 31st, a substantial portion of income for the tax year is earned by January (i.e., income for April to December), and the taxpayer is to pay 75 percent of the tax for that tax year in January (as well as pay any unpaid tax from the previous year). The remaining 25 perce"
2352,"nt of the estimated tax is to be paid 3 months later in April. By early May, the Inland Revenue Department (IRD)—the tax administrator—annually prepares individual tax returns for taxpayers based on information returns filed by employers. Taxpayers review the prepared return, make any revisions such as including deductions (e.g., charitable contributions), and file it with IRD. IRD then will review the returns and determine if any additional tax is due. If the final Salaries Tax assessment turns out to be h"
2353,"igher than the estimated tax previously assessed, IRD is to notify the taxpayer, who is to pay the additional tax concurrently with the January payment of estimated tax for the next tax year. Hong Kong’s tax system is positively viewed by tax experts, practitioners, and a public opinion expert based on our discussions with them. They generally believe that low tax rates, a simple system, and cultural values contribute to Hong Kong’s collection of the Salaries Tax through the two payments rather than periodi"
2354,"c withholding. Tax rates are fairly low, starting at 2 percent of the adjusted salary earned and not exceeding 15 percent. Further, tax experts told us that the Salaries Tax system is simple. Few taxpayers use a tax preparer because the tax form is very straightforward and the tax system is described as “stable.” Further, an expert on public opinion in Hong Kong told us that taxpayers fear a loss of face if recognized as not complying with tax law. This cultural attitude helps promote compliance. IRS offici"
2355,"als learn about foreign tax practices by participating in international organizations of tax administrators. IRS is actively involved in two international tax organizations and one jointly run program that addresses common tax administration issues. First, the IRS participates with the Center for Inter-American Tax Administration (CIAT), a forum made up of 38 member countries and associate members, which exchange experiences with the aim of improving tax administration. CIAT, formed in 1967, is to promote i"
2356,"ntegrity, increase tax compliance, and fight tax fraud. The IRS participates with CIAT in designing and developing tax administration products and with CIAT’s International Tax Planning Control committee. Second, the IRS participates with the Organisation for Economic Co-operation and Development (OECD) Forum on Tax Administration (FTA), which is chaired by the IRS Commissioner during 2011. The FTA was created in July 2002 to promote dialogue between tax administrations and identify good tax administration "
2357,"practices. Since 2002, the forum has issued over 50 comparative analyses on tax administration issues to assist member and selected nonmember countries. IRS and OECD officials exchange tax administration knowledge. For example, the IRS is participating in the OECD’s first peer review of information exchanged under tax treaties and tax information exchange agreements. Under the peer-review process, senior tax officials from several OECD countries examine each selected member’s legal and regulatory framework "
2358,"and evaluate members’ implementation of OECD tax standards. The peer-review report on IRS information exchange practices is expected to be published in mid-2011. As for the jointly run program, the Joint International Tax Shelter Information Centre (JITSIC) attempts to supplement ongoing work in each country to identify and curb abusive tax schemes by exchanging information on these schemes. JITSIC was formed in 2004 and now includes tax agencies of Australia, Canada, China, Japan, South Korea, the United K"
2359,"ingdom, and the United States. According to the IRS, JITSIC members have identified and challenged the following highly artificial arrangements: a cross-border scheme involving millions of dollars in improper deductions and unreported income on tax returns from retirement account withdrawals; highly structured financing transactions created by financial institutions that taxpayers used to generate inappropriate foreign tax credit benefits; and made-to-order losses on futures and options transactions for ind"
2360,"ividuals in other JITSIC jurisdictions, leading to more than $100 million in evaded taxes. To date, the IRS has implemented one foreign tax administration practice. As presented earlier, Australia’s HNWI program examines sophisticated legal structures that wealthy taxpayers may use to mask aggressive tax strategies. In 2009, the OECD issued a report for a project on the tax compliance problems of wealthy individuals and concluded that “high net worth individuals pose significant challenges to tax administra"
2361,"tions” due to their complex business dealings across different business entities, higher tax rates, and higher likelihood of using aggressive tax planning or tax evasion. According to an IRS official, during IRS’s participation in 2008 in the OECD Project, IRS staff began to realize the value of Australia’s program to the U.S. tax system. The IRS now has a program focused on wealthy individuals and their networks. The IRS provided technical comments that are included in this report. As agreed with your offi"
2362,"ces, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after the report date. At that time, we will send copies to the Commissioner of Internal Revenue and other interested parties. This report also will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-9110 or brostekm@gao.gov. Contact points for our Offices of Congressional Relations and Pu"
2363,"blic Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IX. For our objective to describe how other countries have approached tax administration issues that are similar to those in the U.S. tax system, we selected six foreign tax administrators. We based our selection of these practices on several factors, including whether the tax administrators had advanced economies and tax systems and the foreign tax administrator’s approach differed, at least in"
2364," part, from how the United States approaches similar issues. These tax systems also needed to have enough information available in English on their Web site for us to preliminarily understand their tax system and practices. In addition, we considered practices of interest to the requesters. To describe each of the practices, we reviewed documents and held telephone conferences with officials from each tax administrator. We also met with officials of Finland’s government in Helsinki. When possible, we confir"
2365,"med additional information provided to us by officials to assure that we had a reasonable basis for the data presented. We used official reports published by the tax administrators, such as their annual reports, that are made available to the public on their Internet Web site. To identify taxpayers’ attitudes toward Hong Kong’s semiannual payment system, we interviewed experts who were either university professors, were the authors of publications on Hong Kong’s tax system, or were practitioners in well-kno"
2366,"wn law or accounting firms. To understand the development of Finland’s Internet-based withholding estimation and prepared returns system, we met with the public interest and trade groups that provided assistance to Finland’s Parliament during the system’s development. To describe whether and how the Internal Revenue Service (IRS) identifies and integrates tax administration practices used in other countries, we interviewed IRS officials and reviewed related documents. We also followed up with IRS officials "
2367,"based on any information we found independently about practices that relate to issues in the U.S. tax system and our comparison of U.S. and other administrator’s practices. The descriptive information on the practices of foreign administrators presented in this report may provide useful insights for Congress and others on alternatives to current U.S. tax policies and practices. However, our work did not include the separate analytic step of identifying and assessing the factors that might affect the transfe"
2368,"rability of the practices to the United States. To adjust foreign currencies to U.S. dollars, we used the Federal Reserve Board’s database on foreign exchange rates. We used rates that matched the time period cited for the foreign amount. For current amounts, we used the exchange rates published for February 25, 2011. If the amounts were for a previous year, we used the exchange rate published for the last business day of that year. For example, if foreign amounts were cited as of 2006, we used exchange rat"
2369,"es for December 29, 2006. We did not adjust amounts from previous years for inflation. To help ensure the accuracy of the information we present, we shared a summary of our descriptions with representatives of the six foreign tax administrators and incorporated their comments as appropriate. The IRS provided technical comments that are included in this report. We conducted our work from October 2009 to May 2011 in accordance with all sections of GAO’s Quality Assurance Framework that are relevant to our obj"
2370,"ectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions in this report. The New Zealand tax system is centralized through the Inland Revenue Department (IRD). Most of New Zealand’s NZ$49 billion (US$35.5 billion) in revenue for fiscal ye"
2371,"ar 2009 was raised by direct taxation that includes PAYE (Pay As You Earn), Company Tax, and Schedular Payments. In addition, tax expenditures (tax credits in New Zealand) for social programs that were administered by IRD in 2009 include KiwiSaver and Working For Families (WFF) Tax Credits programs. The WFF Tax Credits program, started in 2004, seeks to assist low- to middle-income families with the goal of promoting employment and ensuring income adequacy. Prior to 2004, New Zealand had another program int"
2372,"ended to assist families. However, the New Zealand government discovered that many low-income families were no better off from holding a low-paying job and that those who needed to pay for childcare to work generally were worse off in low-paid work compared to only receiving government benefits. This prompted the government to change in-work incentives and financial support for families with dependent children. These changes were incorporated into the WFF program in 2004. It was estimated that program costs"
2373, would increase by NZ$1.6 billion (US$1.2 billion) per year. The WFF Tax Credits program is an umbrella program that spans certain tax credits administered by the IRD as well as discretionary spending programs administered by the Ministry of Social Development (MSD). Table 2 shows the tax and discretionary spending components of the WFF tax credits program and the agency responsible for them. Under the program IRD makes payments to the majority of eligible recipients during the tax year. The IRD and MSD por
2374,"tions of the WFF tax credit program are intended to work together to assist low- to middle- income families and promote employment. Information that IRD collects and uses in administering the tax credits is subject to New Zealand’s protections for the privacy of sensitive taxpayer information contained in the Tax Administration Act. The information that MSD collects and uses is not subject to the same restrictions. To meet their separate needs, IRD and MSD keep separate datasets. New Zealand’s joint researc"
2375,"h projects integrated research between IRD and other governmental agencies with related programs. The projects were designed to ensure that all disbursements of revenue through either direct program outlays or tax expenditures were administered effectively to meet the goals for social programs, making sure people get the assistance to which they are entitled. One example of joint research was the study of the WFF tax credits program. To overcome the problem of the separate datasets and still protect sensiti"
2376,"ve tax data, the New Zealand government approved a joint research program that created interagency linked datasets between IRD and MSD. Parliament intended that these linked datasets be used to evaluate the tax expenditures and discretionary spending programs, to ensure that the benefits of the overall program were being fully used by its participants. These linked datasets, known as the “WFF Research Datasets,” were constructed from the combined records of the MSD and IRD. They contained several years of d"
2377,"ata, and included information about all families who had received a WFF payment during these years. The data included monthly amounts of income received from salary and wages from employment and from the main benefit payments. The linked dataset information was to be used solely to analyze the results of WFF. It could not be used to take any action, whether adverse or favorable, against a particular individual. In 2004, MSD and IRD developed a Memorandum of Understanding (MOU) for the WFF program. The MOU i"
2378,"ncluded processes to share information while ensuring that all sensitive data were protected from unauthorized disclosure. The MOU permitted IRD to provide MSD with aggregate taxpayer information needed to conduct evaluations with a restriction that only allows IRD employees direct access to sensitive taxpayer information. However, IRD was authorized to distribute sensitive taxpayer information to authorized MSD employees if they were part of the joint research team and were sworn in as IRD employees. Swear"
2379,ing in MSD agents as IRD agents permitted IRD to apply the same sanctions to IRD and MSD agents who did not adhere to IRD’s data-protection policies. The WFF joint research revealed social and cultural barriers that prevented targeted participants from taking full advantage of the WFF program. These barriers included the perceived stigma from receiving government aid if the person could work or felt that the aid infringed on independence or self-sufficiency; transaction costs from accepting government aid s
2380,"uch as taking time off from work, arranging childcare, or following many rules and regulations; low value of applying for the program when the person was close to the maximum eligibility threshold; and geographic barriers when the person lived in areas that were remote or had no transportation, telephone, or Internet. The WFF joint research provided information needed to identify the population that benefited from the program and reduce some of the barriers that kept recipients, particularly an indigenous p"
2381,"opulation, from participating in the target program. Since the inception of the WFF program in 2004, the joint research documented the following benefits from reducing barriers to the targeted population: The percentage of single parents working 20 hours or more increased from 48 percent in June 2004 to 58 percent in June 2007. This represents 8,100 additional single parents in the workforce. The number of single parents receiving benefits from MSD fell by 12 percent from March 2004 to March 2008. Those tha"
2382,"t received the benefits did so for a shorter time and stayed off the benefit programs longer. While structural differences exist between the New Zealand and U.S. tax systems, both systems use tax expenditures (i.e., tax credits in New Zealand). Unlike the United States, New Zealand has developed a method to evaluate the effectiveness of tax expenditures and discretionary spending programs through joint research that created interagency linked datasets. New Zealand did so while protecting confidential tax da"
2383,"ta from unauthorized disclosure. In 2005, we reported that the United States had substantial tax expenditures but lacked clarity on the roles of the Office of Management and Budget (OMB), Department of the Treasury, IRS, and federal agencies with discretionary spending programs to evaluate the tax expenditures. Consequently, the United States lacked information on how effective tax expenditures were in achieving their intended objectives, how cost- effectively benefits were achieved, and whether tax expendi"
2384,"tures or discretionary spending programs worked well together to accomplish federal objectives. At that time, OMB disagreed with our recommendations to incorporate tax expenditures into federal performance management and budget review processes, citing methodological and conceptual issues. However, in its fiscal year 2012 budget guidance, OMB instructed agencies, where appropriate, to analyze how to better integrate tax and spending policies that have similar objectives and goals. Finland’s national and mun"
2385,"icipal governments as well as local church councils levy taxes. Nationally, 39 percent of all taxes are paid under individual and corporate income taxes and a capital gains tax. Taxes on goods, services, and property total about 33 percent of revenue; most of this revenue is from the Value Added Tax (VAT). The final 28 percent comes from social security taxes (e.g., national health insurance system and employment pension insurance). Finland’s individual income tax is levied on a graduated rate schedule with"
2386," four tax brackets, ranging from 7.0 percent to 30.5 percent for incomes over €64,500 (US$92,441) with the tax on investment income levied at a flat rate of 28 percent in 2009. Finland’s corporate income tax is levied at a flat rate of 26 percent. Under the municipal tax, each municipal council sets its tax rate annually. For 2009, municipal taxes are levied at flat rates ranging from 16.5 percent to 21.0 percent of earned income and averaging 18.6 percent. Individuals who are members of the Evangelical-Lut"
2387,"heran Church or the Orthodox Church pay a church tax. For 2009, local church communities determine the rate of tax, which is levied at a flat rate between 1 and 2 percent. Using electronic means, Finland helps taxpayers in estimating their tax withholding and by preparing an income tax return for each individual taxpayer based on third-party information returns. The on-line Tax Card system, established in 2006, is an Internet-based system to help Finnish taxpayers estimate the withholding rate for individua"
2388,"l income tax. The Tax Card covers national taxes, municipality tax, social security tax, and church tax. Taxpayers access the Tax Card through the Web sites of their bank or the Finland Tax Administration. Using the Tax Card system, taxpayers can update their withholding rate as many times as needed throughout the year to adjust for events that increase or decrease their potential tax liability. For example, if the taxpayer takes a job with a higher salary, the taxpayer can estimate the change on his or her"
2389," income tax liability by using the Tax Card system. Taxpayers enter information provided by the employer, based on payroll information, to estimate their adjusted withholding. Annually, 1.6 million taxpayers, about a third of those using the Tax Card, change their tax withholding rate. When the Tax Card has been completed, employees provide the withholding tax rate to their employer through regular mail or in person. If the employer is not notified of any withholding rate, the employer must withhold at the "
2390,"top marginal rate in Finland for all types of taxes—which is 60 percent of gross pay. Employers manually enter the withholding rate into their payroll systems. According to Tax Administration officials, some social benefits can complicate the estimation of the tax due and may not be accurately estimated during the tax year. For example, Finland has a deduction for the cost of travel between a residence and work. If the taxpayer does not accurately estimate the deductions or make changes as the year progress"
2391,"es, the Tax Card withholding rate will be inaccurate. Finland has been operating a tax-return preparation system since 2006. The Finnish Tax Administration prepares an income tax return for each individual taxpayer based on third-party information returns. According to Tax Administration officials, Finland uses information from over 30 types of information-return filers (e.g., employers, banks, and securities brokers). Tax Administration officials said that they have found very little misreporting on the in"
2392,"formation returns used to prepare the tax returns. They use many ways to try to verify the information. Some taxpayers will correct information returns when reviewing their prepared tax returns. Third parties can be penalized for inaccurate information and Finnish tax officials said those penalties are regularly assessed. The system prepares the return each tax year, which ends on December 31. According to Tax Administration officials, the individual tax returns are mailed for review during April. The taxpa"
2393,"yer has until May to make changes to the paper return. Taxpayers can mark up the paper return for revisions and mail it to the Tax Administration whose staff keys in or electronically scans in the changes. Also, taxpayers can choose to make the changes to the return online, using the taxpayer’s account with the Tax Administration. According to Tax Administration officials, typically about 3.5 million people do not ask to change their tax return and about 1.5 million request a tax change. About 400,000 taxpa"
2394,"yers will revise their return using the Tax Administration’s Internet portal. Typically, the average taxpayer takes about half an hour to do the adjustments online. One deduction, the commuting adjustment, is not reported on an information return. This adjustment accounts for changes to about 800,000 prepared returns. Overall, taxpayers need to show some proof to support the change to the prepared return, including any changes they make to the information returns the Tax Administration used to prepare the r"
2395,"eturns. For example, taxpayers showing deductions for mortgage interest that were not reported on information returns would need to show they own a house and the mortgage interest was paid. Or, if an information return reports interest as income, but taxpayers deduct the interest as paid on a loan, the taxpayers need to document the reason for their deduction claims. Finland does not prepare tax returns if individual taxpayers have business income. Rather, these taxpayers must file tax returns based on the "
2396,"data or business records that they maintained. However, some of these taxpayers with business income may get a partially prepared return on personal income and deductions based on third party information on their wages and other personal income in Finland’s prepared return system. All businesses operating in Finland must register with the government. Providing enhanced electronic services has been widely recognized in Finland as an approach for improving taxpayer service while reducing costs. Electronic ser"
2397,"vices provide taxpayers with constant access to assistance regardless of the time of day or distance from the tax administration office. According to Tax Administration officials, electronic systems that provide routine taxpayer assistance allows Tax Administration staff to respond to more complex taxpayer problems. Finland also moved to electronic tax administration to support national policies. As a national policy to encourage economic growth, Finland seeks to have a large private-sector workforce. Accor"
2398,"ding to an official of the Finland’s government, a large number of citizens are nearing retirement. Thus, the government is seeking to reduce its workforce so that more workers are available for the private sector. To achieve this goal, Finland focused on making the delivery of government programs more efficient by using more electronic transactions. Another reason for electronic tax administration was to provide equal access to government services. Finnish law requires all e-services to be accessible to al"
2399,"l Finnish citizens. With a significant segment of its population living in remote regions, according to officials, improving e- government provides more equal access to government services. To encourage equal access and use of the Internet for delivering services, Finland established standard speeds of Internet access in July 2009. Finland’s tax system is viewed positively by taxpayers and industry groups. Members of several industry and taxpayer groups told us that Finland has a simple, stable tax system, "
2400,"which makes compliance relatively easy. They also commented that the Tax Card and preprepared annual return system work well and are easy to use. As a result, few individuals use a tax advisor to help prepare and file the annual income tax return. We were told that individuals using a tax advisor have complex tax issues, such as from owning a businesses or having complex investments. Electronic tax administration has advantages for the government and Finnish taxpayers. According to tax officials, cost savin"
2401,"gs result from spending less time to prepare and process tax returns. These officials said that electronic tax administration has helped to reduce their full-time- equivalent positions over 11 percent from 2003 to 2009. Further, the tax withholding system results in a small amount of individual income tax withheld that needs to be refunded after final returns are filed. For tax year 2007, 8 percent of the tax withheld was refunded to taxpayers as compared to 26 percent refunded in the United States. Finland"
2402,"’s culture of cooperation and the resulting cooperative arrangements between government, banks, businesses, and taxpayers have led to acceptance of the new Tax Card Online service. According to public interest and trade groups in Finland, the Finnish society has a great deal of confidence in the banking system and its secure access. This confidence influenced the decision to place the Tax Card online service on bank Web sites. With taxpayers having regular access to a banking Web site, the banks offer a cha"
2403,"nnel for delivering government services, according to government officials. Public interest and trade groups agreed, noting that the banking industry’s willingness to support the Tax Card enhanced its development. Representatives of a Finnish banking trade group said that placing the Tax Card system on their Web sites helped banks. That is, the more time customers spend on banks’ Web sites, the more opportunities the banks had to offer other services, helping to offset the cost of implementing the system. A"
2404,"ccording to Finnish trade and public interest groups, Finland’s cooperative culture also supports the preprepared individual income tax return system. For this system to work properly, business and other organizations must file accurate information returns within 1 month after the end of the tax year. This short period for filing information returns creates some burden. The burden includes costs to purchase and install special software for collecting the information as well as preparing and filing the retur"
2405,"ns. According to a professional accounting organization in Finland, buying the yearly software updates can be expensive. Any update has to be available well before the start of the tax year so that transactions can be correctly recorded at the start of the year and not revised at the end of the year. In contrast to Finland’s self-described “simple” system, the U.S. tax system is complex and changing annually. Regarding withholding estimation, Finland’s Tax Card system provides taxpayers an online return sys"
2406,"tem for regularly updating the tax amount withheld. For employees in the United States, the IRS’s Web site offers a withholding calculator to help employees determine whether to contact their employer about revising their tax withholding. Finland’s system prepares a notice to the employer that can be sent through the mail or delivered in person, whereas in the United States the taxpayers must file a form with the employer on the amount to be withheld based on the taxpayers’ estimation. In the United States,"
2407," individual income tax returns are completed by taxpayers—not IRS—using information returns mailed to their homes and their own records. Taxpayers are to file an accurate income tax return by its due date. Unlike in Finland, U.S. individual taxpayers heavily rely on tax advisors and tax software to prepare their annual return. In the United States, about 90 percent of individual income tax returns are prepared by paid preparers or by the taxpayer using commercial software. In June 2003, the European Union ("
2408,"EU) adopted the Savings Taxation Directive to encourage tax compliance by exchanging information and in some cases using withholding. The directive is a multilateral agreement that establishes uniform procedures and definitions for exchanging information and facilitating the resolution of common technical problems. Under the directive, the 27 EU members and 10 dependent and associated territories agreed to participate in the directive. With this information, tax authorities in the citizen’s nation are able "
2409,"to verify whether the citizen properly reported and paid tax on the interest income. Each of the 27 member nations has a separate tax system, and varies in the tax rates imposed on personal income, as shown in table 3. The highest personal income tax rates range from 10 percent in Bulgaria to over 56 percent in Sweden. This range of tax rates is an important reason for the need for the exchange of information on income. Residents in higher-tax countries could be motivated to move capital outside of the coun"
2410,"try of residence to potentially avoid reporting income earned on investments of the capital. The directive provided a basic framework for information exchanges, defining essential terms such as beneficial owner of the asset paying interest, identity and residence of the owner, paying agents, interest payments, and information to be reported, and establishing automatic information exchange among members. The directive also states that five other nonmember nations agreed to information exchange upon request f"
2411,"or information defined under the Savings Taxation Directive. During a transition period from 2005 through 2011, Belgium, Luxembourg, and Austria as well as the five nonmember nations, and six associated territories, agreed to a withholding tax. Under these agreements, a withholding tax was to be remitted at the rate of 15 percent during the first 3 years, 20 percent for the next 3 years, and 35 percent thereafter. The directive authorizes the withholding nations to retain 25 percent of the tax collected and"
2412, transfer 75 percent of the revenue to the account owner’s home nation. The withholding nations may develop procedures so that the owners can request that no tax be withheld. These procedures generally require that the owner provide identification information to the paying agent or to the account owner’s home nation. The directive also requires the account owner’s home nation to ensure that the withholding does not result in double taxation. The home nation is to grant a tax credit equal to the amount of ta
2413,"x paid to the nation in which the account is located. If the tax paid exceeds the amount due to the home nation, the home nation is to refund to the account owner the excess amount that was withheld. The role of the EU Commission is to coordinate among the participants in the directive. The commission sets up and maintains contact points for communications among members. All information to be exchanged must be submitted no later than June 13 each year to the commission and follow the standardized Organisati"
2414,"on for Economic Co-operation and Development (OECD) format. The information exchange is completely electronic and automatic. All information is sent and received through a secure network that only member countries can access. As of 2010, all member countries are using this standard format except for Switzerland which is working with the EU on plans for information exchange. The commission is to keep the format updated and periodically review compliance by member countries. The commission is to gather statis"
2415,"tics to measure overall performance and success of the directive. Member countries have agreed to provide the commission with the statistics necessary to gauge performance. Every 2 years the commission hosts a conference to receive feedback from member nations on its performance and to gauge the directive’s success. Additionally, every 3 years the commission reports to the European Parliament and Commission of the European Communities. The first report on the operation of the directive was issued in Septemb"
2416,er 2008. The EU adopted the Savings Taxation Directive to encourage tax compliance by exchanging information and using withholding. Using a multilateral agreement provided a way to uniformly establish procedures and definitions for exchanging information as well as for resolving any common technical problems to information exchange across the entire EU. The September 2008 report to the EU described the status of the directive. The report found that 25 members started applying the rules as required in July 2
2417,"005. In 2006, the first full year in which data were available, 17 members provided information to the exchange. Bulgaria and Romania began implementation in January 2007. The report concluded that the largest economies and financial centers reported the highest amounts of interest paid to other EU citizens. For 2006, Germany, France, Ireland, and the Netherlands accounted for over 98 percent of the dollar value of interest paid by all EU nations to citizens of other EU countries. The report concluded that "
2418,"data limitations created major difficulties for evaluating the effectiveness of the directive. The EU did not have information on withholding results or time-series information from before the directive began. Without this information, the EU had no benchmark to measure the effect of the changes. According to EU officials, the most common administrative difficulties have been information-technology system problems. Some members have not had the data formatted correctly, which caused problems when other memb"
2419,"er nations tried to access the data. For example, how member countries format their mailing address has led to data access problems. To overcome this problem, most member countries insert the taxpayer’s mailing address in the free text field, but this makes the data difficult to efficiently analyze by other nations. Another example has been accessing data from languages that have special diacritical marks or characters. When information exchanged included these special characters, an error was created durin"
2420,"g the data importation process. The directive has suffered from other implementation problems, as follows. Investor behavior. EU staff said the commission tried to measure changes in the different types of investments before and after implementation of the directive. The commission had difficulty in identifying the overall effect the directive has had on individual investment choices because the data used are generally limited to interest-bearing investments. On the basis of decreases in some investor’s tot"
2421,"al interest savings, the report noted that investors appeared to change their investments before implementation to investments that were not covered by the directive. Withholding. The effectiveness of the withholding system under the Saving Tax Directive is unclear. The report found that the 14 countries and dependent and associated territories applying the withholding provisions in 2006 shared €559.12 million (US$738 million) withheld on income earned in their nation with the account owner’s home nation. S"
2422,"ome articles have commented that given the low withholding rates in the early years, taxpayers with higher tax rates in their home nation may have chosen not to report the income. Definitions. The EU identified problems with the definition of terms, making uniform application of the directive difficult. First, the commission’s report raised questions about consistency of coverage of payments made from life insurance contracts where investments were made in securities or funds. Second, confusion existed over"
2423," whether some paying agents were covered by EU rules on investment managers or by the definition established under the directive for noncovered paying agents. Third, identifying the account owners was another problem. In general, the EU report suggests that improved monitoring and follow-up by the home nation can help locate paying agents in third counties and ensure accurate information on the citizen who owns the account. The EU is considering several solutions such as enforcing existing customer due dili"
2424,"gence rules that are to be used by domestic paying agents, who would transmit interest payments to the owners. These rules require that the paying agents must know who they are paying and should not facilitate transactions to mask the owner(s) and avoid taxes or other legal requirements. Nevertheless, EU officials stated that the quality of data has improved over the years. The EU officials have worked with EU member nations to resolve specific data issues, which has contributed to the effective use of the "
2425,"information exchanged under the directive. Generally, unlike the EU multilateral directive, the United States establishes bilateral information-sharing agreements. Those agreements allow for automatic information exchange, but definitions of terms, technical standards, and other matters are not worked out and adopted multilaterally. Resolution of some of those issues may be facilitated by the United States’ participation in the Convention on Multilateral Administrative Assistance in Tax Matters, which inclu"
2426,"des exchange of information agreement provisions and has been ratified by 15 nations and the United States. The United Kingdom’s (UK) main sources of tax revenue are income tax, national insurance contributions, value added tax, and corporate tax. Her Majesty’s Revenue and Customs (HMRC) also administers taxes assessed for capital gains, inheritance, various stamp duties, insurance premium tax, petroleum revenue, and excise duties. The income tax system— where the tax year runs from April 6 through April 5 "
2427,"—taxes individuals on their income from various sources, for example, employment earnings, self-employment earnings, and property income. Taxable individuals under 65 years of age receive a tax-free personal allowance (£6,475, or US$10,410 for the 2010-11 tax year). If their total income is below the allowance amount, no tax is payable. The three main individual income tax rates for income above the personal allowance are 20 percent (£0-£37,400 or up to US$60,132), 40 percent (£37,401-£150,000 or up to US$2"
2428,"41,170), and 50 percent (over £150,000 or over US$241,170). HMRC uses 3 payment systems to collect income tax from individual taxpayers, depending on the type of income and whether the individual is employed, self-employed, or retired. Pay As You Earn (PAYE) is used to withhold tax on wages and salaries paid to individuals by employers. Employers are required to notify HMRC every time an employee starts or stops working for them. Then, HMRC determines a tax withholding code for each individual and employers"
2429," use the tax codes, in conjunction with tax tables, to calculate the amount of tax to be deducted. Self-assessment tax returns are used by some employees with higher rates of income or complicated tax affairs and by self-employed individuals with different kinds of business income. At-source collection is when the tax, such as on interest and dividend income, is withheld at source when the income is paid. For example, tax is deducted from bank interest as it is credited to an individual. According to HMRC o"
2430,"fficials, the majority (68 percent) of taxpayers pay their tax solely through the PAYE system without having to submit a return to HMRC. Other actions have helped remove a large number of taxpayers from submitting a return. For example, the UK requires that tax on some income paid to individuals (such as bank interest) be withheld at a 20 percent rate and remitted to HMRC by the payer, and capital gains income up to the first £10,100 (US$16,239) is exempted from tax. The UK also is working towards burden re"
2431,"duction for the average taxpayer by simplifying the tax return. For example, according to HMRC officials, information that is not necessary has been removed from the return to reduce the return filing burden, and those taxpayers who are required to file a return find it straight-forward. HMRC uses data from information reporting and withholding under the PAYE system to simplify the reporting of tax liability on income tax returns for individuals. PAYE adjusts income tax withheld so that the individual’s tax"
2432," liability is generally met by the end of the tax year. Information reporting helps HMRC and the individual taxpayer determine the total income tax liability, according to HMRC officials. Information returns are to report tax-related transactions by the taxpayer. They are to be supplied by banks and local governments to the taxpayer and HMRC at the end of the tax year. For example, banks are to provide interest payment information. Over 400 local government organizations are to report information on payment"
2433,"s made to small businesses. Local government as both an employer and contractor must report information on payments made to others. The information provided by employers enables HMRC to update the employee’s tax record and issue a tax code to the new employer to start the withholding against employee earnings. HMRC calculates the PAYE code using information about the previous year’s income or other employment in the current tax year. Employers are to match the PAYE code to a tax table, which shows how much "
2434,"tax to withhold each pay period. The employer has to remit the withheld tax to HMRC on a monthly or quarterly basis to fulfill the taxpayer’s tax liability. HMRC annually reviews taxpayer records and issues updated PAYE codes before the start of the tax year for employers to operate at the start of the tax year. The individual will receive a notice showing how the tax code has been calculated. To maintain taxpayer confidentiality, the employer will only receive the tax code itself. HMRC can refund income ta"
2435,"x overpayments or collect underpayments for previous tax years through adjustments to the PAYE code. HMRC reported in 2010 that around 5 million individuals overpaid or underpaid these taxes. HMRC officials said that they use information returns to help determine these adjustments under PAYE. In lieu of having their PAYE codes adjusted, taxpayers may receive a onetime refund of the overpayment or pay the underpaid amount in one lump sum. Taxes owed usually are collected through code adjustments as long as t"
2436,"he taxpayer stays within the PAYE system. HMRC also uses information reporting and withholding to assess the compliance risks on filed returns. In assessing compliance risks, HMRC is attempting to identify underpaid and overpaid tax. The majority of the information for risk assessment is collected centrally from information returns, tax withholdings, filed tax returns, and public sources. This information is mined for risks by special risk-assessment teams. According to HMRC officials, the outcomes of such "
2437,"mining are to be used to verify tax compliance. If low compliance is found, risk specialists are to develop programs to increase compliance. The data mining uses electronic warehouse “Data Marts” that HMRC has had for about 10 years. They have been configured with subsets of data and have been supplemented by sophisticated analysis tools for doing risk assessments. For example, an analyst can create reports to assess the risk for all self-assessment income tax returns where the legal expense is above a spec"
2438,"ified amount. HMRC officials told us that Data Marts had recently been revamped and a strategic capability was added that links related information such as a business that files a corporate tax return for its business profits, pays value added tax, and has directors who submit self-assessment returns. According to HMRC officials, the use of Data Marts combined with their more recent Strategic Risking Capability has allowed them to assess risks at the national and regional levels. HMRC officials said that th"
2439,"ey have moved towards national risk assessments because risk has not proven to be geographically based at regional levels. HMRC officials noted that while a return is being assessed for one type of risk, another type of risk can be found. HMRC is attempting to uncover emerging compliance risks by combining and reviewing data from the various sources in the Data Marts and elsewhere. The risk assessment process has two steps, resulting in identifying tax returns for examination. The first step is to identify "
2440,"tax returns that have an inherent risk because of the taxpayers’ size, complexity of the tax return, and past tendency for noncompliance. For example, returns filed by high-wealth individuals are viewed as risky returns that are sent to a related specialty office. The second step assesses risk on returns that are not sent to a specialty office. HMRC officials said that a relatively large proportion of the risk-assessment effort focuses on the self-employed, who are seen as having the greatest risk for tax n"
2441,"oncompliance since they usually are not under the PAYE system (unless they have some wage income) and instead are to file a self-assessment return. HMRC has separate risk-assessment approaches, depending on the type of individual taxpayer, as discussed below. For individuals under the PAYE system, HMRC’s computers capture most of the necessary data and the system carries out routine checks to verify data and link it to the taxpayer record. A risk to the PAYE system arises when employees receive benefits fro"
2442,"m their employers that are not provided to HMRC at the time it determines the annual tax code. Employer benefits may include a car, health insurance, or professional association fees that employers report on information returns after the tax year and that may be subject to income tax. If these benefits received are not included in the tax code then an underpayment of tax is likely to arise. The unpaid tax can be recovered by an annual reconciliation or when the employee reports the benefits on the employee’"
2443,"s self-assessment tax return. Individuals not under the PAYE system are required to file a self- assessment tax return. To assess risk, HMRC checks some self-assessment tax returns for consistency by comparing them to returns from previous years, focusing on small businesses. For example, if the legal expense jumped from £5,000 to £100,000 (US$8,039 to US$160,780) over 2 years, HMRC may decide to review the reason. HMRC permits any self-employed small business with gross receipts of less than £68,000 (US$10"
2444,"9,330) to file a simple three-line tax return to report business income, expenses, and profit. HMRC officials said that the threshold allows over 85 percent of all self-employed businesses to file simplified returns with less burden. According to HMRC officials, their policy is to collect as much data as possible up front through information returns, and correct the amounts of tax due with the PAYE system, facilitating the payment of tax liabilities. Since information is shared with HMRC, taxpayers are like"
2445,"ly to voluntarily comply if they have to file a tax return. Further, data from information reporting and withholding are to help simplify or eliminate tax reporting at the end of a tax year. According to HMRC officials, the PAYE system makes it unnecessary for most wage earners to file an annual self- assessment tax return. HMRC conducts risk assessments because staff cannot check every tax return in depth due to the large number of taxpayers and the need to lower the costs of administering the tax system. "
2446,"Data from information reporting and withholding provide consistent sources for doing risk assessments. HMRC officials said the income tax system has been simplified because most individual taxpayers fall under the PAYE system, which generally relieves them of the burden of filing a tax return. Even so, some implementation problems have occurred. The House of Commons identified problems with an upgrade to the PAYE information system in 2009-10. The upgrade was to combine information on individuals’ employmen"
2447,"t and pension income into a single record to support more accurate tax withholding codes and reduce the likelihood of over- and underpayments of tax. However, software problems delayed processing 2008-09 PAYE returns for a year. In addition, data-quality problems from the upgraded PAYE system for 2010-11 generated about 13 million more annual tax coding notices than HMRC had anticipated and some were incorrect or duplicates. With these problems, of the 45 million PAYE records to be reconciled, 10 million ca"
2448,"ses needed to be reconciled manually. The House of Commons reported a backlog of cases before the PAYE system was upgraded. Limitations of the previous PAYE system and increasingly complex working patterns have made it difficult to reconcile discrepancies without manual intervention. As of March 2010, a backlog of PAYE cases affected an estimated 15 million taxpayers from 2007-08 and earlier; the backlog included an estimated £1.4 billion (US$2.25 billion) of tax underpaid and £3 billion (US$4.82 billion) o"
2449,"f tax overpaid. HMRC has reported that risk assessment has provided three benefits: (1) improved examination decisions to ensure that they are necessary and reduce the burden on compliant taxpayers; (2) tailored examinations to the risk in question; and (3) deterred taxpayers from concealing income. HMRC’s risk-assessment approach has increasingly focused on providing help and support to individuals and smaller businesses to voluntarily comply up front. To minimize the need for examinations, HMRC aims to he"
2450,lp larger businesses achieve greater and earlier certainty on their tax liabilities. HMRC’s sharper focus on risk assessment means that businesses with reliable track records of managing their own tax risks and being open in their dealings with HMRC benefit from fewer HMRC examinations while those with the highest risks can expect a more robust challenge from dedicated teams of specialists. The UK and United States both have individual income tax returns and use information reporting and tax withholding to 
2451,"help ensure the correct tax is reported and paid. However, differences exist between the countries’ systems. The United States has six tax rates that differ among five filing statuses for individuals (i.e., single, married, married filing separately, surviving spouse, or head of household) and covering all types of taxable income. In general, the UK system has three tax rates, one tax status (individuals), and a different tax return depending on the taxable income (e.g., self- employed or employed individua"
2452,"ls). U.S. income tax withholding applies to wages paid but not interest and dividend income as it does in the UK. U.S. wage earners, rather than the Internal Revenue Service, are responsible for informing employers of how much income tax to withhold, if any, and must annually self-assess and file their tax returns, unlike most UK wage earners. Another major difference is that the United States automatically matches data from information returns and the withholding system to data from the income tax return t"
2453,"o identify individuals who underreported income or failed to file required returns. Matching is done using a unique identifier taxpayer identification number (TIN). HMRC officials told us that they have no automated document-matching process and the UK does not use TINs as a universal identifier, which is needed for wide-scale document matching. The closest form of unique identifier in the UK is the national insurance number. HMRC officials said they are barred from using the national insurance number for w"
2454,"idespread document matching. Instead, HMRC officials said that they may do limited manual document matching in risk assessments and compliance checks. For example, HMRC manually matches some taxpayer data—such as name, address, date of birth—from bank records to data on tax returns. Australia has a federal system of government with revenue collected at the federal, state, and local levels. For 2009-2010, about 92 percent of federal revenue was collected from taxes rather than nontax sources, like fees. The "
2455,"principal source of federal revenue for Australia is the income tax, which accounted for about 71 percent. Australia’s state and local governments rely on grants from the national government and have limited powers to raise taxes. The states receive significant financial support from the federal government. In 2009-10, total payments to the states were 28 percent of all federal expenditures. Individuals accounted for about 65 percent of the 2009-2010 income tax revenue. The system is progressive with tax ra"
2456,"tes up to 45 percent for taxable income in excess of A$180,000 (US$161,622). In 2007-2008, a small proportion of Australian taxpayers paid a large proportion of Australian taxes, as shown in figure 1. The Australian High Net Wealth Individuals (HNWI) program focuses on the characteristics of wealthy taxpayers that affect their tax compliance. According to the Australian Taxation Office (ATO), in the mid 1990s, it was perceived as enforcing strict sanctions on the average taxpayers but not the wealthy. ATO f"
2457,"ound that high-wealth taxpayers, those with a net worth of more than A$30 million (US$20.9 million), tend to have complex business arrangements, which made it difficult for ATO to identify and assure compliance. ATO concluded that the wealthy required a different tax administration approach. ATO set up a special task force to improve its understanding of wealthy taxpayers, identify their tax planning techniques, and improve voluntary compliance. Initially, the program focused on the tax return filed by a we"
2458,"althy individual. Due to some wealthy taxpayers’ aggressive tax planning, which ATO defines as investment schemes and legal structures that do not comply with the law, ATO quickly realized that it could not reach its goals for voluntary compliance for this group by examining taxpayers as individual entities. To tackle the problem, ATO began to view wealthy taxpayers as part of a group of related business and other entities. Focusing on control over related entities rather than on just individual tax obligat"
2459,"ions provided a different understanding of wealthy individuals’ compliance issues. To address the special needs of the wealthy, ATO developed publications that included a separate high-wealth income tax return form, a questionnaire on the wealthy as an entity and a tax guide, Wealthy and wise—A tax guide for Australia’s wealthiest people. According to ATO, a number of factors led to the HNWI program. First, ATO was dealing with a perceived public image that it showed preference to the wealthy while enforcin"
2460,"g strict sanctions on average taxpayers during the 1990s. Second, ATO was perceived as losing revenue from noncompliant taxpayers. Third, high-wealth individuals used special techniques to create and preserve their income and wealth through a “business life cycle.” The cycle includes creating, maintaining, and passing on wealth through complex tax shelters. For example, businesses owned or controlled by wealthy individuals are more likely to have more diverse businesses arrangements, which tend to spread we"
2461,"alth across a group of companies and trusts. Each of these groups controlled by wealthy individuals was classified as a separate taxpayer entity, which made understanding the tax implications of these networks of entities difficult for the ATO. The HNWI approach followed ATO’s general compliance model. The model’s premise is that tax administrators can influence tax compliance behavior through their responses and interventions. Since taxpayers have different attitudes on compliance, ATO used varied response"
2462,"s and interventions tailored to promote voluntary tax compliance across different taxpayer groups. The first part of the standard model is to understand five factors that influence taxpayer compliance. The factors are Business, Industry, Social, Economic, and Psychological. For example, the Business factor included the size, location, nature, and capital structure of the business as well as its financial performance—all of which help ATO understand why compliance or noncompliance occurs. The second part of "
2463,"the model involves taxpayers’ attitudes on compliance. It refers to one of four attitudes that a taxpayer may adopt when interacting with tax regulatory authorities. These attitudes are willing to do the right thing, try to do the right thing, do not want to comply, and decided not to comply. The third part of the model aligns four compliance strategies with the four taxpayer attitudes on compliance and refers to the degree of ATO enforcement under the concept of responsive regulation. ATO prefers to simpli"
2464,"fy the tax system and promote voluntary compliance through self- regulation. If the taxpayer tries to comply, ATO should respond by helping the taxpayer be compliant. If the taxpayer is not motivated to comply, ATO should respond to the level of noncompliance with some degree of enforcement, ending with harsh sanctions for the truly noncompliant. ATO created a High Wealth Individual (HWI) taskforce to assess wealthy individuals on their probability of compliance and place them into one of four broad risk ca"
2465,"tegories using its Risk Differentiation Framework (RDF). RDF is similar to the compliance model in that it is to assess the tax risk and determine the intensity of the response for those with high net wealth, ranging from minimizing burden on compliant wealthy taxpayers to aggressively pursuing the noncompliant. The four broad categories of the RDF are as follows: Higher Risk Taxpayers—ATO performs continuous risk reviews of them with the focus on enforcement. Medium Risk Taxpayers—ATO periodically reviews "
2466,certain transactions from them or where there is a declining trend in effective tax performance with a focus on enforcement. Key Taxpayers—ATO continuously monitors them with the focus on service. Low Risk Taxpayers—ATO periodically monitors them with the focus on service. The HNWI program has produced financial benefits since its establishment in 1996. ATO 2008 data showed that the program had collected A$1.9 billion (US$1.67 billion) in additional revenue and reduced revenue losses by A$1.75 billion (US$1
2467,".5 billion) through compliance activities focused on highly wealthy individuals and their associated entities. ATO’s approach also has been adopted by other tax administrators. According to a 2009 Organisation for Economic Co-operation and Development (OECD) study, nine other OECD countries, including the United States, had adopted some aspect of Australia’s HNWI program. Like ATO, the IRS is taking a close look at high-income and high-wealth individuals and their related entities. In 2009, IRS formed the G"
2468,"lobal High Wealth Industry (GHWI) program to take a holistic approach to high- wealth individuals. IRS consulted with the ATO to discuss ATO’s approach to the high-wealth population as well as its operational best practices. As of February 2011, GHW field groups had a number of high-wealth individuals and several of their related entities under examination. One difference is that Australia has a separate income tax return for high- wealth taxpayers to report information on assets owned or controlled by HNWI"
2469,"s. In contrast, the United States has no separate tax return for high- wealth individuals and generally does not seek asset information from individuals. According to IRS officials, the IRS traditionally scores the risk of individual tax returns based on individual reporting characteristics rather than a network of related entities. However, IRS has been examining how to do risk assessments of networks through its GHWI program since 2009. Another difference is that ATO requires HNWIs to report their busines"
2470,"s networks, and IRS currently does not. Hong Kong’s Inland Revenue Department (IRD) assesses and collects the “earnings and profits tax,” which includes a Profits Tax, Salaries Tax, and Property Tax. IRD also assesses and collects certain “duties and fees” including a stamp duty, business registration fees, betting duty, and estate duty. Hong Kong only taxes income from sources within Hong Kong. Principle revenue sources for tax year 2009-10 are shown in figure 2. According to a Hong Kong tax expert, Hong K"
2471,"ong created the Salaries Tax at the start of World War II without using periodic tax withholding. The lack of withholding was not then, and is not now, considered to be a significant problem. The Salaries Tax is paid by about 40 percent of the estimated 3.4 million wage earners in Hong Kong, while the 60 percent are exempt from the Salaries Tax. Taxpayers whose salary income is lower than their entitlement to deductions (i.e., basic allowance, child allowance, dependent parent, etc.) are exempt from paying "
2472,"Salaries Tax and neither they nor IRD prepare a tax return for this income. However, exempt taxpayers may receive a tax return from IRD once every few years to verify their tax-exempt status. If these exempt taxpayers receive a tax return from IRD, they are required to complete and submit it within 1 month. The Salaries Tax rates are fairly low, according to Hong Kong tax experts. The Salaries Tax has progressive rates starting at 2 percent of the adjusted salary earned and may not exceed the standard rate "
2473,"of 15 percent. In comparison, the highest personal income tax rates in the EU range from about 10 percent to over 56 percent as described in appendix IV. Hong Kong does not use periodic tax withholding (e.g., biweekly or monthly) by employers to collect Salaries Taxes. Rather, IRD collects the Salaries Tax through two payments from taxpayers for a tax year, which runs from April 1 to March 31. The first payment is due in January (9 months into the tax year) and is to be 75 percent of the estimated tax for t"
2474,"he whole year. The second payment is for the remaining 25 percent, which is due 3 months later in April—immediately after the end of the tax year. In May, IRD is to mail the tax return to the individual for the just- completed tax year based on information provided by employers and other sources. Information reporting to IRD has four parts. First, employers must report when each employee is hired and the expected annual salary amount. Second, at the end of the tax year, employers must report the salary paid"
2475," to each employee. Third, the employers must report when the employee ceases employment. Fourth, employers must report and temporarily withhold payments to an employee they know intends to leave Hong Kong. If the employer fails to comply with these requirements without a reasonable excuse, penalties may be imposed. Individuals have 1 month to file the return. For those who elect to file their returns electronically, IRD will prefill the return based on information provided in their past returns and by their"
2476," employers. They have a month and a half to review the prepared tax return, make any revisions such as changes to deductions, and file it with IRD. IRD reviews the filed tax returns to determine the final Salaries Tax. IRD electronically screens all returns to check for consistency between the information provided by the employer and taxpayer. Assessments will normally be made based on the higher amount reported, and taxpayers have the right to object within 1 month. IRD also can cross-check reported salary"
2477," amounts with salary deductions claimed by businesses on Profit Tax returns, which should normally be supported by information returns on employee salary amounts. If the final Salaries Tax for the tax year turns out to be higher than the estimated tax assessment, taxpayers are to pay the additional tax along with the first payment of the estimated tax for the next tax year during the following January, as shown in figure 3. Several factors contribute to Hong Kong’s collection of the Salaries Tax through two"
2478," payments for a tax year without resorting to periodic withholding by employers. The tax only affects about 40 percent of the wage earners who have the highest salaries and uses relatively low tax rates, making it more likely that the taxpayers will have the funds necessary to make the two payments when due. The simplicity of Hong Kong’s tax system, according to Hong Kong tax experts, makes it easier to compute tax liability and to manage the payments. IRD uses a combination of controls to assure that tax p"
2479,"ayments are made, according to a senior IRD official. In addition to information reporting, island geography contributes to the controls. Hong Kong entry/departure points are limited and tax evaders are likely to be identified. Hong Kong government can detain a tax evader from leaving or entering Hong Kong until the tax is paid. IRD has varied processes to trace the assets of delinquent taxpayers as part of collecting any unpaid tax. Culture encourages taxpayers to pay their taxes. Hong Kong experts said ta"
2480,"xpayers fear a loss of face if they are recognized as noncompliant, which could reflect negatively on the family. A Hong Kong official told us that residents try to avoid being taken to court. An expert on public opinion in Hong Kong told us that this cultural attitude generates high tax morale. The expert told us that Hong Kong residents have high regard for Hong Kong’s government as being “cleanly” run and as putting tax revenues to good use. IRD is viewed as having fair and equal treatment of all taxpaye"
2481,"rs. A senior official of Hong Kong’s IRD believes that the Salaries Tax collection system leads to high tax compliance. Low tax rates in concert with a simple tax system that offers generous deductions and effective enforcement mean that taxpayers are fairly compliant, according to the Hong Kong official. It also means that few taxpayers use a tax preparer because the tax forms are very straightforward and the tax system is “stable.” The official also said that taxpayers comply because the cost of noncompli"
2482,"ance is high. If a taxpayer does not pay by the due date, the costs include paying the tax liability, interest surcharges on the debt, and legal costs. Further, submitting an incorrect tax return without reasonable excuse may carry a fine of HK$10,000 (US$1,283) plus three times the amount of tax underpaid and imprisonment. Unlike Hong Kong’s twice-a-year payments for the Salaries Tax, the U.S. income tax on wages relies on periodic tax withholding. IRS provides guidance (e.g., Publication 15) on how and wh"
2483,"en employers should withhold income tax (e.g., every other week) and deposit the withheld income taxes (e.g., monthly). Further, the U.S. individual tax rates are higher and the system is more complex. These tax rates begin at 10 percent and progress to 35 percent. Further, the United States taxes many forms of income beyond salary income on the individual tax return. Nations have many choices on how to structure their tax systems across the federal, as well as state and local, government levels. The propor"
2484,"tion of revenue collected at each governmental level can widely vary. Finland, New Zealand, and the United Kingdom (UK) have a unitary system in which government, including tax administration, is generally centralized at the national level with limited state and local government. For example, in New Zealand, the national government assessed about 90 percent of all the revenue collected across the nation. In contrast, the United States has a federal system in which the national level shares governmental auth"
2485,"ority with state and local governments. In the United States about half of all tax revenue is collected by the national government and about half is collected by the 50 states and tens of thousands of local governments. The revenue data in table 4 below were provided by each nation and compiled by the Organisation for Economic Co-operation and Development (OECD) for consistent presentation. These data cover all taxes in each nation including federal and state/local levels. Using these data, we computed the "
2486,"percent that each type of tax represents of the nation’s total revenue. OECD provided the following definition for each of the major categories of tax in the table: Taxes are compulsory unrequited payments to general government and are not for benefits provided by government to taxpayers in proportion to their payments. Governments include national governments and agencies whose operations are under their effective control, state and local governments and their administrations, certain social security schem"
2487,"es and autonomous governmental entities, excluding public enterprises. Taxes on income, profits, and capital gains cover taxes levied on the net income or profits (i.e., gross income minus allowable tax deductions) of individuals and businesses (including corporations). Also covered are taxes levied on the capital gains of individuals and enterprises, and gains from gambling. Social security contributions are classified as all compulsory payments that confer an entitlement to receive a (contingent) future s"
2488,"ocial benefit. Such payments are usually earmarked to finance social benefits and are often paid to institutions of general government that provide such benefits. These social security benefits would include unemployment insurance benefits and supplements, accident, injury and sickness benefits, old-age, disability and survivors’ pensions, family allowances, reimbursements for medical and hospital expenses or provision of hospital or medical services. Contributions may be levied on both employees and employ"
2489,"ers. Taxes on payroll and workforce cover taxes paid by employers, employees, or the self-employed either as a proportion of payroll or as a fixed amount per person, and which do not confer entitlement to social benefits. Taxes on property, goods, and services cover recurrent and nonrecurrent taxes on the use, ownership, or transfer of property. These include taxes on immovable property or net wealth, taxes on the change of ownership of property through inheritance or gift, and taxes on financial and capita"
2490,"l transactions. Taxes on goods and services include all taxes and duties levied on the production, sale, and lease of goods or services. This category covers multistage cumulative taxes; general sales taxes, value added taxes, excise taxes, or taxes levied on imports and exports of goods. Table 4 shows that the largest source of revenue for 4 of 5 countries is the tax on individuals’ and corporations’ income, profits, and capital gains. Also, the tax paid by individuals is a larger percentage of revenue tha"
2491,"n the corporation tax in each country. The tax on property, goods, and services is the next most important tax except in the UK where the income tax is the second largest source. A large component of the taxes on property, goods, and services is the value added tax and sales tax. In Australia, New Zealand, the UK, and Finland, value added tax and sales tax ranged from 25 percent to 31 percent of the taxes collected in the nation. The United States does not have a value added tax, but sales taxes alone total"
2492,"ed about 14 percent of all U.S. revenue. In addition to the contact named above, Thomas Short, Assistant Director; Juan P. Avila; Debra Corso; Leon Green; John Lack; Alma Laris; Andrea Levine; Cynthia Saunders; Sabrina Streagle; and Jonda VanPelt made key contributions to this report."
2493,"Despite efforts undertaken by TARP to bolster capital of the largest financial institutions, market conditions in the beginning of 2009 were deteriorating and public confidence in the ability of financial institutions to withstand losses and to continue lending were further declining. On February 10, 2009, Treasury announced the Financial Stability Plan, which outlined measures to address the financial crisis and restore confidence in the U.S. financial and housing markets. The goals of the plan were to (1)"
2494," restart the flow of credit to consumers and businesses, (2) strengthen financial institutions, and (3) provide aid to homeowners and small businesses. Under SCAP, the stress test would assess the ability of the largest 19 BHCs to absorb losses if economic conditions deteriorated further in a hypothetical “more adverse” scenario, characterized by a sharper and more protracted decline in gross domestic product (GDP) growth, a steeper drop in home prices, and a larger rise in the unemployment rate than in a b"
2495,"aseline consensus scenario. BHCs that were found not to meet the SCAP capital buffer requirement under the “more adverse” scenario would need to provide a satisfactory capital plan to address any shortfall by raising funds, privately if possible. CAP, which was a key part of the plan, would provide backup capital to financial institutions unable to raise funds from private investors. Any of the 19 BHCs that participated in the stress test and had a capital shortfall could apply for capital from CAP immediat"
2496,"ely if necessary. The timeline in figure 1 provides some highlights of key developments in the implementation of SCAP. In a joint statement issued on February 10, 2009, Treasury, along with the Federal Reserve, FDIC, and OCC (collectively referred to as the SCAP regulators), committed to design and implement the stress test. According to a Treasury official, the department generally did not participate in the design or implementation of SCAP, but was kept informed by the Federal Reserve during the stress te"
2497,"st. The SCAP regulators developed economic assumptions to estimate the potential impact of further losses on BHCs’ capital under two scenarios. The baseline scenario reflected the consensus view about the depth and duration of the recession, and the more adverse scenario reflected a plausible but deeper and longer recession than the consensus view. Regulators then calculated how much capital, if any, was required for each BHC to achieve the required SCAP buffer at the end of 2010 under the more adverse scen"
2498,"ario. The SCAP assessment examined tier 1 capital and tier 1 common capital, and the BHCs were required to raise capital to meet any identified capital shortfall (either tier 1 capital or tier 1 common capital). Tier 1 risk-based capital is considered core capital—the most stable and readily available for supporting a bank’s operations and includes elements such as common stock and noncumulative perpetual preferred stock. SCAP’s focus on tier 1 common capital, a subset of tier 1 capital, reflects the recent"
2499," regulatory push for BHCs to hold a higher quality of capital. The focus on common equity reflected both the long held view by bank supervisors that common equity should be the dominant component of tier 1 capital and increased market scrutiny of common equity ratios, driven in part by deterioration in common equity during the financial crisis. Common equity offers protection to more senior parts of the capital structure because it is the first to absorb losses in the capital structure. Common equity also g"
2500,"ives a BHC greater permanent loss absorption capacity and greater ability to conserve resources under stress by changing the amount and timing of dividends and other distributions. To protect against risks, financial regulators set minimum standards for the capital that firms are to hold. However, SCAP set a one-time minimum capital buffer target for BHCs to hold to protect against losses and preprovision net revenue (PPNR) that were worse than anticipated during the 2009 to 2010 period. For the purposes of"
2501," SCAP, the one-time target capital adequacy ratios are at least 6 percent of risk-weighted assets in tier 1 capital and at least 4 percent in tier 1 common capital projected as of December 31, 2010. For the purposes of the projection, the regulators assumed that BHCs would suffer the estimated losses and earned revenues in 2009 and 2010 in the more adverse scenario. SCAP regulators conducted the stress test strictly on the BHCs’ assets as of December 31, 2008, and—with the exception of off-balance sheet pos"
2502,"itions subject to Financial Accounting Statements No. 166 and 167, which assumed in the analysis to come on balance sheet as of January 1, 2010—did not take int account any changes in the composition of their balance sheets over the year time frame. Stress testing is one of many risk management tools used by both BHCs and regulators. Complex financial institutions need management information systems that can help firms to identify, assess, and manage a full range of risks across the whole organization arisi"
2503,"ng from both internal and external sources and from assets and obligations that are found both on and off the BHC’s balance sheet. This approach is intended to help ensure that a firmwide approach to managing risk has been viewed as being crucial for responding to rapid and unanticipated changes in financial markets. Risk management also depends on an effective corporate governance system that addresses risk across the institution and also within specific areas, such as subprime mortgage lending. The board "
2504,"of directors, senior management, audit committee, internal auditors, external auditors, and others play important roles in effectively operating a risk management system. The different roles of each of these groups represent critical checks and balances in the overall risk management system. However, the management information systems at many financial institutions have been called into question since the financial crisis began in 2007. Identified shortcomings, such as lack of firmwide stress testing, have "
2505,"led banking organizations and their regulators to reassess capital requirements, risk management practices, and other aspects of bank regulation and supervision. Stress testing has been used throughout the financial industry for more than 10 years, but has recently evolved as a risk management tool in response to the urgency of the financial crisis. The main evolution is towards the use of comprehensive firmwide stress testing as an integral and critical part of firms’ internal capital adequacy assessment p"
2506,"rocesses. In the case of SCAP, the intent of the stress test was to help ensure that the capital held by a BHC is sufficient to withstand a plausible adverse economic environment over the 2-year time frame ending December 31, 2010. The Basel Committee on Banking Supervision (Basel Committee) issued a document in May 2009 outlining several principles for sound stress testing practices and supervision. The Basel Committee document endorses stress testing by banks as a part of their internal risk management to"
2507," assess the following: Credit risk. The potential for financial losses resulting from the failure of a borrower or counterparty to perform on an obligation. Market risk. The potential for financial losses due to an increase or decrease in the value of an asset or liability resulting from broad price movements; for example, in interest rates, commodity prices, stock prices, or the relative value of currencies (foreign exchange). Liquidity risk. The potential for financial losses due to an institution’s failu"
2508,"re to meet its obligations because it cannot liquidate assets or obtain adequate funding. Operational risk. The potential for unexpected financial losses due to a wide variety of institutional factors including inadequate information systems, operational problems, breaches in internal controls, or fraud. Legal risk. The potential for financial losses due to breaches of law or regulation that may result in heavy penalties or other costs. Compliance risk. The potential for loss arising from violations of laws"
2509," or regulations or nonconformance with internal policies or ethical standards. Strategic risk. The potential for loss arising from adverse business decisions or improper implementation of decisions. Reputational risk. The potential for loss arising from negative publicity regarding an institution’s business practices. According to SCAP regulators and many market participants we interviewed, the process used to design and implement SCAP was effective in promoting coordination and transparency among the regul"
2510,"ators and participating BHCs, but some SCAP participants we interviewed expressed concerns about the process. The majority of supervisory and bank industry officials we interviewed stated that they were satisfied with how SCAP was implemented, especially considering the stress test’s unprecedented nature, limited time frame, and the uncertainty in the economy. SCAP established a process for (1) coordinating and communicating among the regulators and with the BHCs and (2) promoting transparency of the stress"
2511," test to the public. In addition, according to regulators, the process resulted in a methodology that yielded credible results and by design helped to assure that the BHCs would be sufficiently capitalized to weather a more adverse economic downturn. Robust coordination and communication are essential to programs like SCAP when bringing together regulatory staff from multiple agencies and disciplines to effectively analyze complex financial institutions and understand the interactions among multiple layers "
2512,"of risk. Moreover, supervisory guidance emphasizes the importance of coordination and communication among regulators to both effectively assess banks and conduct coordinated supervisory reviews across a group of peer institutions, referred to as “horizontal examinations.” The regulators implemented each phase of SCAP in a coordinated interagency fashion. Also, while some disagreed, most regulators and market participants we interviewed were satisfied with the level of coordination and communication. They al"
2513,"so thought that the SCAP process could serve as a model for future supervisory efforts. The regulators executed the SCAP process in three broad phases: In the first phase, the Analytical Group, comprising interagency economists and supervisors, generated two sets of economic conditions— a baseline scenario and a more adverse scenario with a worse-than- expected economic outcome—and then used these scenarios to aid in estimating industrywide indicative loan loss rates. To develop these scenarios, the Analyti"
2514,"cal Group used three primary indicators of economic health: the U.S. GDP, housing prices in 10 key U.S. cities, and the annual average U.S. unemployment rate. The baseline scenario reflected the consensus view of the course for the economy as of February 2009, according to well-known professional economic forecasters. The Federal Reserve developed the more adverse scenario from the baseline scenario by taking into account the historical accuracy of the forecasts for unemployment and the GDP and the uncertai"
2515,"nty of the economic outlook at that time by professional forecasters. The Federal Reserve also used regulators’ judgment about the appropriate severity of assumed additional stresses against which BHCs would be required to hold a capital buffer, given that the economy was already in a recession at the initiation of SCAP. In the second phase, several Supervisory Analytical and Advisory Teams— comprising interagency senior examiners, economists, accountants, lawyers, financial analysts, and other professional"
2516,"s from the SCAP regulators—collected, verified, and analyzed each BHC’s estimates for losses, PPNR, and allowance for loan and lease losses (ALLL). The teams also collected additional data to evaluate the BHC’s estimates, and to allow supervisors to develop their own independent estimates of losses for loans, trading assets, counterparty credit risk, and securities and PPNR for each BHC. In the third phase, the Capital Assessment Group, comprising interagency staff, served as the informal decision-making bo"
2517,"dy for SCAP. The Capital Assessment Group developed a framework for combing the Supervisory Analytical and Advisory Teams’ estimates with other independent supervisory estimates of loan losses and resources available to absorb these losses. They evaluated the estimates by comparing across BHCs and by aggregating over the 19 BHCs to check for consistency with the specified macroeconomic scenarios to calculate the amount, if any, of additional capital needed for each BHC to achieve the SCAP buffer target capi"
2518,"tal ratios as of December 31, 2010, in the more adverse economic environment. Lastly, the Capital Assessment Group set two deadlines: (1) June 8, 2009, for BHCs requiring capital to develop and submit a capital plan to the Federal Reserve on how they would meet their SCAP capital shortfall and (2) November 9, 2009, for these BHCs to raise the required capital. A key component of this process was the involvement of multidisciplinary interagency teams that leveraged the skills and experiences of staff from di"
2519,"fferent disciplines and agencies. The Federal Reserve, OCC, and FDIC had representatives on each SCAP team (the Analytical Group, Supervisory Analytical and Advisory Teams, and the Capital Assessment Group). For example, OCC officials said that they contributed to the development of quantitative models required for the implementation of SCAP and offered their own models for use in assessing the loss rates of certain portfolios. In addition, each of the SCAP regulators tapped expertise within their organizat"
2520,"ion for specific disciplines, such as accounting, custodial banking, macroeconomics, commercial and industry loan loss modeling, and consumer risk modeling. According to the FDIC, the broad involvement of experts from across the agencies helped validate loss assumptions and also helped improve confidence in the results. Further, these officials noted that the SCAP process was enhanced because productive debate became a common event as team members from different regulatory agencies and disciplines brought t"
2521,"heir own perspectives and ideas to the process. For example, some SCAP staff argued for a more moderate treatment of securities in BHCs’ available for sale portfolios, which would have been consistent with generally accepted accounting principles under a new change in accounting standards. They maintained that the modified accounting standard for declines in market value (and discounting the impact of liquidity premia) that had been implemented after the stress test was announced and before the numbers had "
2522,"been finalized was in some ways more reflective of the realized credit loss expectations for the affected securities. After significant discussion, the regulators decided to allow for the accounting change in the baseline loss estimates, but not in the more adverse scenario estimates. They believed that under the more adverse scenario there was a heightened possibility of increased liquidity demands on banks and that many distressed securities would need to be liquidated at distressed levels. Consequently, "
2523,"for securities found to be other than temporarily impaired in the more adverse scenario, they assumed the firm would have to realize all unrealized losses (i.e., write down the value of the security to market value as of year end 2008). Similarly, some staff argued against adopting other changes in accounting standards that were expected to impact BHCs’ balance sheets, including their capital adequacy. Primary among these was the inclusion of previously off-balance sheet items. As noted above, ultimately, t"
2524,"he more conservative approach prevailed and the expected inclusion of these assets was addressed in SCAP. To facilitate coordination, the Federal Reserve instituted a voting system to resolve any contentious issues, but in practice differences among regulators were generally resolved through consensus. When SCAP regulators met, the Federal Reserve led the discussions and solicited input from other regulators. For example, officials from OCC and FDIC both told us that they felt that they were adequately invo"
2525,"lved in tailoring the aggregate loss estimates to each BHC as part of the determination of each BHC’s SCAP capital requirement. SCAP regulators were also involved in drafting the design and results documents, which were publicly released by the Federal Reserve. Representatives from most of the BHCs were satisfied with the SCAP regulators’ coordination and communication. Many of the BHC officials stated that they were generally impressed with the onsite SCAP teams and said that these teams improved the BHCs’"
2526," coordination and communication with the regulators. BHC officials said that they usually received answers to their questions in a timely manner, either during conference calls held three times a week, through the distribution of answers to frequently asked questions, or from onsite SCAP examiners. Collecting and aggregating data were among the most difficult and time- consuming tasks for BHCs, but most of them stated that the nature of the SCAP’s requests were clear. At the conclusion of SCAP, the regulato"
2527,"rs presented the results to each of the institutions showing the final numbers that they planned to publish. The SCAP process included steps to promote transparency, such as the release of key program information to SCAP BHCs and the public. According to SCAP regulators, BHCs, and credit rating agency officials we interviewed, the release of the results provided specific information on the financial health and viability of the 19 largest BHCs regarding their ability to withstand additional losses during a t"
2528,"ime of significant uncertainty. Many experts have said that the lack of transparency about potential losses from certain assets contributed significantly to the instability in financial markets during the current crisis. Such officials also stated that publicly releasing the methodology and results of the stress test helped strengthen market confidence. Further, many market observers have commented that the Federal Reserve’s unprecedented disclosure of sensitive supervisory information for each BHC helped E"
2529,"uropean bank regulators decide to publicly release detailed results of their own stress tests in July 2010. Not all SCAP participants agreed that the SCAP process was fully transparent. For example, some participants questioned the transparency of certain assumptions used in developing the stress test. According to BHC officials and one regulator, the Federal Reserve could have shared more detailed information about SCAP loss assumptions and calculations with BHCs. According to several BHC officials, the Fe"
2530,"deral Reserve did not fully explain the methodology for estimating losses but expected BHC officials to fully document and provide supporting data for all of their assumptions. Without knowing the details of the methodology, according to some BHC officials, they could not efficiently provide all relevant information to SCAP examiners. SCAP regulators aimed to ensure that SCAP sufficiently stressed BHCs’ risk exposures and potential PPNR under the more adverse scenario. To accomplish this, the regulators mad"
2531,"e what they viewed to be conservative assumptions and decisions in the following areas. First, the regulators decided to stress only assets that were on the BHCs’ balance sheets as of December 31, 2008, (i.e., a static approach) without accounting for new business activity. According to BHC officials, new loans were thought to have generally been of better quality than legacy loans because BHCs had significantly tightened their underwriting standards since the onset of the financial crisis. As a result, BHC"
2532,"s would have been less likely to charge- off these loans within the SCAP time period ending December 31, 2010, resulting in the potential for greater reported revenue estimates for the period. By excluding earnings from new business, risk-weighted assets were understated, charge-off rates were overstated, and projected capital levels were understated. Second, SCAP regulators generally did not allow the BHCs to cut expenses to address the anticipated drop in revenues under the more adverse scenario. However,"
2533," some BHC officials told us that they would likely cut expenses, including initiating rounds of layoffs, if the economy performed in accordance with the more adverse economic scenario, especially if they were not generating any new business. Federal Reserve officials noted that BHCs were given credit in the stress test for cost cuts made in the first quarter of 2009. Third, some BHCs were required to assume an increase in their ALLL as of the end of 2010, if necessary, to ensure adequate reserves relative t"
2534,o their year end 2010 portfolio. Some BHC officials believed that this requirement resulted in the BHCs having to raise additional capital because the required ALLL increases were subtracted from the revenue estimates in calculating the resources available to absorb losses. This meant that some BHCs judged to have insufficient year end 2010 reserve adequacy had to account for this shortcoming in the calculation of capital needed to meet the SCAP targeted capital requirements as of the end of 2010 while main
2535,"taining a sufficient ALLL for 2011 losses under the more adverse economic scenario. According to some BHCs, the size of the 2010 ALLL was severe given the extent of losses are already included in the 2009 and 2010 loss estimates and effectively stressed BHCs for a third year. Finally, according to many BHC officials and others, the calculations used to derive the loan loss rates and other assumptions to stress the BHCs were conservative (i.e., more severe). For example, the total loan loss rate estimated by"
2536," the SCAP regulators was 9.1 percent, which was greater than the historical 2-year loan loss rates at all commercial banks from 1921 until 2008, including the worst levels seen during the Great Depression (see figure 2). However, the macroeconomic assumptions of the more adverse scenario, which we will discuss later in the report, did not meet the definition of a depression. Specifically, a 25 percent unemployment rate coupled with economic contraction is indicative of a depression. In contrast, the more ad"
2537,"verse scenario estimated approximately a 10 percent unemployment rate with some economic growth in late 2010. SCAP regulators also estimated ranges for loan loss rates within specific loan categories using the baseline and more adverse scenarios as guides. They used a variety of methods to tailor loan losses to each BHC, including an analysis of past BHC losses and quantitative models, and sought empirical support from BHCs regarding the risk level of their portfolios. However, some BHCs told us that the Fe"
2538,deral Reserve made substantial efforts to help ensure conformity with the indicative loan loss rates while incorporating BHC-specific information where possible and reliable. Table 1 compares the different indicative loan loss rate ranges under the more adverse scenario for each asset category with actual losses in 2009 for SCAP BHCs and the banking industry. Some BHCs stated that the resulting loan loss rates were indicative of an economy worse off than that represented by the more adverse macroeconomic as
2539,"sumptions, although they recognized the need for the more conservative approach. However, nearly all agreed that the loan loss rates were a more important indication of the stringency of SCAP than the assumptions. After the public release of the SCAP methodology in April 2009, many observers commented that the macroeconomic assumptions for a more adverse economic downturn were not severe enough given the economic conditions at that time. In defining a more adverse economic scenario, the SCAP regulators made"
2540," assumptions about the path of the economy using three broad macroeconomic indicators—changes in real GDP, the unemployment rate, and home prices—during the 2-year SCAP period ending December 2010. The actual performances of GDP and home prices have performed better than assumed under the more adverse scenario. However, the actual unemployment rate has more closely tracked the more adverse scenario (see figure 3). Further, as noted earlier, some regulatory and BHC officials have indicated that the loan loss"
2541," rates that the regulators subsequently developed were more severe than one would have expected under the macroeconomic assumptions. While our analysis of actual and SCAP estimated indicative loan losses (see table 1) is generally consistent with this view, these estimates were developed at a time of significant uncertainty about the direction of the economy and the financial markets, as well as an unprecedented deterioration in the U.S. housing markets. SCAP largely met its goals of increasing the level an"
2542,"d quality of capital held by the 19 largest BHCs and, more broadly, of strengthening market confidence in the banking system. The stress test identified 10 of the 19 BHCs as needing to raise a total of about $75 billion in additional capital. The Federal Reserve encouraged the BHCs to raise common equity via private sources—for example, through new common equity issuances, conversion of existing preferred equity to common equity, and sales of businesses or portfolios of assets. Nine of the 10 BHCs were able"
2543," to raise the required SCAP amount of new common equity in the private markets by the November 9, 2009, deadline (see table 2). Some of these BHCs also raised capital internally from other sources. GMAC LLC (GMAC) was the only BHC that was not able to raise sufficient private capital by the November 9, 2009, deadline. On December 30, 2009, Treasury provided GMAC with a capital investment of $3.8 billion to help fulfill its SCAP capital buffer requirement, drawing funds from TARP’s Automotive Industry Financ"
2544,"ing Program. A unique and additional element of the estimated losses for GMAC included the unknown impact of possible bankruptcy filings by General Motors Corporation (GM) and Chrysler LLC (Chrysler). Thus, a conservative estimate of GMAC’s capital buffer was developed in response to this possibility. The Federal Reserve, in consultation with Treasury, subsequently reduced GMAC’s SCAP required capital buffer by $1.8 billion—$5.6 billion to $3.8 billion—primarily to reflect the lower-than-estimated actual lo"
2545,"sses from the bankruptcy proceedings of GM and Chrysler. GMAC was the only company to have its original capital buffer requirement reduced. Capital adequacy generally improved across all 19 SCAP BHCs during 2009. As shown in table 3, the largest gains were in tier 1 common capital, which increased by about 51 percent in the aggregate across the 19 BHCs, rising from $412.5 billion on December 31, 2008, to $621.9 billion by December 31, 2009. On an aggregate basis, the tier 1 common capital ratio at BHCs incr"
2546,"eased from 5.3 percent to 8.3 percent of risk-weighted assets (compared with the SCAP threshold of 4 percent at the end of 2010). The tier 1 risk-based capital ratio also grew from 10.7 percent to 11.3 percent of risk-weighted assets (compared with the SCAP threshold of 6 percent at the end of 2010). While these ratios were helped to some extent by reductions in risk-weighted assets, which fell 4.3 percent from $7.815 trillion on December 31, 2008, to $7.481 trillion on December 31, 2009, the primary driver"
2547," of the increases was the increase in total tier 1 common capital. The quality of capital—measured as that portion of capital made up of tier 1 common equity—also increased across most of the BHCs in 2009. The tier 1 common capital ratio increased at 17 of the 19 BHCs between the end of 2008 and the end of 2009 (see table 4). Citigroup Inc. (Citigroup) and The Goldman Sachs Group, Inc. (Goldman Sachs) had the largest increases in tier 1 common capital ratios—747 and 450 basis points, respectively. However, "
2548,"GMAC’s tier 1 common capital ratio declined by 155 basis points in this period to 4.85 percent. MetLife, Inc. was the only other BHC to see a drop in its tier 1 common capital ratio, which fell by 33 basis points to 8.17 percent and still more than double the 4 percent target. Based on the SCAP results document, the 2008 balances in the table include the impact of certain mergers and acquisitions, such as Bank of America Corporation’s (Bank of America) purchase of Merrill Lynch & Co. Inc. Further, the incre"
2549,"ase in capital levels reflects the capital that was raised as a result of SCAP. As previously stated by interviewees, the unprecedented public release of the stress test results helped to restore investors’ confidence in the financial markets. Some officials from participating BHCs and credit rating agencies also viewed the BHCs’ ability to raise the capital required by the stress test as further evidence of SCAP’s success in increasing market confidence and reducing uncertainty. But some expressed concerns"
2550," that the timing of the announcement of SCAP on February 10, 2009—nearly 3 months before the results were released on May 7, 2009—may have intensified market uncertainty about the financial health of the BHCs. A broad set of market indicators also suggest that the public release of SCAP results may have helped reduce uncertainty in the financial markets and increased market confidence. For example, banks’ renewed ability to raise private capital reflects improvements in perceptions of the financial conditio"
2551,"n of banks. Specifically, banks and thrifts raised significant amounts of common equity in 2008, totaling $56 billion. Banks and thrifts raised $63 billion in common equity in the second quarter of 2009 (see figure 4). The substantial increase in second quarter issuance of common equity occurred after the stress test results were released on May 7, 2009, and was dominated by several SCAP institutions. Similarly, stock market prices since the release of the stress test results in May 2009 through October 200"
2552,"9 improved substantially in the overall banking sector and among the 18 public BHCs that participated in SCAP (see figure 5). The initial increase since May 2009 also suggests that SCAP may have helped bolster investor and public confidence. However, equity markets are generally volatile and react to a multitude of events. Credit default swap spreads, another measure of confidence in the banking sector, also improved. A credit default swap is an agreement in which a buyer pays a periodic fee to a seller in "
2553,"exchange for protection from certain credit events such as bankruptcy, failure to pay debt obligations, or a restructuring related to a specific debt issuer or issues known as the reference entity. Therefore, the credit default swap spread, or market price, is a measure of the credit risk of the reference entity, with a higher spread indicating a greater amount of credit risk. When the markets’ perception of the reference entity’s credit risk deteriorates or improves, the spread generally will widen or tigh"
2554,"ten, respectively. Following the SCAP results release in May 2009, the credit default swap spreads continued to see improvements (see figure 6). While many forces interact to influence investors’ actions, these declining spreads suggest that the market’s perception of the risk of banking sector defaults was falling. Further, the redemption of TARP investments by some banking institutions demonstrated that regulators believed these firms could continue to serve as a source of financial and managerial strengt"
2555,"h, as well as fulfill their roles as intermediaries that facilitate lending, while both reducing reliance on government funding and maintaining adequate capital levels. This positive view of the regulators may also have helped increase market confidence in the banking system (see appendix II for details on the status of TARP investments in the institutions participating in SCAP). As of the end of 2009, while the SCAP BHCs generally had not experienced the level of losses that were estimated on a pro rata ba"
2556,"sis under the stress test’s more adverse economic scenario, concerns remain that some banks could absorb potentially significant losses in certain asset categories that would erode capital levels. Collectively, the BHCs’ total loan losses of $141.2 billion were approximately 38 percent less than the GAO-calculated $229.4 billion in pro rata losses under the more adverse scenario for 2009 (see table 5). The BHCs also experienced significant gains in securities and trading and counterparty credit risk portfol"
2557,"ios compared with estimated pro rata losses under SCAP. Total resources other than capital to absorb losses (resources) were relatively close to the pro rata amount, exceeding it by 4 percent. In tracking BHCs’ losses and resources against the SCAP estimates, we compared the actual results with those estimated under the more adverse scenario. We used the 2-year estimates of the more adverse scenario from the SCAP results and annualized those amounts by dividing them in half (the “straight line” method) to g"
2558,"et pro rata loss estimates for 2009 because the SCAP regulators did not develop estimates on a quarterly or annual basis. A key limitation of this approach is that it assumes equal distribution of losses, revenues, expenses, and changes to reserves over time, although these items were unlikely to be distributed evenly over the 2-year period. Another important consideration is that actual results were not intended and should not be expected to align with the SCAP projections. Actual economic performance in 2"
2559,"009 differed from the SCAP macroeconomic variable inputs, which were based on a scenario that was more adverse than was anticipated or than occurred, and other forces in the business and regulatory environment could have influenced the timing and level of losses. Appendix I contains additional details on our methodology, including our data sources and calculations, for tracking BHCs’ financial performance data. Although the 19 BHCs’ actual combined losses were less than the 2009 pro rata loss estimates for "
2560,"the more adverse scenario, the loss rates varied significantly by individual BHCs. For example, most of the BHCs had consumer and commercial loan losses that were below the pro rata loss estimates, but three BHCs—GMAC, Citigroup, and SunTrust Banks Inc. (SunTrust)—exceeded these estimates in at least one portfolio (see figure 7). GMAC was the only one with 2009 loan losses on certain portfolios that exceeded SCAP’s full 2-year estimate. Specifically, GMAC exceeded the SCAP 2-year estimated losses in the fir"
2561,"st-lien, second/junior lien, and commercial real estate portfolios and the 1-year pro rata losses in the “Other” portfolio; Citigroup exceeded the 1-year pro rata estimated losses in the commercial and industrial loan portfolio; and SunTrust exceeded the 1-year estimated losses in the first-lien and credit card portfolios. Appendix III provides detailed data on the individual performance of each of the BHCs. GMAC faced particular challenges in the first year of the assessment period and posed some risk to t"
2562,"he federal government, a majority equity stakeholder. GMAC’s loan losses in its first-lien portfolio were $2.4 billion, compared with the $2 billion projected for the full 2-year period. In the second/junior lien portfolio, GMAC saw losses of $1.6 billion, compared with the $1.1 billion estimated losses for the 2 years. GMAC experienced losses of $710 million in its commercial real estate portfolio, compared with $600 million projected for the full 2-year period. Further, in its “Other” portfolio (which is "
2563,"comprised of auto leases and consumer auto loans), GMAC’s losses were $2.1 billion, exceeding the 1-year pro rata $2 billion loss estimate. With a tier 1 common capital ratio of 4.85 percent— just more than the SCAP threshold of 4 percent—at the end of 2009, GMAC has a relatively small buffer in the face of potential losses. GMAC’s position should be placed in context, however, because it is relatively unique among the SCAP participants. It was the only nonpublicly traded participant, and the federal govern"
2564,"ment owns a majority equity stake in the company as a result of capital investments made through the Automotive Industry Financing Program under TARP. Further, GMAC’s core business line—financing for automobiles—is dependent on the success of efforts to restructure, stabilize, and grow General Motors Company and Chrysler Group LLC. Finally, the Federal Reserve told us that because GMAC only recently became a BHC and had not previously been subject to banking regulations, it would take some time before GMAC "
2565,"was fully assimilated into a regulated banking environment. To improve its future operating performance and better position itself to become a public company in the future, GMAC officials stated that the company posted large losses in the fourth quarter of 2009 as result of accelerating its recognition of lifetime losses on loans. In addition, the company has been restructuring its operations and recently sold off some nonperforming assets. However, the credit rating agencies we met with generally believed "
2566,"that there could still be further losses at GMAC, although the agencies were less certain about the pace and level of those losses. Two of the agencies identified GMAC’s Residential Capital, LLC mortgage operation as the key source of potential continued losses. Given that market conditions have generally improved, the BHCs’ investments in securities and trading account assets performed considerably better in 2009 than had been estimated under the pro rata more adverse scenario. The SCAP assessment of the s"
2567,"ecurities portfolio consisted of an evaluation for possible impairment of the portfolio’s assets, including Treasury securities, government agency securities, sovereign debt, and private sector securities. In the aggregate, the securities portfolio has experienced a gain of $3.5 billion in 2009, compared with a pro rata estimated loss of $17.6 billion under the stress test’s more adverse scenario. As figure 8 shows, 5 of the 19 BHCs recorded securities losses in 2009, 13 recorded gains, and 1 (Morgan Stanle"
2568,"y) recorded no gain or loss. Losses were projected at 17 of the BHCs under the pro rata more adverse scenario, and SCAP regulators did not consider the remaining 2 BHCs (American Express Company and Morgan Stanley) to be applicable for this category. In the securities portfolio, The Bank of New York Mellon Corporation had losses greater than estimated under SCAP for the full 2-year period. The variances could be due to a number of factors, including the extent to which a BHC decides to deleverage, how their"
2569," positions react to changing market values, and other factors. To estimate trading and counterparty losses, SCAP regulators assumed that these investments would be subject to the change in value of a proportional level as experienced in the last half of 2008. The trading portfolio shows an even greater difference between the 1-year pro rata estimates and the actual performance—a gain of $56.9 billion in 2009 rather than the pro rata $49.7 billion estimated loss under the more adverse scenario (see table 5)."
2570," The stress test only calculated trading and counterparty credit loss estimates for the five BHCs with trading assets that exceeded $100 billion. All five had trading gains as opposed to losses, based on the publicly available data from the Y-9C. These gains were the result of a number of particular circumstances. First, the extreme spreads and risk premium resulting from the lack of liquidity during the financial crisis—especially in the second half of 2008—reversed in 2009, improving the pricing of many r"
2571,"isky trading assets that remained on BHCs’ balance sheets. Because the trading portfolio is valued at fair value, it had been written down for the declines in value that occurred throughout 2008 and the first quarter of 2009 and saw significant gains when the market rebounded through the remainder of 2009. Second, the crisis led to the failure or absorption of several large investment banks, reducing the number of competitors and, according to our analysis of Thomson Reuters Datastream, increased market sha"
2572,"re and pricing power for the remaining firms. Finally, the Federal Reserve’s low overnight bank lending rates (near 0 percent) have prevailed for a long period and have facilitated a favorable trading environment for BHCs. This enabled BHCs to fund longer-term, higher yielding assets in their trading portfolios with discounted wholesale funding (see figure 9). Potentially large losses in consumer and commercial loans continue to challenge SCAP BHCs, and addressing these challenges depends on a variety of fa"
2573,"ctors, including, among other things, the effectiveness of federal efforts to reduce foreclosures in the residential mortgage market. The BHCs absorbed nearly $400 billion in losses in the 18 months ending December 31, 2008. As they continue to experience the effects of the recent financial crisis, estimating precisely how much more they could lose is difficult. In March 2010, officials from two credit rating agencies indicated that 50 percent or more of the losses the banking industry was expected to incur"
2574," during the current financial crisis could still be realized if the economy were to suffer further stresses. Data for the 19 BHCs show a rapid rise in the percentage of nonperforming loans over the course of 2009 (see figure 10). Specifically, total nonperforming loans grew from 1 percent in the first quarter of 2007 to 6.6 percent in the fourth quarter of 2009 for SCAP BHCs. In particular, increases in total nonperforming loans were driven by significant growth in nonperforming first-lien mortgages and com"
2575,"mercial real estate loans. Standard & Poor’s Corporation noted that many nonperforming loans may ultimately have to be charged-off, exposing the BHCs to further potential losses. According to the credit rating agencies that we interviewed, federal housing policy to aid homeowners who are facing foreclosures, as well as time lags in the commercial real estate markets, will likely continue to affect the number of nonperforming loans for the remainder of the SCAP time frame (December 2010). The total amount of"
2576," resources other than capital to absorb losses (resources) has tracked the amount GAO prorated under the stress test’s more adverse scenario. Resources measure how much cushion the BHCs have to cover loans losses. As shown previously in table 5, the aggregate actual results through the end of 2009 for resources showed a total of $188.4 billion, or 4 percent more than GAO’s pro rata estimated $181.5 billion in the stress test’s more adverse scenario. Eleven of the 19 BHCs tracked greater than the pro rata es"
2577,"timated amount in 2009, while the remaining 8 tracked less than the estimate (see figure 11). GMAC and MetLife, Inc. had negative resources in 2009, although only GMAC was projected to have negative resources over the full 2-year period. Our calculation considers increases in ALLL during 2009 to be a drain on resources in order to mirror the regulators’ calculation for the full 2-year projection. However, the ALLL may ultimately be used as a resource in 2010, causing available resources to be higher than th"
2578,"ey currently appear in our tracking. PPNR is based on numerous factors, including interest income, trading revenues, and expenses. The future course of this resource will be affected by factors such as the performance of the general economy, the BHCs’ business strategies, and regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and the Credit Card Accountability, Responsibility, and Disclosure Act of 2009. Such regulatory changes could impose a"
2579,"dditional costs or reduce future profitability, either of which would impact future PPNR. The SCAP stress test provided lessons in a number of areas that can be incorporated in the bank supervision process and used to improve BHCs’ risk management practices. First, the transparency that was part of SCAP helped bolster market confidence, but the Federal Reserve has not yet developed a plan that incorporates transparency into the supervisory process. Second, the SCAP experience highlighted that BHCs’ stress t"
2580,"ests in the past were not sufficiently comprehensive and we found that regulators’ oversight of these tests has been generally weak. Third, we identified opportunities to enhance both the process and data inputs for conducting stress testing in the future. Finally, SCAP demonstrated the importance of robust coordination and communication among the different regulators as an integral part of any effective supervisory process. By incorporating these lessons going forward, regulators will be able to enhance th"
2581,"eir ability to efficiently and effectively oversee the risk- taking in the banking industry. As stated earlier and as agreed generally by market participants, the public release of the SCAP design and results helped restore confidence in the financial system during a period of severe turmoil. Some agency officials stated that their experience in implementing SCAP suggested that greater transparency would also be beneficial in the supervisory process. In recent statements, the chairman and a governor of the "
2582,"Federal Reserve have both stated that, while protecting the confidentiality of firm-specific proprietary information is imperative, greater transparency about the methods and conclusions of future stress tests could benefit from greater scrutiny by the public. The Federal Reserve governor also noted that feedback from the public could help to improve the methodologies and assumptions used in the supervisory process. In addition, they noted that more transparency about the central bank’s activities overall w"
2583,"ould ultimately enhance market discipline and that the Federal Reserve is looking at ways to enhance its disclosure policies. Consistent with the goal of greater transparency, we previously recommended that the Federal Reserve consider periodically disclosing to the public the aggregate performance of the 19 BHCs against the SCAP estimates for the 2-year forecast period. Subsequently, the chairman and a governor of the Federal Reserve have publicly disclosed 2009 aggregate information about the performance "
2584,"of the 19 BHCs based on the Federal Reserve’s internal tracking. As the 2-year SCAP period comes to a close at the end of 2010, completing a final analysis that compares the performance of BHCs with the estimated performance under the more adverse economic scenario would be useful; however, at the time of the review, Federal Reserve officials told us that they have not decided whether to conduct and publicly release any type of analysis. Given that the chairman and a governor of the Federal Reserve have alr"
2585,"eady publicly disclosed some aggregate BHC performance against the more adverse scenario for 2009, providing the 2-year results would provide the public with consistent and reliable information from the chief architect of the stress test that could be used to further establish the importance of understanding such tests and consider lessons learned about the rigor of the stress test estimates. Increasing transparency in the bank supervisory process is a more controversial issue to address. Supervisory offici"
2586,"als from OCC (including the then Comptroller) and the Federal Reserve question the extent to which greater transparency would improve day-to-day bank supervision. And, some BHCs we interviewed also were against public disclosure of future stress tests results. They noted that SCAP was a one-time stress test conducted under unique circumstances. Specifically, during the financial crisis, Treasury had provided a capital backstop for BHCs that were unable to raise funds privately. They expressed concern that p"
2587,"ublic disclosure of certain unfavorable information about individual banks in a normal market environment could cause depositors to withdraw funds en masse creating a “run” on the bank. In addition, banks that appear weaker than their peers could be placed at a competitive disadvantage and may encourage them to offer more aggressive rates and terms for new depositors, thereby increasing their riskiness and further affecting their financial stability. While these concerns are valid and deserve further consid"
2588,"eration, they have to be weighed against the potential benefits of greater transparency about the financial health of financial institutions and the banking system in general to investors, creditors, and counterparties. The Dodd-Frank Act takes significant steps toward greater transparency. For example, the act requires the Federal Reserve to perform annual stress tests on systematically significant institutions and publicly release a summary of results. Also, the act requires each of the systematically sig"
2589,"nificant institutions to publicly report the summary of internal stress tests semiannually. Given comments by its senior leadership, the Federal Reserve is willing to engage in a constructive dialogue about creating a plan for greater transparency that could benefit the entire financial sector. The other federal bank regulators—FDIC, OCC, and the Office of the Thrift Supervision—are also critical stakeholders in developing such a plan. While Federal Reserve officials have discussed possible options for incr"
2590,"easing transparency, the regulators have yet to engage in a formal dialogue about these issues and have not formalized a plan for the public disclosure of regulatory banking information or developed a plan for integrating public disclosures into the ongoing supervisory process. Without a plan for reconciling these divergent views and for incorporating steps to enhance transparency into the supervisory process and practices, including the public disclosure of certain information, bank regulators may miss a s"
2591,"ignificant opportunity to enhance market discipline by providing investors, creditors, and counterparties with information such as bank asset valuations. SCAP highlighted that the development and utilization of BHCs’ stress tests were limited. Further, BHC officials noted that they failed to adequately stress test for the effects of a severe economic downturn scenario and did not test on a firmwide basis or test frequently enough. We also found that the regulator’s oversight of these tests were weak, reinfo"
2592,"rcing the need for more rigorous and firmwide stress testing, better risk governance processes by BHCs, and more vigorous oversight of BHCs’ stress tests by regulators. Going forward, as stress tests become a fundamental part of oversights of individual banks and the financial system, more specific guidance needs to be developed for examiners. BHCs and regulators stated that they are taking steps to address these shortcomings. Prior to SCAP, many BHCs generally performed stress tests on individual portfolio"
2593,"s, such as commercial real estate or proprietary trading, rather than on a firmwide basis. SCAP led some institutions to look at their businesses in the aggregate to determine how losses would affect the holding company’s capital base rather than individual portfolios’ capital levels. As a result, some BHC officials indicated that they had begun making detailed assessments of their capital adequacy and risk management processes and are making improvements. Officials from one BHC noted that before SCAP their"
2594," financial and risk control teams had run separate stress tests, but had not communicate or coordinate with each other about their stress testing activities. Officials from another BHC noted that their senior management and board of directors were not actively involved in the oversight of the stress testing process. These officials said that since participating in SCAP, they have improved in these areas by institutionalizing the internal communication and coordination procedures between the financial risk a"
2595,"nd control teams, and by increasing communication with senior management and board of directors about the need for active involvement in risk management oversight, respectively. These improvements can enhance the quality of the stress testing process. Moreover, officials of BHCs that were involved in ongoing bank mergers during the SCAP process credited SCAP with speeding up of the conversion process of the two institutions’ financial systems since the BHCs’ staff had to work together to be able to quickly "
2596,"provide, among other things, the aggregate asset valuations and losses of the combined firm’s balance sheets to the regulators. BHC officials also stated that their stress tests would take a firmwide view, that is, taking into account all business units and risks within the holding company structure and would include updates of the economic inputs used to determine potential losses and capital needs in adverse scenarios. One BHC noted that it had developed several severe stress scenarios for liquidity becau"
2597,"se the recent financial crisis had shown that liquidity could deteriorate more quickly than capital, endangering a company’s prospects for survival. This danger became evident in the failures of major financial institutions during the recent financial crisis— for example, IndyMac Bank, Lehman Brothers, and Bear Stearns. Officials from many SCAP BHCs and the Federal Reserve noted that internal bank stress test models generally did not use macroeconomic assumptions and loss rates inputs as conservative as tho"
2598,"se used in the SCAP stress test. According to Federal Reserve officials, using the SCAP macroeconomic assumptions, most of the 19 BHCs that took part in SCAP initially determined that they would not need additional capital to weather the more adverse scenario. However, the SCAP test results subsequently showed that more than half of them (10 of 19) did need to raise capital to meet the SCAP capital buffer requirements. Some BHCs indicated that future stress tests would be more comprehensive than SCAP. BHCs "
2599,"can tailor their stress test assumptions to match their specific business models, while SCAP generally used a one-size-fits-all assumptions approach. For example, some BHCs noted that they use macroeconomic inputs (such as disability claims, prolonged stagflation, or consumer confidence) that were not found in the SCAP stress test. Although the Federal Reserve has required BHCs to conduct stress tests since 1998, officials from several BHCs noted that their institutions had not conducted rigorous stress tes"
2600,"ts in the years prior to SCAP, a statement that is consistent with regulatory findings during the same period. To some degree, this lack of rigorous testing reflected the relatively good economic times that preceded the financial crisis. According to one credit rating agency and a BHC, stress test assumptions generally tend to be more optimistic in good economic times and more pessimistic in bad economic times. In addition, one BHC noted that it had conducted stress tests on and off for about 20 years, but "
2601,"usually only as the economy deteriorated. To address this issue, many BHC officials said that they have incorporated or are planning to incorporate more conservative inputs into their stress test models and are conducting more rigorous, firmwide stress testing more frequently. Although regulators’ guidelines have required for over 10 years that financial institutions use stress tests to assess their capacity to withstand losses, we found that regulators’ oversight of these tests had been limited. Horizontal"
2602," examinations by the regulators from 2006 through 2008 identified multiple weaknesses in institutions’ risk management systems, including deficiencies in stress testing. Areas of weaknesses found during examination included that the BHCs’ stress testing of their balance sheets lacked severity, were not performed frequently enough, and were not done on a firmwide basis. Also, it was found that BHCs’ risk governance process lacked the active and effective involvement of BHC senior management and board of dire"
2603,"ctors. The SCAP stress test and the financial crisis revealed the same shortcomings in BHCs’ risk management and stress testing practices. However, we previously found that regulators did not always effectively address these weaknesses or in some cases fully appreciate their magnitude. Specifically, regulators did not take measures to push forcefully for institutions to better understand and manage risks in a timely and effective manner. In addition, according to our discussions with some SCAP participants,"
2604," oversight of these tests through routine examinations was limited in scope and tended to be discretionary. For example, regulators would review firms’ internal bank stress tests of counterparty risk and would make some suggestions, but reviews of these tests were done at the discretion of the individual supervisory team and were not consistently performed across teams. Even though BHCs have for many years performed stress tests to one degree or another, they have not been required to report the results of "
2605,"their testing to the Federal Reserve unless it specifically requested the information. The Federal Reserve recently issued a letter to the largest banking organizations outlining its view on good practices with respect to the use of stress testing in the context of internal capital adequacy assessment practices (ICAAP). For example, some areas highlighted in the letter include how frequent a stress test should be performed, the minimum time frame that the test should cover, documentation of the process, inv"
2606,"olvement of senior management and board of directors, and types of scenarios and risks to include in such tests. Some BHC officials believed that stress testing would become an integral part of future risk management practices and noted that SCAP helped them see how bank examiners would want them to stress their portfolios in the future. In anticipation of future action by regulators, many BHCs were designing at least part of their stress tests along the lines of SCAP. However, a few BHC officials hoped tha"
2607,"t future stress tests would not be performed in the same manner as SCAP, with the largest institutions tested simultaneously in a largely public setting, but rather as part of the confidential supervisory review process. Federal Reserve officials stated that going forward, stress tests will become a fundamental part of the agency’s oversight of individual banks and the financial system. As a result of SCAP, Federal Reserve officials stated that they are placing greater emphasis on the BHCs’ internal capital"
2608," adequacy planning through their ICAAP. This initiative is intended to improve the measurement of firmwide risk and the incorporation of all risks into firms’ capital planning assessment and planning processes. In addition to enhanced supervisory focus on these practices across BHCs, stress testing is also a key component of the Basel II capital framework (Pillar 2). Under Pillar 2, supervisory review is intended to help ensure that banks have adequate capital to support all risks and to encourage that bank"
2609,"s develop and use better risk management practices. All BHCs, including those adopting Basel II, must have a rigorous process of assessing capital adequacy that includes strong board and senior management oversight, comprehensive assessment of risks, rigorous stress testing and scenario analyses, validation programs, and independent review and oversight. In addition, Pillar 2 requires supervisors to review and evaluate banks’ internal capital adequacy assessments and monitor compliance with regulatory capit"
2610,"al requirements. The Federal Reserve wants the large banks to conduct this work for themselves and report their findings to their senior management and boards of directors. According to Federal Reserve officials, for BHCs to satisfy the totality of expectations for ICAAP it may take 18 to 24 months, partly because the BHCs are taking actions to enhance practices where needed—including with respect to the use of stress testing and scenario analyses in internal capital assessments—and the Federal Reserve then"
2611," needs to evaluate these actions across a relatively large number of BHCs. In addition, the Federal Reserve is finalizing guidance for examiners to assess the capital adequacy process, including stress testing, for BHCs. Examiners are expected to evaluate how BHCs’ stress tests inform the process for identifying and measuring risk and decisions about capital adequacy. Federal Reserve officials stated that examiners are expected to look closely at BHCs’ internal stress test methodologies and results. In a le"
2612,"tter to BHCs, the Federal Reserve also emphasized that institutions should look at time frames of 2 or more years and considers losses firmwide. It also suggested that BHCs develop their own stress test scenarios and then review these scenarios and the results for appropriate rigor and quantification of risk. While these are positive steps, examiners do not have specific criteria for assessing the quality of these tests. For example, the Federal Reserve has not established criteria for assessing the severit"
2613,"y of the assumptions used to stress BHCs’ balance sheets. The Federal Reserve officials stated that they intend to have technical teams determine the type of criteria that will be needed to evaluate these assumptions, but they are in the early planning stages. Development of such criteria will be particularly helpful in ensuring the effective implementation of the stress test requirements under the Dodd-Frank Act. Without specific criteria, Federal Reserve examiners will not be able to ensure the rigor of B"
2614,"HCs’ stress tests—an important part of the capital adequacy planning. Furthermore, the absence of such guidance could lead to variations in the intensity of these assessments by individual examiners and across regional districts. Following SCAP, regulatory and BHC officials we met with identified opportunities to enhance both the process and data inputs for conducting stress testing in the future. This would include processes for obtaining, analyzing, and sharing data and capabilities for data modeling and "
2615,"forecasting, which potentially could increase the Federal Reserve’s abilities to assess risks in the banking system. According to the Federal Reserve, an essential component of this new system will be a quantitative surveillance mechanism for large, complex financial institutions that will combine a more firmwide and multidisciplinary approach for bank supervision. This quantitative surveillance mechanism will use supervisory information, firm-specific data analysis, and market-based indicators to identify "
2616,"developing strains and imbalances that may affect multiple institutions, as well as emerging risks within specific institutions. This effort by the Federal Reserve may also improve other areas of supervision which rely on data and quantitative analysis, such as assessing the process used by BHC’s to determine their capital adequacy, forecasting revenue, and assessing and measuring risk, which is critical to supervising large, complex banks. Officials at the Federal Reserve told us that examiners should be a"
2617,"nalyzing BHC performances versus their stress test projections to provide insight into the agency’s loss forecasting approach. Moreover, Federal Reserve officials stated that they are always looking to increase their analytical capabilities, and they have recently implemented a new governance structure to address some of their management information infrastructure challenges. However, not enough time has passed to determine the extent to which such measures will improve banking supervision. In addition, som"
2618,"e other deficiencies were found in the data reported to the Federal Reserve by BHCs using the Y-9C, as well as the Federal Reserve’s ability to analyze the risk of losses pertaining to certain portfolios that were identified during the SCAP stress test. This led the Federal Reserve to develop a more robust risk identification and assessment infrastructure including internally developed models or purchased analytical software and tools from data vendors. Going forward, such models and analytics would facilit"
2619,"ate improved risk identification and assessment capabilities and oversight, including the oversight of systemic risk. Moreover, a risk identification and assessment system that can gauge risk in the banking sector by collecting data on a timelier basis is necessary to better ensure the safety and soundness of the banking industry. Specific areas in which data collection and risk identification and assessment could be enhanced include mortgage default modeling to include more analysis of nontraditional mortg"
2620,"age products, counterparty level exposures, country and currency exposures, and commodity exposures. An example of where the Federal Reserve used SCAP to significantly upgrade its ability to assess risks across large BHCs is the development of a system that allowed BHCs to submit their securities positions and market values at a fixed date and apply price shocks. This process was enhanced during SCAP to facilitate the stress analysis of securities portfolios held by SCAP BHCs. This system allowed the Federa"
2621,"l Reserve to analyze approximately 100,000 securities in a relatively short time period. The Federal Reserve intends to continue using this database to receive and analyze updated positions from BHCs. With other portfolios, the Federal Reserve contracted with outside data and analytical systems providers. For multifamily loan portfolios, nonfarm loans, and nonresidential loans with a maturity beyond 2 years, all of which are subsets of commercial and industrial loans or commercial real estate portfolios, th"
2622,"e Federal Reserve used internal models and purchased an outside vendor service that allowed it to estimate losses for these portfolios. For the remaining commercial portfolios, the Federal Reserve used different existing models found at both the Federal Reserve and Federal Reserve district banks and new models developed to meet the needs of SCAP. When analyzing BHCs’ mortgage portfolios, the consumer loans Supervisory Analytical and Advisory Team provided templates to the BHCs to collect granular data for s"
2623,"uch analysis, allowing the system to separate BHCs’ mortgage portfolios into much more granular tranches than would be possible using data from regulatory filings. The Federal Reserve further used data from various sources, including a large comprehensive loan-level database of most mortgages that have been securitized in the United States to assist in developing its own loss estimates to benchmark against the BHCs’ proprietary estimates. These examples point to enhancements in the ability to assess risks t"
2624,"o individual firms and across the banking sector that resulted from the SCAP stress test. The Federal Reserve has made clear that it views many of these innovations in its ability to assess and model risks and potential losses as permanent additions to its toolkit, and has also recognized the need for more timely and granular information to improve its supervision of BHCs and other institutions. However, the extent to which these models and tools will be distributed across the Federal Reserve district banks"
2625," and other federal banking regulators is unclear. In addition, as the stress test applied to trading positions was limited to those BHCs that held trading positions of at least $100 billion as of February 20, 2009, the Federal Reserve has not indicated that it will roll out its new system to BHCs with smaller trading positions. The Federal Reserve has taken steps to maintain and enhance the tools and data used during SCAP. Further, improving the Federal Reserve’s financial data collection and supervisory to"
2626,"ols will require additional resources, training for bank examiners, coordination in the dissemination of new infrastructure across all U.S. financial regulators, and, according to a Federal Reserve governor, would benefit from relief from the Paperwork Reduction Act of 1980 as well. The Federal Reserve lacks a complete plan on how it will achieve permanent improvements in its risk identification and assessment infrastructure, but according to officials, such a plan is in development. The Federal Reserve has"
2627," finalized a plan that describes a governance structure for overseeing large, complex financial organizations. The plan defines the roles and responsibilities of various committees and teams within the Federal Reserve that will carry out its supervisory responsibilities over these organizations. However, further planning is needed to incorporate lessons learned from SCAP for addressing data and modeling gaps that existed prior to the crisis and a structure for disseminating improvements to risk identificati"
2628,"on and assessment. Specifically, this plan will also be critical to addressing improvements to data and modeling infrastructure in supervising not only large financial holding companies but also smaller institutions. A fully developed plan would also consider how to disseminate data, models, and other infrastructure to the entire Federal Reserve System and bank regulatory agencies, as well as the newly established Financial Stability Oversight Council and Treasury’s Office of Financial Research. Without suc"
2629,"h a plan, the agency runs the risk of not optimizing its oversight responsibilities, especially in light of its new duties as the systemic risk regulator under the Dodd-Frank Act. Another critical lesson from SCAP was the need for robust coordination and communication among the regulators in examining large, complex financial institutions. Officials from the regulatory agencies and BHCs stated that the degree of cooperation among the SCAP regulators was unprecedented and improved the understanding of the ri"
2630,"sks facing the individual BHCs and the financial market. Such coordination and communication will become increasingly important as banking regulators increase their oversight role. Even with recent major reform to the financial regulatory structure, multiple regulatory agencies continue to oversee the banking industry, and regulators will need to prioritize efforts to promote coordination and communication among staff from these agencies so that emerging problematic issues affecting the financial industry a"
2631,"re identified in a timely manner and effectively addressed. Going forward, based on our discussions with various SCAP participants and statements by Federal Reserve officials, including the chairman, the regulators’ experience with SCAP is anticipated to lead to the expanded use of horizontal examinations and multidisciplinary staff that will require extensive interagency coordination. Horizontal examinations may involve multiple regulators and underscore the importance of effective coordination and communi"
2632,"cation. Currently, regulators are conducting horizontal examinations of internal processes that evaluate the capital adequacy at the 28 largest U.S. BHCs. Their focus is on the use of stress testing and scenario analyses in ICAAP, as well as how shortcomings in fundamental risk management practices and governance and oversight by the board of directors for these processes could impair firms’ abilities to estimate their capital needs. Regulators recently completed the initial phase of horizontal examinations"
2633," of incentive compensation practices at 25 large U.S. BHCs. As part of this review, each organization was required to submit an analysis of shortcomings or “gaps” in its existing practices relative to the principles contained in the proposed supervisory guidance issued by the Federal Reserve in the fall of 2009 as well as plans—including timetables—for addressing any weaknesses in the firm’s incentive compensation arrangements and related risk-management and corporate governance practices. In May 2010, regu"
2634,"lators provided the banking organizations feedback on the firms’ analyses and plans. These organizations recently submitted revised plans to the Federal Reserve for addressing areas of deficiencies in their incentive compensation programs. In a June 2010 press release, the Federal Reserve noted that to monitor and encourage improvements in compensation practices by banking organizations, its staff will prepare a report after 2010 on trends and developments in such practices at banking organizations. Our pri"
2635,"or work has found that coordination and communication among regulatory agencies is an ongoing challenge. For example, in 2007, OCC onsite examiners, as well as officials in headquarters, told us that coordination issues hampered the Federal Reserve’s horizontal examinations. Also, in 2007, a bank told us that it had initially received conflicting information from the Federal Reserve, its consolidated supervisor, and the OCC, its primary bank supervisor, regarding a key policy interpretation. Officials from "
2636,"the bank also noted that when the Federal Reserve collected information, it did not coordinate with OCC, the primary bank examiner of the lead bank, resulting in unnecessary duplication. We noted that to improve oversight in the future, regulators will need to work closely together to expedite examinations and avoid such duplications. Since the SCAP stress test was concluded, the following examples highlight ongoing challenges in coordination and communication: Officials from OCC and FDIC indicated that the"
2637,"y were not always involved in important discussions and decisions. For example, they were not involved in the decision to reduce GMAC’s SCAP capital requirement, even though they were significantly involved in establishing the original capital requirement. Also, FDIC noted that it was excluded from such decision even though it is the primary federal bank regulator for GMAC’s retail bank (Ally Bank). The Federal Reserve held an internal meeting to discuss lessons learned from SCAP, but has yet to reach out t"
2638,"o the other SCAP regulators. The OCC and FDIC told us that they had not met with the Federal Reserve as a group to evaluate the SCAP process and document lessons learned. As a result, the FDIC and OCC did not have an opportunity to share their views on what aspects of SCAP worked and did not work, as well as any potential improvements that can be incorporated into future horizontal reviews or other coordinated efforts. In the recent horizontal examinations, both FDIC and OCC noted that the interagency proce"
2639,"ss for collaboration—especially in the initial design stages—was not as effective as it was for SCAP. OCC commented that more collaboration up front would have been preferable. Also, FDIC stated that the Federal Reserve did not include it in meetings to formulate aggregate findings for the horizontal examination of incentive compensation programs, and it experienced difficulties in obtaining aggregate findings from the Federal Reserve. The Federal Reserve commented that the FDIC was involved in the developm"
2640,"ent of findings for those organizations that control an FDIC-supervised subsidiary bank and that FDIC has since been provided information on the findings across the full range of organizations included in the horizontal review, the majority of which do not control an FDIC-supervised subsidiary bank. These continued challenges in ensuring effective coordination and communication underscore the need for sustained commitment and effort by the regulators to ensure the inclusion of all relevant agencies in key d"
2641,"iscussions and decisions regarding the design, implementation, and results of multiagency horizontal examinations. As the SCAP process has shown, active participation by all relevant regulators can strengthen approaches used by examiners in performing their supervisory activities. Without continuous coordination and communication, the regulators will miss opportunities to leverage perspectives and experiences that could further strengthen the supervision of financial institutions, especially during horizont"
2642,"al examinations of financial institutions. Publicly reporting a comparison of the actual performance of the SCAP BHCs and the estimated performance under a more adverse scenario provides insights into the financial strength of the nation’s largest BHCs. Senior Federal Reserve officials have publicly disclosed select aggregate information about the performance of the 19 BHCs consistent with the recommendation in our June 2009 report. Specifically, we recommended that the Federal Reserve consider periodically"
2643," disclosing to the public the performance of the 19 BHCs against the SCAP estimates during the 2-year period. However, the Federal Reserve has yet to commit to completing a final analysis that compares the BHCs’ actual performance with the estimated performance under SCAP’s more adverse economic scenario for the entire 2-year period and making this analysis public. Such an analysis is important for the market and BHCs to assess the rigor of the stress test methodology. Publicly releasing the results also wo"
2644,"uld allow the public to gauge the health of the BHCs that participated in SCAP, which is a strong proxy for the entire U.S. banking industry. And public disclosure of this analysis could act as a catalyst for a public discussion of the value of effective bank risk management and enhance confidence in the regulatory supervision of financial institutions. The public release of the stress test methodology and results helped improve market confidence in the largest BHCs during the recent financial crisis and pr"
2645,"ovided an unprecedented window into bank supervision process. Subsequently, the Chairman of the Federal Reserve and a Federal Reserve governor have publicly stated that greater transparency should be built into the supervisory process and that feedback from the public could help increase the integrity of the supervisory process. Increased transparency can also augment the information that is available to investors and counterparties of the institutions tested and enhance market discipline. Despite these sta"
2646,"tements, the Federal Reserve and other bank regulators have yet to start a formal dialogue about this issue, nor have they developed a plan for integrating public disclosures into the ongoing supervisory process. Such a plan could detail the types of information that would benefit the markets if it were publicly released; the planned methodology for the stress tests, including assumptions; the frequency with which information would be made public; and the various means of disseminating the information. Taki"
2647,"ng into account the need to protect proprietary information and other market-sensitive information would be an important part of such a plan. While regulators will undoubtedly face challenges in determining how best to overcome skepticism about the potential effects on the financial markets of disclosing sensitive information on the financial health of banks, the Dodd-Frank Act requires that the Federal Reserve and certain banks publicly release a summary of results from periodic stress tests. Without a pla"
2648,"n for enhancing the transparency of supervisory processes and practices, bank regulators may miss a significant opportunity to further strengthen market discipline and confidence in the banking industry by providing investors, creditors, and counterparties with useful information. The SCAP stress test shed light on areas for further improvement in the regulators’ bank supervision processes, including oversight of risk management practices at BHCs. Prior to SCAP, regulatory oversight of stress tests performe"
2649,"d by the BHCs themselves was ineffective. Specifically, although regulators required stress tests, the guidelines for conducting them were more than a decade old, and the individual banks were responsible for designing and executing them. The Federal Reserve’s reviews of the internal stress tests were done at the discretion of the BHCs’ individual supervisory teams and were not consistently performed. Further, even though BHCs performed stress tests, they were not required to report the results of their str"
2650,"ess testing to the Federal Reserve without a specific request from regulators. Post-SCAP, however, the Federal Reserve has stated that stress testing will now be a fundamental part of their oversight of individual banks. The Federal Reserve expects to play a more prominent role in reviewing assumptions, results, and providing input into the BHCs’ risk management practices. While the Federal Reserve has begun to take steps to augment its oversight, currently Federal Reserve examiners lack specific criteria f"
2651,"or assessing the severity of BHCs’ stress tests. Without specific criteria, Federal Reserve examiners will not be able to ensure the rigor of BHCs’ stress tests. Furthermore, the absence of such criteria could lead to variations in the intensity of these assessments by individual examiners and across regional districts. The experience with SCAP also showed that regulators needed relevant and detailed data to improve oversight of individual banks and to identify and assess risks. As the Federal Reserve and t"
2652,"he other regulators conduct more horizontal reviews, they will need a robust plan for quantitatively assessing the risk in the banking sector. Collecting timely data for the annual stress testing and other supervisory actions will be critical in order to better ensure the safety and soundness of the banking industry. The Federal Reserve has finalized a plan that describes a governance structure for overseeing large, complex financial organizations. However, further planning is needed to incorporate lessons "
2653,"learned from SCAP for addressing data and modeling gaps and a structure for disseminating improvements to risk identification and assessment. Further, efforts to improve the risk identification and assessment infrastructure will need to be effectively coordinated with other regulators and the newly established Financial Stability Oversight Council and Treasury’s Office of Financial Research in order to ensure an effective systemwide risk assessment. Without fully developing a plan that can identify BHCs’ ri"
2654,"sks in time to take appropriate supervisory action, the Federal Reserve may not be well- positioned to anticipate and minimize future banking problems and ensure the soundness of the banking system. Despite the positive coordination and communication experience of the SCAP stress test, developments since the completion of SCAP have renewed questions about the effectiveness of regulators’ efforts to strengthen their coordination and communication. For example, on important issues, such as finalizing GMAC’s S"
2655,"CAP capital amount, the Federal Reserve chose not to seek the views of other knowledgeable bank regulators. While the Dodd-Frank Act creates formal mechanisms that require coordination and communication among regulators, the experiences from SCAP point to the need for a sustained commitment by each of the banking regulators to enhance coordination and communication. In particular, ensuring inclusion of relevant agencies in key discussions and decisions regarding the design, implementation, and results of mu"
2656,"ltiagency horizontal examinations will be critical. If regulators do not consistently coordinate and communicate effectively during horizontal examinations, they run the risk of missing opportunities to leverage perspectives and experiences that could further strengthen bank supervision. To gain a better understanding of SCAP and inform the use of similar stress tests in the future, we recommend that the Chairman of the Federal Reserve direct the Division of Banking Supervision and Regulation to: Compare th"
2657,"e performance of the 19 largest BHCs against the more adverse scenario projections following the completion of the 2-year period covered in the SCAP stress test ending December 31, 2010, and disclose the results of the analysis to the public. To leverage the lessons learned from SCAP to the benefit of other regulated bank and thrift institutions, we recommend that the Chairman of the Federal Reserve in consultation with the heads of the FDIC and OCC take the following actions: Follow through on the Federal "
2658,"Reserve’s commitment to improve the transparency of bank supervision by developing a plan that reconciles the divergent views on transparency and allows for increased transparency in the regular supervisory process. Such a plan should, at a minimum, outline steps for releasing supervisory methodologies and analytical results for stress testing. Develop more specific criteria to include in its guidance to examiners for assessing the quality of stress tests and how these tests inform BHCs’ capital adequacy pl"
2659,"anning. These guidelines should clarify the stress testing procedures already incorporated into banking regulations and incorporate lessons learned from SCAP. Fully develop its plan for maintaining and improving the use of data, risk identification and assessment infrastructure, and requisite systems in implementing its supervisory functions and new responsibilities under the Dodd-Frank Act. This plan should also ensure the dissemination of these enhancements throughout the Federal Reserve System and other "
2660,"financial regulators, as well as new organizations established in the Dodd-Frank Act. Take further steps to more effectively coordinate and communicate among themselves. For example, ensuring that all applicable regulatory agencies are included in discussions and decisions regarding the development, implementation, and results of multiagency activities, such as horizontal examinations of financial institutions. We provided a draft of this report to the Federal Reserve, FDIC, OCC, OTS, and Treasury for revie"
2661,"w and comment. We received written comments from the Chairman of the Federal Reserve Board of Governors and the Assistant Secretary for Financial Stability. These comments are summarized below and reprinted in appendixes IV and V, respectively. We also received technical comments from the Federal Reserve, FDIC, OCC, and Treasury, which we incorporated into the report as appropriate. OTS did not provide any comments. In addition, we received technical comments from the Federal Reserve and most of the 19 SCAP"
2662," BHCs on the accuracy of our tracking of revenues and losses in 2009 for each of the SCAP BHCs and incorporated them into the report as appropriate. In its comment letter, the Federal Reserve agreed with all five of our recommendations for building on the successes of SCAP to improve bank supervision. The Federal Reserve noted that our recommendations generally relate to actions it is currently undertaking or planning to take under the Dodd-Frank Act. It also cited that in coordination with FDIC and OCC, it"
2663," would provide a public assessment of BHCs’ performance relative to the loss and preprovision net revenue estimates under the more adverse scenario, taking into account the limitations of such an analysis. For our remaining recommendations related to increased transparency, examiner guidance, risk identification and assessment, and coordination and communication of multiagency activities, the Federal Reserve generally noted that it has taken step in these areas and will continue to consult with the FDIC and"
2664," OCC in implementing our recommendations and its new responsibilities under the Dodd-Frank Act. While our report recognizes the steps that the Federal Reserve has taken related to transparency, examiner guidance, risk identification and assessment, and coordination and communication of multiagency activities, these areas warrant ongoing attention. For example, as we note in the report, while the Federal Reserve is in the process of finalizing examination guidance for reviewing stress tests, examiners curren"
2665,"tly do not have specific criteria for assessing the severity of these tests nor have they coordinated with the other bank regulators. Until this guidance is completed, examiners will lack the information needed to fully ensure the rigor of BHCs’ stress tests, and the Board will not be able to fully ensure the consistency of the assessment by individual examiners. Our report also notes the positive coordination and communication experience of the SCAP stress test, but we continued to find specific instances "
2666,"since the completion of SCAP that have renewed questions about the effectiveness of regulators’ efforts to strengthen their coordination and communication. For instance, while the Federal Reserve included relevant agencies in key discussions and decisions regarding the design, implementation, and results of SCAP, we found that the Federal Reserve missed opportunities to include other bank regulators when planning more recent horizontal examinations. Treasury agreed with our report findings, noting that it a"
2667,"ppreciated our acknowledgment that SCAP met its goals of providing a comprehensive, forward-looking assessment of the balance sheet risks of the largest banks and increasing the level and quality of capital held by such banks. It further noted that the unprecedented public release of the stress test results led to an increase in the market confidence in the banking system, which aided in improving the capital adequacy of the largest banks. We are sending copies of this report to the appropriate congressiona"
2668,"l committees; Chairman of the Federal Reserve, the Acting Comptroller of Currency, Chairman of the FDIC, the Acting Director of the Office of the Thrift Supervision, and the Secretary of the Treasury. Also, we are sending copies of this report to the Congressional Oversight Panel, Financial Stability Oversight Board, the Special Inspector General for TARP, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Should you or your staff "
2669,"have any questions on the matters discussed in this report, please contact me at (202) 512-8678 or williamso@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this letter. GAO staff who made key contributions to this report are listed in appendix VI. The objectives of this report were to (1) describe the process used to design and conduct the stress test and participants views’ of the process, (2) describe the extent to which the stress te"
2670,"st achieved its goals and compare its estimates with the bank holding companies’ (BHC) actual results, and (3) identify the lessons regulators and BHCs learned from the Supervisory Capital Assessment Program (SCAP) and examine how each are using those lessons to enhance their risk identification and assessment practices. To meet the report’s objectives, we reviewed the Board of Governors of the Federal Reserve System’s (Federal Reserve) The Supervisory Capital Assessment Program: Design and Implementation ("
2671,"SCAP design and implementation document) dated April 24, 2009, and The Supervisory Capital Assessment Program: Overview of Results (SCAP results document) dated May 7, 2009. We analyzed the initial stress test data that the Federal Reserve provided to each BHC, the subsequent adjustments the Federal Reserve made to these estimates, and the reasons for these adjustments. We reviewed BHC regulatory filings such as the Federal Reserve’s 2009 Consolidated Financial Statements for Bank Holding Companies—-FR Y-9C"
2672," (Y-9C); company quarterly 10-Qs and annual 10-Ks; speeches and testimonies regarding SCAP and stress testing; BHCs’ presentations to shareholders and earnings reports; bank supervision guidance issued by the Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC); and documents regarding the impact of SCAP and the financial crisis and proposed revisions to bank regulation and supervisory oversight. To further understand these documents and obta"
2673,"in different perspectives on the SCAP stress test, we interviewed officials from the Federal Reserve, OCC, FDIC, and the Office of the Thrift Supervision, as well as members of the multidisciplinary teams created to execute SCAP. We also collected data from SNL Financial—a private financial database that contains publicly filed regulatory and financial reports, including those of the BHCs involved in SCAP—in order to compare the BHCs’ actual performance in 2009 against the regulators’ 2-year SCAP loss estim"
2674,"ates and GAO’s 1-year pro rata loss estimates. To obtain additional background information regarding the tracking of the BHCs, perspectives on their performance, anticipated loan losses, and the success of SCAP in achieving its goals, we interviewed relevant officials (e.g., chief risk officers and chief financial officers) from 11 of the 19 BHCs that participated in the SCAP stress test. The BHCs we interviewed were the American Express Company; Bank of America Corporation; The Bank of New York Mellon Corp"
2675,"oration; BB&T Corporation; Citigroup Inc.; GMAC LLC; The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; MetLife, Inc.; Regions Financial Corporation; and Wells Fargo & Company. We selected these BHCs to reflect differences in size, types of financial services provided, geographic location, primary bank regulator, and participation in the Troubled Asset Relief Program (TARP). In addition, we met with credit rating agency officials from the Standard and Poor’s Corporation, Moody’s Corporation, and Fitch Rat"
2676,"ings Inc. for their perspective on SCAP and their own stress test practices. To more completely understand the execution of SCAP, we completed a literature search of stress tests conducted by others—for example, the Committee on European Banking Supervisors and the International Monetary Fund. We also reviewed relevant credit rating agency reports and the reports of other oversight bodies such as the Congressional Oversight Panel and the Special Inspector General for the Troubled Asset Relief Program on top"
2677,"ics related to stress testing and TARP. We also reviewed our past work on the bank supervisory process and SCAP. In addition, to track the actual performance of the 19 BHCs, we collected data from several sources. We then compared the BHCs’ actual performance to the December 31, 2008, capital levels presented in SCAP and the projections made under the more adverse scenario for estimated losses for loans, securities (available for sale and held to maturity), trading and counterparty, and resources other than"
2678," capital to absorb losses. Our primary source for SCAP estimates was the May 7, 2009, SCAP results document, which contained the estimates for each of the 19 BHCs and aggregate data for all BHCs. We also reviewed the confidential April 24, 2009, and May 5, 2009, presentations that the SCAP regulators made to each of the 19 BHCs to identify estimates of preprovision net revenue (PPNR) and changes in allowance for loan and lease losses (ALLL) for the 2 years ended 2010. Our primary source for the actual resul"
2679,"ts at the BHCs was the Federal Reserve’s Y-9C. In doing so, we used the SNL Financial database to extract data on the Y-9C and the Securities and Exchange Commission forms 10-K and 10-Q. These data were collected following the close of the fourth quarter of 2009, the halfway point of the SCAP’s 2-year time frame. Since losses were not estimated on a quarter-by-quarter or yearly basis but projected for the full 2-year period, we assumed that losses and revenue estimates under the more adverse scenario were d"
2680,"istributed at a constant rate across the projection period. Thus, we compared the actual 2009 year end values with half of the Federal Reserve’s 2-year SCAP projections. This methodology has some limitations because losses, expenses, revenues, and changes to reserves are historically unevenly distributed and loss rates over a 2-year period in an uncertain economic environment can follow an inconsistent path. However, the Federal Reserve, OCC, credit rating agencies, an SNL Financial analyst, and most of the"
2681," BHCs we interviewed who are tracking performance relative to SCAP estimates are also using the same methodology. We assessed the reliability of the SNL Financial database by following GAO’s best practices for data reliability and found that the data was sufficiently reliable for our purposes. To confirm the accuracy of our BHC tracking data, we shared our data with the Federal Reserve and the 19 SCAP BHCs. We received comments and incorporated them as appropriate. Some of the data that we collected were no"
2682,"t in a form that was immediately comparable to the categories used in the SCAP results, and we had to make adjustments in order to make the comparison. For tier 1 common capital, most asset categories, and resources other than capital to absorb losses, we had to find a methodology suited to aggregating these data so that we could compare it to the corresponding SCAP data. For example, net-charge offs for the various loan categories are broken out into more subcategories in the Y-9C than those listed in the "
2683,"SCAP results. In addition, we calculated “Resources Other than Capital to Absorb Losses” to correspond to the SCAP definition of PPNR minus the change in ALLL, which required obtaining data from multiple entries within the Y- 9C. When calculating noninterest expense we removed the line item for goodwill impairment losses because this item was not included in the SCAP regulators’ projections. We also used the calculation of a change in ALLL until December 31, 2009. But the SCAP regulators considered an incre"
2684,"ase in ALLL over the full 2-year period to be a drain on resources, because the provisions made to increase the ALLL balance would not be available to absorb losses during the 2-year SCAP time frame. This notion creates a problem in using the formula for 1-year tracking purposes because an increase in ALLL during 2009 would require provisions for that increase, but those added reserves could ultimately be used to absorb losses during 2010. To maintain consistency, our calculation considers ALLL increases du"
2685,"ring 2009 to be a drain on resources, but we recognize that this money could act as a resource to absorb losses rather than a drain on those resources. We faced an additional limitation pertaining to the ALLL calculation and a challenge with regard to the treatment of trading and counterparty revenues. In our review of SCAP documentation, we found that SCAP regulators used two different ALLL calculations—1 calculation for 4 of the BHCs that included a reserve for off-balance sheet items and another for the "
2686,"remaining 15 BHCs that did not include off-balance sheet reserves. The Federal Reserve confirmed that there were two different calculations that were not adjusted for consistency. In order to be consistent across the BHCs, we applied the same methodology that the regulators used for 15 of the BHCs to the 4 that remained. The treatment of trading and counterparty revenue created a challenge because the data in the Y-9C includes both customer derived revenue from transactions for BHCs that operate as broker-d"
2687,"ealers and gains (or losses) from proprietary trading and certain associated expenses. These items are presented only in net form in the Y-9C. However, for the five BHCs (Bank of America Corporation; Citigroup, Inc.; Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; and Morgan Stanley) that had their trading portfolios stressed, the trading and counterparty line is based on projections of gains (losses) from proprietary trading, but PPNR (specifically noninterest revenue) is based on gains from customer deri"
2688,"ved revenue from transactions for BHCs that operate as broker-dealers. Because we could not segregate these items based on the Y-9C, we have included the net amount in both the trading and counterparty and noninterest income line items. This means that the net amount of the trading gains or losses as reported in the Y-9C are included in two places in our tracking table for those five BHCs. For the remaining 14 BHCs, we included the entire line item in noninterest income, as that is where it was located in t"
2689,"he SCAP projections. Table 6 shows the items we used to calculate tier 1 capital, asset losses, PPNR, and ALLL as of December 31, 2009 and the specific sources we used. We also included specific references to the sources we used. Some elements within the table required a more detailed aggregation or calculation and are therefore explained further in tables 7 and 8 below. For reporting these capital measures and asset balances for the year ending December 31, 2008, we generally relied on the figures publishe"
2690,"d in various SCAP documents. Table 7 shows our methodology for calculating tier 1 common capital, including the part of the Y-9C in which the data can be found. Currently, there is no defined regulatory method for calculating tier 1 common capital, and it is not a required data field for BHCs to file in their Y-9C submissions. As a result, we developed a formula consistent with the Federal Reserve’s by reviewing the guidance available in the SCAP design and implementation and SCAP results documents and cons"
2691,"ulting with SNL Financial regarding its methodology. Table 8 provides a crosswalk for the asset classification we used to group the various charge-off categories listed in the Y-9C. To ensure additional comparability with SCAP, we attempted to identify any unique circumstances that could skew the results. For example, after we shared our initial tracking estimates with the 19 BHCs, one BHC had identified an issue with our calculation of tier 1 common capital that resulted from the way information is reporte"
2692,"d on the Y-9C. After discussing the issue with the BHC and verifying their explanation, we adjusted our calculation to more accurately reflect their position. Another BHC also had a one-time charge that had been included in the “Other” loss category, and we decided to segregate this item as a separate line item. We have also submitted our tracking spreadsheet to the Federal Reserve and to each BHC to give them an opportunity to provide input and ensure the accuracy and comparability of our numbers. Appropri"
2693,"ate adjustments to 2009 numbers based on information received from the Federal Reserve and individual BHCs are noted, where applicable, in the tables in appendix III. Some items that impact precise comparisons between actual results and the pro rata estimates are disclosed in our footnotes, rather than as adjustments to our calculations. For example, the stress test was applied to loan and other asset portfolios as of December 31, 2008, without including a calculation for ongoing banking activities. Because"
2694," the Y-9C data includes ongoing activity as of the date of the report, the actual results are slightly different than the performance of the stressed assets as the BHCs were treated as liquidating concerns rather than going concerns in the SCAP stress test. Distinguishing between the gains (losses) from legacy assets and those that resulted from new assets is not possible using public data. Other examples are that SCAP did not include the impact of the owned debt value adjustment or one-time items (occurrin"
2695,"g subsequent to SCAP) in their projections of PPNR. As credit default swap spreads narrowed in 2009, liability values increased at most banks, causing a negative impact on revenue at those banks that chose to account for their debt at fair value; but these losses were not included in the SCAP estimates. One-time items, such as sales of business lines, were also not included in the SCAP estimates of PPNR, as these events occurred subsequent to the stress test and, in part, could not be fully predicted as a p"
2696,"art of SCAP. Rather than remove the losses from the owned debt value adjustments and the gains (or losses) due to one-time items from the BHCs’ 2009 PPNR results, we disclosed the amounts in footnotes for the applicable BHCs. We chose this treatment so that PPNR would reflect actual results at the BHCs, while still disclosing the adjustments needed for more precise comparability to SCAP. We identified the TARP status of each of the 19 BHCs that participated in SCAP by reviewing data from the Treasury’s Offi"
2697,"ce of Financial Stability’s TARP Transactions Report for the Period Ending September 22, 2010 (TARP Transactions Report) and the SCAP results document. We used the SCAP results document to identify BHCs that were required to raise capital. The TARP Transactions Report, was then used to identify the program under which TARP funds were received (if any), the amount of funds received, capital repayment date, amount repaid, and warrant disposition date and to determine whether the warrants were repurchased or s"
2698,"old by Treasury in a public offering. To gain a better understanding of future potential losses, we determined the percentage of BHCs’ total loans that are either nonaccrual or more than 90 days past due using Y-9C data from the SNL Financial database. We used quarterly data for the period 2007 through 2009 on nonaccrual loans and past due balances of more than 90 days, for each of the BHCs. We aggregated the data into the same six loan categories used in SCAP: first-lien mortgages, second/junior-lien mortg"
2699,"ages, commercial and industrial loans, commercial real estate loans, credit card balances, and “Other.” (See tables 8 and 9 for details.) Once the data were aggregated, we divided that data by the applicable total loan balance for each category at each point in time (i.e., quarterly basis). One limitation is that Y-9C data were not available for all periods for four of the BHCs (American Express Company; GMAC LLC; The Goldman Sachs Group, Inc.; and Morgan Stanley) because they had recently became BHCs. As a"
2700," result, we did not include these BHCs in the calculation during those periods where their Y- 9Cs were not available (fourth quarter of 2008 and earlier for all except GMAC LLC, which also did not have a Y-9C in the first quarter of 2009). We collected Y-9C data from the SNL Financial database to calculate the loan loss rates across BHCs with more than $1 billion of assets and compare the 19 BHCs with the indicative loss rates provided by the SCAP regulators. We used annual data for the year ended December "
2701,"31, 2009, on loan charge-offs. We also used average total loan balances. In the Y-9C total loan balances were categorized somewhat differently from charge- offs. Table 9 provides a crosswalk for the asset classification. We aggregated loan balance data into the same categories that were used in the indicative loss rate table in SCAP: first-lien mortgages, prime mortgages, Alt-A mortgages, subprime mortgages, second/junior lien mortgages, closed-end junior liens, home equity lines of credit, commercial and i"
2702,"ndustrial loans, commercial real estate loans, construction loans, multifamily loans, nonfarm nonresidential loans, credit card balances, other consumer, and other loans. Once the data were aggregated into these categories, we divided the net charge-offs by the applicable average loan balance. This calculation showed the loss rate for each category (e.g., first-lien mortgages and commercial real estate) for the year ended December 31, 2009. This methodology was applied to calculate the loss rates for the 19"
2703," SCAP BHCs and all BHCs with more than $1 billion of assets, respectively. Because those institutions had recently converted to being BHCs, Y-9C data on loan balances was not available for the fourth quarter of 2008 for American Express Company; The Goldman Sachs Group, Inc.; and Morgan Stanley, and was not available for GMAC LLC for both the first quarter of 2009 and the fourth quarter of 2008. Therefore, we approximated the loan balances in these periods for GMAC LLC and American Express Company based on "
2704,"their Form 10-Q for these time periods. Because The Goldman Sachs Group, Inc. and Morgan Stanley have considerably smaller loan balances, in general, than the other BHCs; the fourth quarter of 2008 balance was not approximated for these BHCs. Instead, the average loan balance was simply based on the available data (e.g., first quarter of 2009 through fourth quarter of 2009). We conducted this performance audit from August 2009 to September 2010 in accordance with generally accepted government auditing stand"
2705,"ards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Twelve of the 19 bank holding companies (BHC) that participated in the Supervisory Capital Assessment Program (SCAP) had redeemed their Troubled Asset Relief Program (TARP) investm"
2706,"ents and had their warrants disposed of as of September 22, 2010, and most of them were not required to raise capital under SCAP (table 10). Six of the 19 BHCs tested under SCAP have not repaid TARP investments or disposed of warrants, and one, MetLife, Inc., did not receive any TARP investments. BHCs participating in SCAP must follow specific criteria to repay TARP funds. In approving applications from participating banks that want to repay TARP funds, the Federal Reserve considers various factors. Some of"
2707," these factors include whether the banks can demonstrate an ability to access the long-term debt market without relying on the Federal Deposit Insurance Corporation’s (FDIC) Temporary Liquidity Guarantee Program and whether they can successfully access the public equity markets, remain in a position to facilitate lending, and maintain capital levels in accord with supervisory expectations. BHCs intending to repay TARP investments must have post repayment capital ratios that meet or exceed SCAP requirements."
2708," Table 11 shows the names, location, and total assets as of December 31, 2008, of the 19 bank holding companies (BHC) subject to the Supervisory Capital Assessment Program (SCAP) stress test that was conducted by the federal bank regulators in the spring of 2009. The stress test was a forward-looking exercise intended to help federal banking regulators gauge the extent of the additional capital buffer necessary to keep the BHCs strongly capitalized and lending even if economic conditions are worse than had "
2709,"been expected between December 2008 and December 2010. The following tables (12 through 30) compare the 2009 performance of the 19 BHCs involved in SCAP to the 2-year SCAP estimates and the GAO 1- year pro rata estimates for the more adverse economic scenario. Specifically, these tables include comparison of actual and estimates of losses and gains associated with loans, securities, trading and counterparty, resources, preprovision net revenue (PPNR), and allowance for loan and lease losses (ALLL). These ta"
2710,"bles also include a comparison of actual capital levels at December 31, 2009, and December 31, 2008. Totals may not add due to rounding. For a more detailed explanation of the calculations made in constructing this analysis, see appendix I. Daniel Garcia-Diaz (Assistant Director), Michael Aksman, Emily Chalmers, Rachel DeMarcus, Laurier Fish, Joe Hunter, William King, Matthew McDonald, Sarah M. McGrath, Timothy Mooney, Marc Molino, Linda Rego, and Cynthia Taylor made important contributions to this report."
2711,"Available data showed that case dispositions and processing times in disciplinary cases during the period of January 1, 1996, through June 30, 1998, differed for SES employees and lower-level, or general schedule (GS), staff. In addition, a 1997 IRS internal study found that actions taken against lower-level employees more closely conformed to the IRS table of penalties than actions taken against higher-graded employees. However, because of dissimilarities in the types of offenses and incomplete case files,"
2712," these data do not necessarily prove disparate treatment. Agencies must consider many factors, such as the nature and seriousness of the offense; the employee’s job level and type of employment; whether the offense was intentional, technical, or inadvertent; the employee’s past disciplinary record; and the notoriety of the offense or its impact upon the reputation of the agency, in deciding what penalty, if any, should be imposed in any given case. IRS recognized that problems have hindered the processing a"
2713,"nd resolution of employee misconduct cases and has begun revamping its disciplinary systems. For the period we studied, IRS tracked disciplinary cases for GS and SES employees in different systems. The Office of Labor Relations (OLR), which is the personnel office for non-SES staff, handled GS cases. It tracked these cases in the Automated Labor and Employee Relations Tracking System (ALERTS), although IRS officials told us that ALERTS data were often missing or incomplete. The Office of Executive Support ("
2714,"OES), which is the personnel office for IRS executives, handled SES cases. Although ALERTS was supposed to also track SES cases, OES tracked SES cases by using a log and monthly briefing reports. The monthly briefing reports were used to inform the Deputy Commissioner about the status of cases. We selected the cases for our study of disciplinary actions for SES and lower-level staff as follows: For GS cases, we used ALERTS data for 22,025 cases received in, or closed by, OLR between January 1, 1996, and Jun"
2715,"e 30, 1998. For SES cases, our information came from two sources: (1) a 70-case random sample of SES nontax misconduct case files that were active between January 1, 1996, and June 30, 1998; and (2) for the same time period, 43 other SES nontax cases reported either in the logs or as “overaged” SES cases in the monthly briefing reports. In total, we looked at 113 cases involving 83 SESers. Unless otherwise noted, all SES statistics presented in this section are based on the random sample. See appendix I for"
2716," more information on how we selected the cases for our study. We were unable to make many meaningful statistical comparisons between SES and GS employee misconduct cases for three reasons. First, we were able to collect more detailed data through our SES file review than from the ALERTS database used for GS cases. This was particularly true regarding dates on which important events occurred. As a result, we could not compare average processing time at each phase of the disciplinary process, although we were"
2717," able to compare processing times from case receipt through case closure. Second, the level of detail and accuracy of ALERTS data varied widely. Some IRS regions historically took ALERTS data entry more seriously than others did, according to an IRS memorandum, and cases contained varying levels of detail about case histories, issues, facts, and analyses. ALERTS had few built-in system controls to ensure data integrity. Instead, IRS relied on managers to ensure the accuracy of their subordinates’ work. Thir"
2718,"d, some data were missing for the majority of the cases tracked in ALERTS. For example, we could not analyze the frequency with which final dispositions were less severe than proposed dispositions because both pieces of information were available for only about 13 percent of the ALERTS cases. Because officials said that ALERTS was OLR’s means of recording information on lower-level disciplinary cases, we used it to the extent that it had information comparable to what we collected on SES cases. Available da"
2719,"ta showed that processing time and frequency and type of case dispositions differed for SES and lower-level staff. On average, from OES’ or OLR’s receipt of a case until case closure, SES cases, on the basis of our 70-case random sample, lasted almost a year (352 days) and lower-level cases lasted less than 3 months (80 days). We estimated that the largest difference between SES and GS case dispositions occurred in the closed without action (CWA) and clearance categories. As shown in table 1, the dispositio"
2720,"ns in 73 percent of SES cases were CWA or clearance, versus 26 percent for GS cases. CWA is to be used to close a case when the evidence neither proves nor disproves the allegation(s). A disposition of clearance is to be used when the evidence clearly establishes that the allegations are false. In practice, neither disposition results in a penalty. The actual breakdown between the two dispositions is as follows: for SES cases, 61 percent were CWA and 12 percent were clearance; for GS cases, 24 percent were "
2721,"CWA and 2 percent were clearance. Table 1 outlines in order of severity the frequency with which available data indicate that various dispositions were imposed for SES and lower- level staff. SES data are based on the 56 closed cases in our 70-case sample. GS data are based on 15,656 closed cases in ALERTS. Ninety-five- percent confidence intervals for the SES data are presented to more accurately portray our findings. Using these confidence intervals, the rates of occurrence differed between SES and GS cas"
2722,"es for dispositions of clearance and CWA, reprimand, suspension, and other. However, using 95- percent confidence intervals and eliminating the CWA or clearance category from the analysis, the rates of occurrence between SES and GS cases were similar for all dispositions, except oral or written counseling and retired/resigned. In any case, we will discuss later in this report that differences in dispositions of SES and GS cases do not necessarily mean that the dispositions were inappropriate or that dispara"
2723,"te treatment occurred. We also analyzed disciplinary actions for an additional 43 SES cases. Because these cases were not randomly selected, the results may not be representative. Of the 43 cases, we found 9 in the more serious categories—6 instances of counseling, 1 reprimand, 1 suspension, and 1 removal. As further detailed in the upcoming section of this report on alleged case- processing delays by the Deputy Commissioner, SES cases took a long time to close for many reasons. These reasons included poor "
2724,"case-tracking procedures, inadequate file management, and poor communication among agency officials involved in the disciplinary process. We do not know to what extent, if any, these difficulties contributed to differences in processing times between SES and GS cases. Many factors can affect the discipline imposed in a particular case. These factors include the nature and seriousness of the offense; the employee’s job level and type of employment; whether the offense was intentional, technical, or inadverte"
2725,"nt; the employee’s past disciplinary record; and the notoriety of the offense or its impact upon the reputation of the agency. Collectively, these factors are components of what is known as the Douglas Factors, and they must be considered in determining the appropriate penalty in a case. See appendix II for a listing of the Douglas Factors. Not all of the Douglas Factors will be pertinent in every case, and, while some factors will weigh in the employee’s favor (mitigating factors), others may weigh against"
2726," the employee (aggravating factors). IRS officials told us that lower-level actions tend to be more straightforward than SES actions, with fewer mitigating factors. Since mitigating factors tend to reduce the level of discipline imposed, this could partially explain why penalties might be imposed differently in lower-level cases than in SES cases. We found that allegations against SES employees were usually reported to a hotline, the Department of the Treasury’s Office of Inspector General (OIG), or the IRS"
2727," Inspection Service. Because complaints against SES employees can be anonymous, this anonymity can affect IRS’ ability to follow up on a complaint or investigate it thoroughly. In contrast, IRS officials told us that GS cases were generally filed by managers about their subordinates. In these cases, the complainant was known and generally provided concrete evidence to support the allegation. Further, typical issues surrounding lower-level cases may be less complicated or easier to successfully investigate t"
2728,"han those involving SES employees. Table 2 outlines in more detail the most common issues in SES and lower-level staff cases. SES data are based on our 70-case sample. GS data are based on 22,025 cases in ALERTS. We subjectively classified the issues in SES cases, and our classifications may not be precise. Overall, we found that the most common issue in SES cases was prohibited personnel practices, while time and attendance was the most common issue in GS cases. In 1994, in response to an internal IRS stud"
2729,"y reporting a perception that managers received preferential treatment in disciplinary matters, IRS created a table of penalties, the Guide for Penalty Determinations. The purpose of the guide was to ensure that decisions on substantiated cases of misconduct were appropriate and consistent throughout IRS. In 1997 and 1998, IRS studied the effect of the guide on GS and SES employees and found that actions taken against lower-graded employees more closely conformed to the guide than those taken against higher"
2730,"-graded employees (see table 3); for GS employees overall, 91 percent of disciplinary actions conformed to the guide, versus 74 percent for SES employees; when disciplinary actions did not conform to the guide, the actions were below the guide’s prescribed range 93 percent of the time for GS employees overall, versus 100 percent of the time for GS-13 through GS-15 and SES employees; and if admonishments were included as part of reprimands, conformance with the guide approached 100 percent for GS-13 through "
2731,"GS-15 employees. The IRS study and IRS officials agreed that the guide had limitations and no longer met IRS needs. Specifically, the guide covered all employees but did not address statutory and regulatory limitations that restricted management’s ability to impose disciplinary suspensions on SES employees. IRS officials said that governmentwide, there was no level of discipline available for SES employees that was more severe than a reprimand but less severe than a suspension of at least 15 days. In contra"
2732,"st, GS employees could have received suspensions of 14 days or less. While the guide prescribed a penalty range of “reprimand to suspension,” the only option for SES employees, because of the statutory limitations against suspensions of less than 15 days, was a reprimand if management wished to impose a penalty, but not the harshest available penalty. IRS officials also told us that in certain cases, they might have imposed discipline in between a reprimand and a 15-day suspension had they had the option to"
2733," do so. According to IRS officials, IRS’ 1995 attempt to have the Office of Personnel Management deal with this issue was unsuccessful. Statutory and regulatory requirements could partially explain why reprimands might have been imposed when a harsher disciplinary action might have seemed more appropriate. Applying to employees at different levels, the IRS penalty guide was constructed with very broad recommended discipline ranges to provide for management discretion. However, one IRS study pointed out that"
2734,", in some instances, this rendered the guide useless (e.g., when the penalty range was “reprimand to removal”). IRS created a disciplinary review team in September 1998. Among other things, the team was to develop an action plan that addressed case handling, complaint systems, review and revise IRS’ Guide for Penalty Determinations; and develop a process to review and monitor complaints. As of March 1999, the team was proposing a new integrated IRS complaint process. Its intent was to overcome problems with"
2735," complaint processing systems’ not (1) communicating or coordinating with each other, (2) capturing the universe of complaints, (3) specifically tracking or accurately measuring complaints, and (4) following up on complaints to ensure that appropriate corrective action had been taken. The team was proposing a 26-person Commissioner’s Review Group to, among other things, manage and analyze complaints sent to the Commissioner of Internal Revenue, monitor other IRS complaint systems, and coordinate with the sy"
2736,"stems’ representatives. The team was also redesigning the penalty guide. On the basis of our review of SES cases, we did not find a case in which an individual who was ineligible to retire at the time an allegation was filed, retired while the case was pending with the Deputy Commissioner. However, we found cases that spent up to 4 years at this stage in the disciplinary process and cases that stalled at various points throughout the process. Although OES’ goal for closing an SES case was 90 days, on the ba"
2737,"sis of our random sample, cases averaged almost 1 year for OES to close. Further, IRS had poor case-tracking procedures, inadequate file management, missing and incomplete files, and poor communication among officials involved in the disciplinary process. Because IRS’ 1990 and 1994 written SES case-handling procedures were out of date, IRS officials described the operable procedures to us. During the period covered by our review, OES handled SES misconduct cases. Its goal for closing a case was 90 days from"
2738," its receipt of a case. Once OES received a case, it was to enter it into ALERTS, although it did not always do this, and prepare a case analysis. The case analysis and supporting documents were then to be forwarded to the appropriate Regional Commissioner, Chief, or Executive Officer for Service Center Operations, who was to act as the “recommending official.” Within 30 days, the recommending official was to review the case with the help of local labor relations experts, develop any additional facts deemed"
2739," appropriate, and return a case report to OES, including a recommendation for disposition. If OES disagreed with the report for any reason, it was to include a “statement of differences” in its case analysis. OES was to forward the field report and the OES analysis to the Deputy Commissioner’s office for concurrence or disapproval. If the Deputy Commissioner concurred with the proposed disposition, the recommending official could take action. If the Deputy Commissioner did not approve, he could impose a les"
2740,"ser disposition or return the case to OES for further development. IRS executive case-handling procedures did not define a time period within which the Deputy Commissioner was to act on case dispositions. We collected information on SES cases from two sources: (1) the five specific cases mentioned during the April 1998 Senate Finance hearings, and (2) a 70-case random sample of the SES misconduct case files as previously described, plus 43 more cases from OES tracking logs and monthly briefing reports, for "
2741,"a total of 113 cases. These 113 cases involved 83 individuals. Again, see appendix I for more details on how we selected the cases to study. Of the 113 SES cases we reviewed, we did not find a single instance in which an individual who was ineligible to retire at the time the allegation was filed, retired while the case was pending with the Deputy Commissioner. Overall, of the 83 individuals involved in the 113 cases, 25 people, or 30 percent, had retired from IRS by December 31, 1998. Of these 25 people, 1"
2742,"3 retired before their cases were closed or the cases were closed because the individuals retired. At the time of retirement, cases for 2 of the 13 people were pending in the Deputy Commissioner’s office, but both of these individuals had been eligible to retire at the time the complaints against them were originally filed. Cases for the remaining 11 of the 13 people either were still being investigated or were pending in OES, that is, they had not yet reached the Deputy Commissioner’s office. In doing our "
2743,"analyses, we focused on actual retirements and did not reach general conclusions about eligibility to retire. As table 4 shows, of the five executive cases mentioned during the April 1998 hearings, two of the executives were already eligible to retire when the allegations against them were filed. We refer to the executives in the five cases as Executives A through E. One of the two eligible executives— Executive B—was still an IRS employee as of September 30, 1998. The other—Executive D—retired while, in OE"
2744,"S’ view, his case was pending in the Deputy Commissioner’s office. Of the three individuals who were not eligible to retire when the allegations against them were filed, one retired 16 months after his case was closed. The other two executives, one of whom was not found culpable, were still employed by IRS as of September 30, 1998. IRS records showed that the misconduct cases spent from 2 months to 4 years at the Deputy Commissioner level. See appendix III for more details about the five cases. As shown in "
2745,"table 5, on the basis of our random sample, the total processing time for SES misconduct cases averaged 471 days (almost 16 months) from the date the complaint was filed until the case was closed. Most of this time involved OES case analysis and referral to the recommending official for inquiry (214 days, or about 7 months) and investigation by the recommending official (124 days, or more than 4 months). These averages exceeded IRS’ most recent, written case- processing time guidelines, which were 14 and 30"
2746," days, respectively. The average total time from OES’ receipt of a case to the case’s closure was 352 days, compared to a goal of 90 days. As previously mentioned, there was no targeted time frame for the Deputy Commissioner’s review. However, on average, cases spent 42 days at this level. In addition, we found that some cases took a particularly long time to be resolved. For example, in our sample cases, from the date the complaint was filed to the date the case was closed, 8 cases took at least 2 years, a"
2747,"n additional case took more than 3 years, and still another case took longer than 4 years. In 1992, IRS acknowledged that the best way to prevent employees from retiring before their cases closed was to improve timeliness. Although we found no cases in which individuals ineligible to retire when allegations were made retired with the case pending before the Deputy Commissioner, the longer it takes to close cases, the more likely that individuals would retire or resign while their cases were open. Our review"
2748," and a recent IRS task force report identified numerous problems with the executive misconduct case-handling process. These problems included inadequate staffing, poor communication, inaccurate and incomplete records and files, outdated procedures, conflicts over proposed case dispositions, and internal disagreement about case investigations. These problems contributed to the lengthy case-processing times in the available data and case files. According to IRS officials, IRS’ downsizing a few years ago signi"
2749,"ficantly affected OES and field staff resources. From late 1996 through early 1998, OES devoted only one staff year to executive misconduct cases. The staff year was divided between the Director and one employee. In mid-1998, the Director moved to Labor Relations, and the employee retired, leaving OES with no resident expertise. Previously, four or five case experts handled executive cases. In total, according to an IRS official, the office was understaffed for about 18 months, which caused a case backlog. "
2750,"However, the new Chief of OES was able to bring the staffing level up to eight, including two individuals with employee relations backgrounds to act as team leaders. She also used detailees and a technical contractor to reduce the case backlog. The understaffing issue also extended to the labor relations functions in the regions. These functions supplied the staff that recommending officials used to investigate misconduct cases. When the regional offices were consolidated several years ago, they lost their "
2751,"labor relations functions as well as a central repository for program administration and expertise. IRS did not enter executive misconduct cases into ALERTS from late 1996 through early 1998. IRS officials told us they did not have enough labor relations experts to properly track cases on ALERTS because the system required significant detail about each case. Instead, it tracked these cases using logs and monthly briefing reports. OES also used the briefing reports to inform the Deputy Commissioner of case s"
2752,"tatus. IRS officials acknowledged that these independent systems often disagreed with each other about the details and status of the cases. Our review found that poor communication among IRS support staff, the Deputy Commissioner’s office, IRS Inspection, and OIG contributed to case-processing delays. As previously mentioned, the Deputy Commissioner considered one case to be closed with the transfer of the individual, but OES was not told to formally close the case. In another instance, the Deputy Commissio"
2753,"ner told us that he inadvertently allowed a case to be lost in the system. Case information in the ALERTS, OES, and IRS Inspection tracking systems was also found to be inconsistent and inaccurate in many instances. For example, according to IRS officials, cases recorded as “overaged” in the IRS Inspection system were recorded as “closed” by the field offices, leading to confusion among officials as to whether a case was open or closed and where a particular case was pending at a given time. An internal IRS"
2754," study found that many cases had timeliness problems, especially cases that had been referred to IRS from OIG. In certain instances, cases stayed at a particular phase in the process for months before an OES employee inquired about their status. In one instance, for nearly 2 years, OES did not follow up on the status of an OIG investigation. IRS officials told us that these problems occurred primarily because IRS had no contact person for OIG cases before early 1997, and because OES lacked staff resources t"
2755,"o properly monitor cases. Our review identified several concerns surrounding IRS’ files, records, and miscellaneous procedures for executive misconduct cases. Examples included the following: Poor filing. Executive misconduct cases were to be filed alphabetically. Several times, we happened upon misfiled cases only because we went through all of the files to draw our sample. Also, in one instance, a closing letter addressed to the executive involved in a case was filed instead of being mailed to the individ"
2756,"ual. It took nearly 5 months for the error to be discovered and rectified. Missing files and records. We requested eight case files for our review that IRS could not provide, even after more than 4 months. Incomplete files. In some cases, the case files did not document important information, such as dates, transmittal memorandums, and final case dispositions. In one instance, the case file consisted of a single E-mail message. The case was serious enough to warrant suspending the individual. Noncompliance "
2757,"with procedures. In several instances, field staff imposed discipline before the Deputy Commissioner had concurred with the proposed action. Several files contained memorandums to the field staff, reminding them not to impose discipline or close a case until the Deputy Commissioner had indicated his approval. Further, as mentioned in appendix III, a premature disposition occurred in one of our case studies. According to two 1998 IRS internal studies, outdated procedures led to inefficient case handling and "
2758,"confusion as to who was responsible for what. Because of regional and district consolidations and a national office restructuring, the written, 1994 case-handling procedures no longer accurately depicted the proper flow of cases. Although procedures were informally adjusted and work kept moving, it was not efficient. As a result, ad hoc procedures were developed in each region, leading to communication problems between the regions and the national office. IRS recognized this problem in March 1998 and comple"
2759,"ted a draft of new case procedures in July 1998. During that time, the Internal Revenue Service Reform and Restructuring Act of 1998 established the Treasury Inspector General for Tax Administration (TIGTA), and procedures were again revised to accurately depict TIGTA’s role. According to IRS officials, draft procedures were sent to IRS field offices for comment in mid-March 1999. Another factor contributing to case-processing delays was internal disagreement surrounding the proper level of discipline to im"
2760,"pose in particular cases. In our case studies, we noted instances in which internal disputes significantly lengthened case-processing times. OES officials told us that this situation occurred much more frequently in the past. However, over the past few years, IRS has made a concerted effort to resolve disputes below the Deputy Commissioner level. As shown in table 6, in the cases involving Executives C and D, disagreements were serious. In fact, they warranted formal statements of differences. In each of th"
2761,"ese two cases, OES endorsed a stronger level of discipline than that suggested by the recommending official. In the case of Executive E, IRS officials disagreed among themselves over the facts of the case. Although an IRS Internal Security investigation confirmed the allegations, the Deputy Commissioner was not comfortable with the allegations’ correctness. However, he eventually agreed that the allegations had some merit. The Deputy Commissioner issued a letter of counseling 5-½ years after the complaint w"
2762,"as filed, which was more than 4 years after he received the case. As of March 1999, an IRS disciplinary review team was proposing changes to overcome problems with complaints processing. One of the units of its proposed Commissioner’s Review Group was to provide labor relations support for SES and other cases. This unit would have 11 employees. In addition, the Commissioner’s Review Group would have a contractor available to supplement it and support field investigations when management believed help was ne"
2763,"eded. As previously mentioned, the group would also be responsible for overcoming communication and coordination problems among complaint-processing systems. IRS did not comprehensively collect and analyze information on reprisals against IRS employee whistleblowers or on IRS retaliation against taxpayers. Some information was available on the number of IRS-related whistleblowing reprisal cases resolved by the two agencies responsible for considering such cases. For example, one of the agencies, OSC, receiv"
2764,"ed 63 IRS whistleblower reprisal matters over the fiscal years 1995 through 1997 and obtained action from IRS favorable to employees in 4 cases. Concerning allegations of IRS retaliation against taxpayers, we reported in 1996 and 1998 that IRS did not systematically capture information needed to identify, address, and prevent such taxpayer abuse. During this review, we also found limited and incomplete IRS information of past revenue agent retaliation against taxpayers. The IRS Restructuring and Reform Act "
2765,"of 1998 included several provisions related to abuse or retaliation against taxpayers, their representatives, or IRS employees. As of March 1999, the IRS disciplinary review team was proposing how data needed to fulfill the act’s requirements would be assembled. It is against the law to take a personnel action as a reprisal against a whistleblower. More specifically, an employee with personnel authority is not allowed to take, fail to take, or threaten a personnel action against an employee because the empl"
2766,"oyee made a protected disclosure of information. Protected disclosures include disclosures that an employee reasonably believes show a violation of law, rule, or regulation; gross mismanagement; gross waste of funds; or an abuse of authority. If federal employees believe they have been subject to reprisal, they may pursue their complaint through the agency where they work. Alternatively, they may direct their complaint to OSC or MSPB. We could not determine the extent of reprisal against whistleblowers beca"
2767,"use IRS did not track information on whistleblower claims of reprisal. According to a knowledgeable IRS official, until recently, the ALERTS database did not have a code to capture information on retaliation associated with individuals, including reprisal against whistleblowers. However, OSC and MSPB provided the number of complaints filed with them. Under the Whistleblower Protection Act of 1989, OSC’s main role is to protect federal employees, especially whistleblowers, from prohibited personnel practices"
2768,". In this role, OSC is to act in the interests of the employees by investigating their complaints of whistleblower reprisal and initiating appropriate actions. Whistleblowing employees may file a complaint with OSC for most personnel actions that are allegedly based on whistleblowing. As shown in table 7, between fiscal years 1995 and 1997, OSC received 63 whistleblowing reprisal matters related to IRS, compared to 2,092 for the federal government as a whole. However, OSC concluded that a much smaller numbe"
2769,"r of IRS and governmentwide reprisal matters involved potentially valid statutory claims and therefore warranted more extensive investigation. OSC closed cases without further action for many reasons, including lack of jurisdiction over an agency or employee, absence of an element needed to establish a violation, and insufficient evidence. Since IRS had about 100,000 employees during this period, the ratio of matters received to the number of employees was less than a tenth of 1 percent. Similarly, although"
2770," OSC received whistleblowing reprisal matters from throughout the federal government, the number of matters received was an extremely small percentage of the civilian employee federal workforce that numbered almost 2 million people. As table 7 further shows, at times both IRS and the federal government took “favorable actions” as a result of OSC investigations. In general, favorable actions are those that may directly benefit the complaining employee, punish the supervisor involved, or systematically preven"
2771,"t future questionable personnel actions. Agencies take these actions after receiving a request from OSC or with knowledge of a pending OSC investigation. The four favorable actions taken by IRS between fiscal years 1995 and 1997 entailed removing disciplinary letters from a personnel file, correcting an employee’s pay level, presenting a performance award, and promoting an employee retroactively and providing back pay. Employee complaints of whistleblowing reprisal may reach MSPB in two ways. First, if empl"
2772,"oyees do not obtain relief through OSC, they may appeal to MSPB. Second, employees may appeal directly to MSPB without first going through OSC. They may do this for actions including adverse actions, performance-based removals or reductions in grade, denials of within-grade salary increases, reduction-in-force actions, and denials of restoration or reemployment rights. MSPB categorizes both types of appeals as “initial appeals.” MSPB administrative judges throughout the country decide initial appeals. The j"
2773,"udges either dismiss the cases or decide them on their merits. Common reasons for dismissing cases are that they do not raise appealable matters within MSPB’s jurisdiction or that they are not filed within the required time limit. The parties to the dispute also may enter into a voluntary settlement, sometimes with assistance from the judge. Cases not dismissed or settled are adjudicated on their merits. Possible outcomes are that the agency action may be affirmed or reversed or the agency penalty may be mi"
2774,"tigated or otherwise modified. A party dissatisfied with a case decision may file a “petition for review” by MSPB’s three-member board. The board may grant a petition if it determines that the initial decision was based on an erroneous interpretation of law or regulation or if new and material evidence became available. It may dismiss a petition that is untimely, withdrawn by the parties, or moot. Petitions may also be denied or settled. As with OSC, the number of whistleblowing reprisal decisions issued by"
2775," MSPB was very small compared to the size of the IRS and federal workforces. As shown in table 8, for fiscal years 1995 through 1997, MSPB decided 45 initial appeals of whistleblowing reprisal allegations involving IRS. Similar to MSPB’s rulings involving the rest of the federal government, MSPB dismissed the majority of initial appeals involving IRS and denied the majority of petitions for review. However, settlements occurred in more than half of the initial appeals that were not dismissed, which could me"
2776,"an that employees were getting some relief. MSPB also occasionally remanded petitions for review, that is, sent them back for further consideration. MSPB ordered IRS corrective action (canceling an employee’s removal and mandating back pay) in one initial appeal case when due process measures unrelated to reprisal were not followed. To our knowledge, except for this case, MSPB did not reverse any IRS actions regarding alleged whistleblower reprisal matters over the 3-year period. For government initial appe"
2777,"als as a whole, MSPB ordered agency corrective action 11 times and otherwise reversed agency actions in 24 instances. Before the IRS Reform and Restructuring Act of 1998, IRS did not systematically collect information on retaliation against taxpayers. As we have previously reported, IRS information systems were designed for tracking disciplinary and investigative cases or correspondence and not for identifying, addressing, or preventing retaliation against taxpayers. The systems contained data elements that"
2778," encompassed broad categories of employee misconduct, taxpayer problems, and legal action. Information in the systems related to allegations of taxpayer abuse was not easily distinguishable from information on allegations not involving taxpayers. Consequently, we found limited information on potential taxpayer abuse in IRS information systems, as shown in table 9. Recent changes in the law and IRS’ progress on information systems are intended to improve IRS’ ability to determine the extent to which its empl"
2779,"oyees might have retaliated against taxpayers or employees for whistleblowing. Enacted in July 1998, the IRS Restructuring and Reform Act of 1998 included several provisions related to abuse or retaliation against taxpayers, their representatives, or IRS employees. “violations of the Internal Revenue Code of 1986, Department of Treasury regulations, or policies of the Internal Revenue Service (including the Internal Revenue Manual) for the purpose of retaliating against, or harassing, a taxpayer, taxpayer r"
2780,"epresentative, or other employee of the Internal Revenue Service” …or ... “threatening to audit a taxpayer for the purpose of extracting personal gain or benefit.” The act also required the Treasury Inspector General for Tax Administration to include in its annual report summary information about any termination under section 1203 or about any termination that would have occurred had the Commissioner not determined there were mitigating factors. In March 1999, the disciplinary review team previously describ"
2781,"ed was proposing that the Commissioner’s Review Group report these data to the Inspector General as well as broader data on the number of taxpayer complaints and the number of taxpayer abuse and employee misconduct allegations. The group would collect, consolidate, and validate data from existing systems and obtain supplemental information to fill gaps. However, according to the team, the group would have to qualify the initial reports to the Inspector General, waiting for data reliability to be established"
2782,". With respect to allegations of improper zeroing out or reductions of recommended tax by IRS managers, we found no evidence to support the allegations in the eight specific cases referred to us by the IRS employees who testified at the hearings. On the other hand, IRS does not systematically collect data on the extent to which additional taxes recommended by IRS auditors are zeroed out or reduced without a basis in law or IRS procedure. While there are no data on improper reductions, there are data on IRS "
2783,"recommendations of additional tax that were not ultimately assessed. On the basis of such data, we recently reported that the majority of recommended additional taxes was not assessed. We attributed this result to a variety of factors, including the complexity of the tax code and the overreliance on taxes recommended as a measure of audit results. IRS’ process for doing audits of taxpayers’ returns and closing related disputes over additional recommended taxes has several steps. In an audit, an IRS auditor "
2784,"usually reviews the taxpayer’s books and records to determine compliance with tax laws and identify whether the proper amount of tax has been reported. To close an audit, the auditor may recommend increasing, decreasing, or not changing the tax reported. If a taxpayer disagrees with the recommendation at the close of the examination, the taxpayer may request an immediate review by the auditor’s supervisor. If the taxpayer agrees with the recommended additional tax or does not respond to IRS’ notices of exam"
2785,"ination results, IRS assesses the tax. With an assessment notice, IRS formally notifies the taxpayer that the specified amount of tax is owed and that interest and penalties may accrue if the tax is not paid by a certain date. The assessed amount, not the amount an auditor recommends at the end of the audit, establishes the taxpayer’s liability. If the taxpayer disagrees with an examination’s recommendation, the recommendation may be protested to IRS’ Office of Appeals or the dispute can be taken to court. "
2786,"The Office of Appeals settles most of these disputes, and the remainder are docketed for trial. Agreements made in settlements and court decisions determine the assessed part of the disputed tax. The issue of reductions in recommended tax was raised in the Committee’s hearing by IRS auditors who alleged that some supervisors “zeroed out” or reduced the results of audits—that is, the audits were closed with no or reduced recommended additional tax, without a basis in law or IRS procedure. The witnesses furth"
2787,"er alleged that the reasons for zeroing out included retaliating against auditors to diminish their chances for promotion, favoring former IRS employees in private practice, and exchanging zeroing out for bribes and gratuities from taxpayers. IRS has not systematically collected data on the extent to which additional taxes recommended by auditors have been zeroed out or reduced without a basis in law or IRS procedure. In particular, IRS had no data on supervisors’ improperly limiting auditors’ recommendatio"
2788,"ns of additional tax before an audit was closed. However, IRS collects data on the amounts of recommended taxes that were not assessed and the number of examinations closed with no change in tax liability. One of our recent reports illustrates the lack of data on the extent to which supervisors improperly limit auditors’ recommendations of additional tax.We found that an estimated 94 percent of IRS workpapers lacked documentation that the group manager reviewed either the support for adjustments or the repo"
2789,"rt communicating the adjustments to the taxpayer. IRS managers acknowledged that because of competing priorities, they could not thoroughly review workpapers for all audits. IRS officials commented that supervisory reviews were usually completed through other processes, such as reviewing time spent on an audit, conducting on- the-job visits, and discussing cases with auditors. We recommended that the IRS Commissioner require all audit supervisors to document their review of all workpapers to help ensure the"
2790," quality of all examinations. In another recent report, we found that most additional taxes recommended by IRS auditors were not assessed. Table 10 shows taxes recommended by IRS auditors and the percentage of these amounts assessed for audits closed in fiscal years 1992 through 1997. During these years, at most, 41 percent of the additional taxes recommended during audits were assessed. Other IRS data showed that many examinations were concluded with no recommended additional tax. For example, according to"
2791," IRS’ Fiscal Year 1997 Data Book, 24 percent of the corporate examinations completed during fiscal year 1997 were closed with no proposed tax change. Our previous work identified several factors that, in part, explained why recommended additional taxes were not assessed after audits were closed. Factors like these could also explain some actions by supervisors to zero out or reduce recommended tax amounts prior to audits being closed. However, IRS does not collect data on the extent to which these factors, "
2792,"or others, contribute to supervisors’ decisions prior to audits being closed. We reported that the complexity and vagueness of the tax code was one explanation for recommended taxes not being assessed after a corporate audit was closed. Because of the complexity and vagueness of the tax code, IRS revenue agents had to spend many audit hours to find the necessary evidence to clearly support any additional recommended taxes. In addition, differing interpretations in applying the tax code to underlying transac"
2793,"tions increased the likelihood of tax disputes. Because corporate representatives usually prevailed in Appeals or the courts, additional taxes recommended were often not actually assessed. We also reported that aspects of the corporate audit process for large corporations also made it difficult for revenue agents to develop enough support to recommend tax changes that could survive a taxpayer appeal. For example, revenue agents worked alone on complex, large corporation audits with little direct assistance "
2794,"from district counsel or their group managers. In addition, when selecting returns for audit, the agents had little information on previously audited corporations or industry issues to serve as guideposts. Finally, the agents had difficulty obtaining relevant information from large corporations in a timely manner. IRS Internal Audit recently cited several factors that contributed to low productivity, as partially manifested by high no-change rates, in the Manhattan District Office. IRS acknowledged that in "
2795,"1995, it took aggressive action to close old examinations. Also, audit group managers in Manhattan and two other districts did not have enough time to perform workload reviews to ensure quality examinations. Manhattan was below the IRS regional average in complying with IRS audit standards for such things as depth of examinations and workpaper support for conclusions. We also reported that relying too heavily on additional taxes recommended as a measure of audit results might create undesirable incentives f"
2796,"or auditors. We found that audits of large corporations raised concerns that relying on recommended taxes as a performance indicator might encourage auditors to recommend taxes that would be unlikely to withstand taxpayer challenges and thus not be assessed. Supervisors on guard against this incentive, which might have also influenced them, might have been accused of improper zeroing out. In this connection, we recently reported that IRS examination and collection employees perceived that managers considere"
2797,"d enforcement results when preparing annual performance evaluations. IRS is increasing its efforts to ensure that enforcement statistics are not used to evaluate its employees. In commenting on our report on enforcement statistics, the Commissioner stated that IRS was taking several actions to ensure that all employees comply with its policies on the proper use of enforcement statistics. These actions included redrafting applicable sections of the Internal Revenue Manual, establishing a panel responsible fo"
2798,"r answering all questions IRS received on enforcement statistics, and establishing an independent review panel to monitor compliance with restrictions on using enforcement statistics. In addition, in January 1999, IRS proposed establishing a balanced system of organizational measures focusing on quality and production measures, but not including tax enforcement results. Several of the individual allegations made by IRS employees that we reviewed involved the issue of improper zeroing out of additional taxes"
2799," by IRS managers. The eight specific cases in question involved large organizations, and the issues generally related to complex financial transactions. We found no evidence to support the allegations that IRS managers’ decisions to zero out or reduce proposed additional taxes were improper. Instead, we found that the managers acted within their discretion and openly discussed relevant issues with involved IRS agents, technical advisors, and senior management. Ultimately, the decisions were approved by appr"
2800,"opriate individuals and were documented in the files. Several of the cases demonstrated some of the concerns and issues we have raised in our prior work concerning audits of large corporations. For example, the complexity and vagueness of the tax code create legitimate differences in interpretation and administering the tax system creates a tension in seeking a proper balance between the tax administrator’s need for supporting documentation and the taxpayer’s burden in providing such information. IRS has ac"
2801,"knowledged problems related to the EEO climate in its Milwaukee, WI, area offices and over the last few years has moved to address them. After a finding of discrimination in 1995 in the case of one employee, a new district director initiated an internal review, and, afterwards, IRS appointed an outside review team to study the EEO situation. The internal study made 53 recommendations in broad categories related to creating a supportive work culture, understanding issues, preparing employees for promotion, a"
2802,"nd examining the promotion process. The outside study found no discriminatory hiring or promotion practices, but it did make recommendations related to hiring and promotions, among other things. Problems with the EEO climate in IRS’ Midwest District Office, which is headquartered in Milwaukee, date back several years. In 1995, Treasury agreed with an Equal Employment Opportunity Commission administrative judge who found that a district employee was the victim of discrimination and retaliation. Also, Wiscons"
2803,"in congressional offices received EEO-related complaints from IRS employees, and internal and external groups were critical of district EEO matters. According to the District Director who arrived in early 1996, the district was perceived to run on “good-old-boy” connections. Also, the district, which was created in 1996 through the merger of three smaller districts, was facing possible layoffs, further contributing to tense labor-management relations. To try to better identify some of the underlying causes "
2804,"of the problems in IRS Milwaukee area offices, the District Director commissioned an IRS team in April 1996 to assess the EEO climate and make recommendations for corrective action. As part of its review, the team distributed a survey to all Milwaukee area district employees to gather EEO-related perceptions. On the basis of its review of the survey results and other data, in December 1997, the team reported that a lack of trust and goodwill pervaded the work environment. The survey revealed that people in "
2805,"all groups (e.g., males, females, nonminority whites, African Americans, and Hispanics) believed they were less likely than people in other groups to receive promotions, significant work assignments, training opportunities, and formal recognition or rewards. Specific problems cited in the report included little recent diversity training, a belief by certain minority employees that stereotypes negatively affected their treatment, difficulties in widely disseminating information, gaps in EEO communication, no"
2806," formal mentoring program, and much dissatisfaction with how employees were selected for promotion. On the basis of its findings, the assessment team made 53 recommendations in 4 categories. The categories covered creating a supportive culture, creating a greater understanding of issues, preparing employees for promotion, and examining ways that employees were selected for promotion. In a 5th category—examining the representation of minorities in the district—the team made 21 more recommendations that were "
2807,"expected to be suspended pending an IRS analysis of the ramifications of certain court cases. The District Director who commissioned the climate assessment report praised it and the process that produced it. During his tenure, many actions were taken to address the district’s EEO problems. For example, (1) policy statements were issued tolerating no discriminatory behavior, (2) minority representation in the Director’s and EEO offices was increased, (3) the EEO office was given more privacy, (4) baselines w"
2808,"ere set to measure the impact of any improved hiring or promotion policies, (5) minorities were promoted to positions of authority, and (6) training was provided. Goals were also set to open communications with employees, employee and community groups, and the media; treat individual performance cases fairly; and not debate emotionally charged personnel issues in the press. In spite of the climate assessment team’s efforts and the various changes made or planned, the district’s EEO problems persisted. Conse"
2809,"quently, IRS and certain members of the Wisconsin congressional delegation agreed that another team should independently review the situation. To try to preserve its independence, the team purposefully had no representation from IRS. Also for this reason, it solicited no IRS comments on its draft report. The team interviewed more than 100 people and examined over 130 records and files, although it did not scientifically select interviewees or broadly survey all district employees. Team members told us they "
2810,"tried to ensure broad coverage by talking to many people and to all sides of general issues. Moreover, they relied on the climate assessment survey to summarize perceptions. They also, however, relied extensively on anecdotal information without determining its objectivity or accuracy. In August 1998, the team reported, among other things, that (1) many employees had no confidence in the EEO process and feared retaliation if they filed complaints or participated in a way considered adversarial to management"
2811,", (2) separating EEO functions into outreach and traditional EEO/counseling components was not working effectively, (3) the counseling program was in disarray, and (4) confusion existed over the role of Treasury’s Regional Complaint Center in the formal EEO complaint process. Also, although anecdotes collected by the team did not support a sweeping indictment of Milwaukee IRS management practices, the report concluded that, intentionally or not, some practices perpetuated a work environment that was histori"
2812,"cally insensitive to the concerns of female and minority employees. On the basis of its review, the team made recommendations in different areas. For instance, many recommendations dealt with the team’s findings related to the district’s EEO process for resolving issues in a precomplaint stage and its relationship to Treasury’s formal complaint process. The team also made recommendations relating to hiring and promotions in spite of finding no discriminatory pattern or practice in promoting or hiring minori"
2813,"ties or women. The report noted that African Americans in IRS’ Milwaukee and Waukesha, WI, offices appeared underrepresented when compared to the Milwaukee civilian labor force. Although district managers and representatives of employee groups disagreed with many of the issues and assertions in the report, there was general agreement with many of the recommendations. For instance, the head of the diversity office at the time of the study informed us that he agreed with the substance of, had actually taken a"
2814,"ction related to, or would favor forwarding to Treasury many of the report’s recommendations. After the report was released, IRS initiated several significant actions to address problems identified. Chief among these was appointing a new District Director who arrived in the district in mid-November 1998 with a stated commitment to overcome past problems. In that regard, she described to us her intent to open communication channels and deal with disrespect, nastiness, and mean-spiritedness at all levels. She"
2815," emphasized her themes of communication, responsibility, and accountability and told us that on her second day in the district she discussed these themes at an off-site meeting with top managers and union, EEO, and diversity officials. The new District Director also expressed to us her commitment to work with various interest groups. In addition, she combined the district’s EEO and diversity functions, made EEO positions permanent as opposed to rotational, and invited a union representative to be present fo"
2816,"r interviews for a new EEO officer. The new District Director stated that these actions were on the right track, but because of the long and contentious history of EEO problems in the district, improvements and success will take time. She also noted that better communication and cooperation among IRS and the various internal and external stakeholders will be extremely important in dealing with the district’s long-standing problems. In commenting on a draft of this report, the Commissioner of Internal Revenu"
2817,"e described IRS actions on the issues we noted. For instance, he shared our concern that IRS needed to improve how it managed executive misconduct cases. He noted that the recently created Commissioner’s Complaint Processing and Analysis Group, proposed as the Commissioner’s Review Group, will coordinate IRS’ efforts to improve complaint information, especially relating to alleged reprisal against whistleblowers, so that complaints will be promptly and fairly resolved. IRS will also share more information w"
2818,"ith employees and the public on responses to reprisals and other complaints to highlight a message that all employees will be held accountable for their actions. The full text of the Commissioner’s comments is reprinted in appendix IV. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to Senator Daniel Patrick Moynihan, the Ranking Minority Member of the S"
2819,"enate Committee on Finance; the Honorable Charles O. Rossotti, Commissioner of Internal Revenue; other interested congressional committees; and other interested parties. This work was done under the direction of Joseph E. Jozefczyk, Assistant Director for Tax Policy and Administration Issues. Other major contributors are listed in appendix V. If you have questions, you may contact me on (202) 512-9110. We organized our work to bring together information bearing on the five issues contained in your May 21, 1"
2820,"998, request letter. Accordingly, our objectives were to (1) determine if senior Internal Revenue Service (IRS) managers received the same level of disciplinary action as line staff; (2) determine to what extent, if any, the IRS Deputy Commissioner might have delayed action on substantiated cases of employee misconduct until senior managers were eligible to retire; (3) ascertain the extent to which IRS employees might have retaliated against whistleblowers and against taxpayers or their representatives who "
2821,"were perceived as uncooperative; (4) determine the extent to which IRS employees might have zeroed out or reduced the additional tax recommended from examinations for reasons not related to the merits of the examinations; and (5) describe equal employment opportunity (EEO) issues in IRS offices in the Milwaukee metropolitan area. Our scope and methodology related to each of these objectives follow. To compare disciplinary experiences of Senior Executive Service (SES) and lower-level employees, we matched da"
2822,"ta accumulated by sampling senior executives’ misconduct cases against data for lower-level employees extracted from IRS’ broader disciplinary database, the Automated Labor and Employee Relations Tracking System (ALERTS). We compiled general statistics on how long senior executive cases took by collecting information from every second nontax SES case file in IRS’ Office of Executive Support (OES) that was active sometime between January 1, 1996, and June 30, 1998. Our sample included 70 cases. For each case"
2823," in our sample, we extracted and recorded data from the relevant case file. These data included issues involved, processing dates, information on whether allegations were substantiated by investigators, disciplinary actions proposed and adopted, and information related to retirement. For lower-level employees, that is, general schedule (GS) employees, we obtained selected parts of the ALERTS database from IRS. We ran our statistical analyses on ALERTS cases that IRS’ Office of Labor Relations received betwe"
2824,"en January 1, 1996, and June 30, 1998, and on cases that were closed within that period. More specifically, we focused on administrative and IRS Inspection Service cases within ALERTS because they were the categories in which conduct matters were found. Although we did not audit ALERTS, IRS officials told us that this data system had over the years had flaws, but they also told us it was better than it used to be. Because ALERTS was the only source of information available on lower-level disciplinary action"
2825,"s, we used it to the extent that it had information comparable to what we collected on senior-level cases. We also reviewed recent internal IRS and independent studies of IRS’ disciplinary systems and interviewed IRS officials about their plans for revamping the systems. One IRS study we reviewed used the lower-level disciplinary database to assess the effect of IRS’ using a guide to determine appropriate disciplinary action. We also became familiar with the Douglas Factors, shown in appendix II, governing "
2826,"disciplinary actions imposed and asked IRS officials about the differences, if any, they perceived between SES and lower-level cases. We examined the question of alleged delays in dealing with cases of alleged misconduct by senior executives by taking several steps. First, we studied in depth the five specific cases mentioned in the April 1998 hearings. This involved examining investigative and personnel files as well as files maintained by OES. In addition, we interviewed various IRS officials, including t"
2827,"he Deputy Commissioner, about these cases. In addition, we used the 70-case sample of senior executive cases previously described to obtain more broad-based information about any possible delays. Although most of our analyses were based on this sample, to learn more about the cases that took the most time, we also examined every case file IRS could find that appeared on lists of cases awaiting action at OES for at least 90 days during the January 1, 1996, through June 30, 1998, period we were studying. We a"
2828,"lso examined cases that appeared on logs that IRS kept so we could better ensure we were not overlooking cases we did not otherwise encounter for the period. In all, we examined the 70 cases in our sample plus 43 more cases on lists and logs for a total of 113 cases. Because some individuals were involved in more than 1 case, the 113 cases we analyzed covered 83 senior executives. We extracted the same type of information from each of the case files that we extracted from the sampled case files. Examining l"
2829,"ists, logs, and files allowed us to see if recordkeeping practices might have contributed to any delays. To examine the relationship between case-processing and retirement dates, we analyzed where in the case-processing sequence the retirement dates provided us by OES fell. In instances in which OES was also able to readily provide retirement eligibility dates, we considered them in examining processing timeliness as well. To tabulate the number of whistleblowing reprisal cases, we obtained information from"
2830," the Office of Special Counsel (OSC) and the Merit Systems Protection Board (MSPB). We did this for the number of cases involving IRS employees, and for contextual purposes, for cases from throughout the federal government. For governmentwide data, we used either information already published or data generated specifically for us. For IRS data, the agencies did special searches of their databases. We did not audit the OSC or MSPB data systems. Because in the MSPB data system not all IRS cases could be isola"
2831,"ted, we examined actual case rulings that MSPB gathered for us or that we located on the Internet, looking for Department of the Treasury cases that were really IRS cases. For Treasury cases for which MSPB was not able to give us timely information and information was not on the Internet, we asked IRS to identify whether they involved IRS employees. In looking for information on IRS employees who might have retaliated against taxpayers or their representatives who were perceived to be uncooperative, we stud"
2832,"ied our reports on taxpayer abuse. In addition, we interviewed IRS officials and investigated entries under specific codes in various databases to see if relevant issues appeared. Finally, we discussed with IRS officials changes to the information systems that might be coming in the future. Concerning information on the improper zeroing out or reduction of additional tax recommended, we studied our and Inspection Service reports dealing with examination issues related to audit results. We specifically consi"
2833,"dered our and IRS information on the extent to which IRS audit recommendations were actually assessed and the factors that could explain the results. To describe EEO issues in the Milwaukee area, we examined the report of an outside team studying the program and the documents that the team accumulated in doing its work, including an IRS internal EEO climate assessment study. We also interviewed key study participants and affected parties in Washington, D.C., and Milwaukee to better understand what the EEO c"
2834,"limate in the area was, how the study report was done, and what had happened since the report was finished. In addition to addressing the concerns of the Senate Committee on Finance, we planned our work to respond to a mandate in the Conference Report on the IRS Restructuring and Reform Act of 1998. The conferees intended for us to review the study team report. We did our work in Washington, D.C., and Milwaukee between June 1998 and March 1999 in accordance with generally accepted government auditing standa"
2835,"rds. The Douglas Factors are as follows: The nature and seriousness of the offense, and its relation to the employee’s duties, position, and responsibilities, including whether the offense was intentional or technical or inadvertent, or was committed maliciously or for gain, or was frequently repeated; the employee’s job level and type of employment, including supervisory or fiduciary role, contacts with the public, and prominence of the position; the employee’s past disciplinary record; the employee’s past"
2836," work record, including length of service, performance on the job, ability to get along with fellow workers, and dependability; the effect of the offense upon the employee’s ability to perform at a satisfactory level and its effect upon supervisors’ confidence in the employee’s ability to perform assigned duties; consistency of penalty with those imposed upon other employees for the same or similar offenses; consistency of the penalty with the applicable agency table of penalties; the notoriety of the offen"
2837,"se or its impact on the reputation of the agency; the clarity with which the employee was on notice of any rules that were violated in committing the offense, or had been warned about the conduct in question; potential for employee’s rehabilitation; mitigating circumstances surrounding the offense such as unusual job tensions, personality problems, mental impairment, harassment, or bad faith, malice or provocation on the part of others involved in the matter; and the adequacy and effectiveness of alternativ"
2838,e sanctions to deter such conduct in the future by the employee or others. This appendix summarizes information about the five senior-level misconduct allegations cited in the April 1998 Senate Finance Committee hearings. The summaries include information about when the executives were eligible to retire and about whether their eligibility dates might have related to how their cases were processed. We refer to the executives in these five cases as Executives A through E. An IRS employee filed a complaint th
2839,"at Executive A and two other IRS employees violated IRS ethics rules. The IRS employee also alleged that Executive A and the two other employees retaliated against her for reporting the ethics violations. The alleged violations included manipulating a rating system, giving an improper award, falsifying records, and not reporting time card fraud, although Executive A was only alleged to be involved in the last violation. Treasury’s Office of Inspector General (OIG) did not find that Executive A was culpable "
2840,for ethics violations but found that the other two employees were culpable. IRS attorneys reviewing the case concluded that the information in the OIG report did not demonstrate misconduct on Executive A’s part. Executive A was not eligible for retirement when the allegation was made or when the OIG investigation was closed. This case started when the OIG received an anonymous allegation that Executive B abused travel authority. IRS officials reviewed the allegation and found that Executive B had authorized
2841," unjustified travel expenditures. Local management then counseled Executive B that all expenditures needed to be authorized according to IRS procedures. This counseling was confirmed in writing. However, contrary to IRS policy, the counseling took place before the Deputy Commissioner concurred with the proposed case resolution. Executive B was already eligible for retirement at the time the allegation was made. The OIG received an anonymous complaint that Executive C was abusing official travel. The OIG rep"
2842,"ort concluded that Executive C made personal use of some travel benefits earned on government travel. The offices considering the case disagreed among themselves over the facts, the adequacy of the investigation, and the steps to be taken next. The Director of IRS’ Human Resources Division, which was involved in executive misconduct cases earlier in the 1990s, advocated a reprimand, but the recommending official thought that significant circumstances mitigated any disciplinary action. OES prepared a stateme"
2843,"nt of differences and recommended a reprimand. A few months later, the recommending official, finding no abuse and unclear IRS guidance in the area, recommended closing the case without action but cautioning the executive. The next month, the OES official who previously recommended a reprimand sent the case to the Deputy Commissioner, this time agreeing with the recommending official’s position. A few months after that, the OIG reminded the Deputy Commissioner of the previous year’s report and requested app"
2844,"ropriate action. Later, OIG officials told OES that they disagreed with OES’ recommendation to close the case without action. Finally, OES wrote the Deputy Commissioner reaffirming the recommendation for closure without action but with cautioning. The Deputy Commissioner counseled the executive 5-½ years after the case began and 18 months after receiving the case. When we asked the Deputy Commissioner why the final stage of case processing took so long, he had no explanation. Executive C was not eligible fo"
2845,"r retirement at the time the allegation was made or at the time he was counseled. The IRS sexual harassment hotline received an anonymous allegation that Executive D might have harassed a staff member. During the Inspection Service investigation, Executive D refused to answer a question he believed was irrelevant. In its report, the Inspection Service summarized the facts of the investigation and did not conclude whether there was a violation of IRS ethical standards. OES and the recommending official disag"
2846,"reed in their analyses of the report and their resulting recommendations. OES concluded that a 15-day suspension was warranted for the refusal to answer a question even though IRS counsel was not sure a violation really occurred. OES also raised the possibility of reassigning Executive D. The recommending official believed that, in this case, refusal to answer a question did not violate ethics rules, but that counseling was warranted. About 39 months after OES prepared a statement of differences, an Inspect"
2847,"ion Service case-tracking entry indicated that IRS management planned no action on the case. The next year, OES closed the case “administratively” due to the employee’s retirement. The Deputy Commissioner told us that, several years before its administrative close, the case was “de facto closed” with Executive D’s transfer. He stated that the transfer was the appropriate disciplinary action because Executive D was too familiar with local employees. OES did not close the case until the individual retired sev"
2848,"eral years after the transfer. It did not realize that the Deputy Commissioner considered it closed earlier. Also, IRS officials we asked could not find the case file for at least a few months. Executive D was eligible for retirement at the time the allegation was made. The Inspection Service began an investigation after an anonymous caller reported to Internal Security that Executive E abused her authority. More than a year later, the investigation confirmed the allegation, and the Director of the Human Re"
2849,"sources Division recommended that a letter of reprimand be issued. More than 4 years after that, OES recommended sending a letter of reprimand or a letter confirming counseling. The Deputy Commissioner sent Executive E a letter of counseling 5-½ years after the original complaint and more than 4 years after receiving the case. The Deputy Commissioner explained to us that he had not been comfortable with the allegations’ correctness, but that he eventually agreed that the allegations had some merit. He added"
2850," that the delay in closing the case occurred because he allowed the case to be lost in the system. He did not, he said, cover up for Executive E. Specifically, he stated that reduced OES staffing and a poor information system were contributing factors to the case being delayed without a disposition. Executive E was not eligible for retirement at the time the allegation was made or at the time the counseling letter was sent. Lawrence M. Korb, Evaluator-in-Charge, Tax Policy and Administration Leon H. Green, "
2851,"Senior Evaluator Deborah A. Knorr, Senior Evaluator Anthony P. Lofaro, Senior Evaluator Jacqueline M. Nowicki, Evaluator Patricia H. McGuire, Assistant Director MacDonald R. Phillips, Senior Computer Specialist James J. Ungvarsky, Senior Computer Specialist Eric B. Hall, Computer Technician The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, w"
2852,"hen necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To"
2853," receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch-tone phone. A recorded menu will provide information on how to obtain these lists."
2854,"In recent years, a number of factors have led to growing concern about the protection of privacy when personally identifiable information is collected and maintained by the federal government. Recent data breaches of personal information at government agencies, such as the data breach at the Department of Veterans Affairs, which exposed the personal information of 26.5 million veterans and active duty members of the military in May 2006, have raised concerns about identity theft. In addition, increasingly s"
2855,"ophisticated analytical techniques employed by federal agencies, such as data mining, also raise concerns about how personally identifiable information is used and what controls are placed on its use. Concerns such as these have focused attention on the structures agencies have instituted to ensure privacy protections are in place. The major requirements for privacy protection by federal agencies come from two laws, the Privacy Act of 1974 and the E-Gov Act of 2002. The Privacy Act places limitations on age"
2856,"ncies’ collection, disclosure, and use of personal information maintained in systems of records. The act describes a “record” as any item, collection, or grouping of information about an individual that is maintained by an agency and contains his or her name or another personal identifier. It also defines “system of records” as a group of records under the control of any agency from which information is retrieved by the name of the individual or by an individual identifier. The Privacy Act requires that whe"
2857,"n agencies maintain a system of records, they must notify the public by a system-of-records notice: that is, a notice in the Federal Register identifying, among other things, the type of data collected, the types of individuals about whom information is collected, the intended “routine” use of the data, and procedures that individuals can use to review and correct personal information. The act also requires agencies to define and limit their use of covered personal information. In addition, the act requires"
2858," that to the greatest extent practicable, personal information should be collected directly from the subject individual when it may affect an individual’s rights or benefits under a federal program. The E-Gov Act of 2002 also assigns agencies significant responsibilities relating to privacy. The E-Gov Act strives to enhance protection for personal information in government information systems or information collections by requiring that agencies conduct PIAs. A PIA is an analysis of how personal information"
2859," is collected, stored, shared, and managed in a federal system. Furthermore, according to OMB guidance, a PIA is an analysis of how information is handled. Specifically, a PIA is to (1) ensure that handling conforms to applicable legal, regulatory, and policy requirements regarding privacy; (2) determine the risks and effects of collecting, maintaining, and disseminating information in identifiable form in an electronic information system; and (3) examine and evaluate protections and alternative processes f"
2860,"or handling information to mitigate potential privacy risks. Agencies must conduct PIAs (1) before developing or procuring information technology that collects, maintains, or disseminates information that is in a personally identifiable form or (2) before initiating any new data collections involving personal information that will be collected, maintained, or disseminated using information technology if the same questions are asked of 10 or more people. To the extent that PIAs are made publicly available, t"
2861,"hey provide explanations to the public about such things as the information that will be collected, why it is being collected, how it is to be used, and how the system and data will be maintained and protected. OMB is tasked with providing guidance to agencies on how to implement the provisions of these two acts and has done so, beginning with guidance on the Privacy Act, issued in 1975. The guidance provides explanations for the various provisions of the law as well as detailed instructions on how to compl"
2862,"y. OMB’s guidance on implementing the privacy provisions of the E- Gov Act of 2002 identifies circumstances under which agencies must conduct PIAs and explains how to conduct them. We have previously reported on the role of senior privacy officials in the federal government. In 2006, we testified that the elevation of privacy officers to senior positions reflected the growing demands that these individuals faced in addressing privacy challenges on a day-to-day basis. The challenges we identified included en"
2863,"suring compliance with relevant privacy laws, such as the Privacy Act and the E-Gov Act, and controlling the collection and use of personal information obtained from commercial sources. Additionally, in 2007 we reported that the DHS Privacy Office had made significant progress in carrying out its statutory responsibilities under the Homeland Security Act and its related role in ensuring E-Gov Act compliance, but noted that more work remained to be accomplished. We recommended that DHS designate privacy offi"
2864,"cers at key DHS components, implement a department wide process for reviewing Privacy Act notices, establish a schedule for the timely issuance of privacy reports, and ensure that the Privacy Office’s annual reports to Congress contain a specific discussion of complaints of privacy violations. In response, DHS included a discussion of privacy complaints in its most recent annual report; however, the other recommendations have not yet been implemented. Laws and guidance set a variety of requirements for seni"
2865,"or privacy officials at federal agencies. For example, agencies have had a long standing requirement under the Paperwork Reduction Act to assign agency CIOs overall responsibility for privacy policy and compliance with the Privacy Act. In recent years, additional laws have been enacted that also address the roles and responsibilities of senior officials with regard to privacy. Despite much variation, all of these laws require agencies to assign overall responsibility for privacy protection and compliance to"
2866," a senior agency official. In addition, OMB guidance has directed agencies to designate senior officials with overall responsibility for privacy. These laws and guidance set specific privacy responsibilities for these agency officials. These responsibilities can be grouped into six broad categories: (1) conducting PIAs; (2) Privacy Act compliance; (3) reviewing and evaluating the privacy implications of agency policies, regulations, and initiatives; (4) producing reports on the status of privacy protections"
2867,"; (5) ensuring that redress procedures are in place; and (6) ensuring that employees and contractors receive appropriate training. The laws and guidance vary in how they frame requirements in these categories and which agencies must adhere to them. Numerous laws assign privacy responsibility to senior agency officials. The earliest of these laws is the Paperwork Reduction Act of 1980, which, as amended, directs agency heads to assign a CIO with responsibility for carrying out the agency’s information resour"
2868,"ces management activities to improve agency productivity, efficiency, and effectiveness. The act directs agency CIOs to undertake responsibility for implementing and enforcing applicable privacy policies, procedures, standards, and guidelines, and to assume responsibility and accountability for compliance with and coordinated management of the Privacy Act of 1974 and related information management laws. As concerns about privacy have increased in recent years, Congress has enacted additional laws that inclu"
2869,"de provisions addressing the roles and responsibilities of senior officials with regard to privacy. Despite variations, a common thread among these laws, as well as relevant OMB guidance, is that they all require agencies to assign overall responsibility for privacy protection and compliance to a senior agency official. Relevant laws include the following: The Homeland Security Act of 2002 directed the secretary of DHS to designate a senior official with primary responsibility for privacy policy. The Intell"
2870,"igence Reform and Terrorism Prevention Act of 2004 required the Director of National Intelligence to appoint a Civil Liberties Protection Officer and assigned this individual specific privacy responsibilities. The Violence Against Women and Department of Justice Reauthorization Act of 2005 instructed the Attorney General to designate a senior official with primary responsibility for privacy policy. The Transportation, Treasury, Independent Agencies and General Government Appropriations Act of 2005 directed "
2871,"each agency whose appropriations were provided by the act, including the Departments of Transportation and Treasury, to designate a CPO with primary responsibility for privacy and data protection policy. The Implementing Recommendations of the 9/11 Commission Act of 2007 instructed the heads of Defense, DHS, Justice, Treasury, Health and Human Services, and State, as well as the Office of the Director of National Intelligence and the Central Intelligence Agency to designate no less than one senior officer t"
2872,"o serve as a privacy and civil liberties officer. Specific privacy provisions of these laws are summarized in appendix II. A number of OMB memorandums have also addressed the roles and responsibilities of senior privacy officials. In 1999, OMB required agencies to designate a senior official to assume primary responsibility for privacy policy. OMB later reiterated this requirement in its guidance on compliance with the E-Gov Act, in which it directed agency heads to designate an appropriate senior official "
2873,"with responsibility for the coordination and implementation of OMB Web and privacy policy and to serve as the agency’s principal contact for privacy policies. Most recently, in 2005, OMB directed agencies to designate an SAOP with agency wide responsibility for information privacy issues and with responsibility for specific privacy functions, including ensuring agency compliance with all federal privacy laws, playing a central policy-making role in the development of policy proposals that implicate privacy "
2874,"issues, and ensuring that contractors and employees are provided with adequate privacy training. Beginning in 2005, OMB has also issued guidance significantly enhancing longstanding requirements for agencies to report on their compliance with privacy laws. OMB’s 2005 guidance directed agencies to add a new section addressing privacy to their annual reports under the Federal Information Security Management Act (FISMA). SAOPs were assigned responsibility for completion of this section, in which they were to r"
2875,"eport on such things as agency policies and procedures for the conduct of PIAs, agency policies for ensuring adequate privacy training, as well as their own involvement in agency regulatory and policy decisions. In 2006, OMB issued further guidance requiring agencies to include as part of their FISMA reports a section addressing measures for protecting personally identifiable information. This guidance also required that agencies provide OMB with quarterly privacy updates and report all incidents relating t"
2876,"o the loss of or unauthorized access to personally identifiable information. Most recently, OMB directed agencies in 2007 to include in their FISMA reports additional items, such as their breach notification policies, plans to eliminate unnecessary use of Social Security numbers, and plans for reviewing and reducing their holdings of personally identifiable information. These laws and guidance set a variety of requirements for senior officials to carry out specific privacy responsibilities. These responsibi"
2877,"lities can be grouped into the following six key functions: Conduct of PIAs: A PIA is an analysis of how personal information is collected, stored, shared, and managed in a federal system, and is required before developing or procuring information technology that collects, maintains, or disseminates information that is in a personally identifiable form. Several laws assign privacy officials at covered agencies responsibilities that are met in part by performing PIAs on systems that collect, process, or stor"
2878,"e personally identifiable information. This includes the requirements for several agencies to ensure that “technologies sustain and do not erode privacy protections.” Furthermore, OMB guidance requires agency SAOPs to ensure compliance with federal laws, regulations, and policies relating to information privacy, such as the E-Gov Act, which spells out agency PIA requirements. Privacy Act compliance: As previously discussed, the Privacy Act sets a variety of requirements for all federal agencies regarding pr"
2879,"ivacy protection. For example, the act requires that when agencies establish or make changes to a system of records, they must notify the public by a notice in the Federal Register , identifying, among other things, the type of data collected, the types of individuals about whom information is collected, the intended “routine” use of the data, and procedures that individuals can use to review and correct personal information. Several other laws explicitly direct agency privacy officials to ensure that the p"
2880,"ersonal information contained in their Privacy Act systems of records is handled in compliance with fair information practices as set out in the act. Further, OMB guidance assigns agency SAOPs with responsibility for ensuring Privacy Act compliance. Policy consultation: Relevant laws direct senior privacy officials to actively participate in the development and evaluation of privacy-sensitive agency policy decisions. Several specifically task the SAOP with evaluating legislative and regulatory proposals or "
2881,"periodically reviewing agency actions affecting privacy. As agencies develop new policies, senior officials responsible for privacy issues play a key role in identifying and mitigating potential privacy risks prior to finalizing a particular policy decision. Moreover, OMB directed agency SAOPs to undertake a central role in the development of policy proposals that implicate privacy issues. Privacy reporting: Agency senior privacy officials are often required to prepare periodic reports to ensure transparenc"
2882,"y about their activities and compliance with the law. Many laws reviewed required agencies to produce periodic privacy reports to agency stakeholders and Congress. OMB also requires agency SAOPs to report on their privacy activities as part of their annual FISMA reports, including such measures as their total numbers of systems of records, the number of written privacy complaints they have received, and whether a senior official has responsibility for all privacy-related activities. Redress: With regard to "
2883,"federal agencies, the term “redress” generally refers to an agency’s complaint resolution process, whereby individuals may seek resolution of their concerns about an agency action. Specifically, in the privacy context, redress refers to processes for handling privacy inquiries and complaints as well as for allowing citizens who believe that agencies are storing and using incorrect information about them to gain access to and correct that information. The Privacy Act requires that all agencies, with certain "
2884,"exceptions, allow individuals access to their records and the ability to have inaccurate information corrected. Several recent laws also direct senior privacy officials at specific agencies to provide redress by ensuring that they have adequate procedures for investigating and addressing privacy complaints by individuals. Several laws also provide for attention to privacy in a broader context of civil liberties protection. Privacy training: Privacy training is critical to ensuring that agency employees and "
2885,"contractor personnel follow appropriate procedures and take proper precautions when handling personally identifiable information. For example, The Transportation, Treasury, Independent Agencies and General Appropriations Act of 2005 requires senior privacy officials at covered agencies to ensure that employees have adequate privacy training. OMB also requires agency SAOPs to ensure that employees and contractors receive privacy training. In addition to performing key privacy functions, requirements in laws "
2886,"include responsibilities to ensure adequate security safeguards to protect against unauthorized access, use, disclosure, and destruction of sensitive personal information. Generally, this is provided through agency information security programs established under FISMA, and overseen by agency CIOs and chief information security officers (CISO). Moreover, OMB has issued guidance instructing agency heads to establish appropriate administrative, technical, and physical safeguards to ensure the security and conf"
2887,"identiality of records. Figure 1 shows the extent to which laws have requirements that specifically address each privacy function and to which agencies these requirements apply. Agencies have varying organizational structures to address privacy responsibilities. For example, of the 12 agencies we reviewed, 2 had statutorily designated CPOs who also served as SAOPs, 5 designated their agency CIOs as their senior officials, and the others designated a variety of other officials, such as the general counsel or"
2888," assistant secretary for management. Further, not all of the agencies we reviewed had given their designated senior officials full oversight over all privacy-related functions. While 6 agencies had these officials overseeing all key privacy functions, 6 others relied on other organizational units not overseen by the designated senior official to perform certain key privacy functions. The fragmented way in which privacy functions have been assigned to organizational units in these agencies is at least partly"
2889," the result of evolving requirements in law and guidance. As requirements have evolved, organizational responsibilities have been established incrementally to meet them. However, without oversight and involvement in all key privacy functions, SAOPs may be unable to effectively serve as agency central focal points for privacy. Agencies have taken varied approaches to designating senior agency officials with privacy responsibilities. Two of the 12 agencies we reviewed had separate CPOs that were also designat"
2890,"ed as the senior officials for privacy. Five agencies assigned their agency CIOs as SAOPs, and 1 agency assigned its CISO. Lastly, 4 agencies assigned another high-level official, such as a general counsel or assistant secretary for management, as the SAOP. In addition to varying in how they designated senior officials for privacy, agencies also varied in the way they assigned privacy responsibilities to organizational units. Four of the 12 agencies we reviewed (Transportation, DHS, State, and U.S. Agency f"
2891,"or International Development) had one organization primarily responsible for all of the six key privacy functions outlined in the previous section. The remaining 8 agencies (Social Security Administration, Veterans Affairs, Defense, Commerce, Labor, Justice, Treasury, and Health and Human Services) relied on more than one organizational unit to perform privacy functions. Figure 2 summarizes the organizational structures in place at agencies to address the six key privacy functions, including the specific or"
2892,"ganizational units responsible for carrying out each of the key privacy functions. Six of the agencies (DHS, State, Social Security Administration, Transportation, U.S. Agency for International Development, and Veterans Affairs) established privacy structures in which the SAOP oversaw all key privacy functions. For example, DHS’s Privacy Office performed these functions under the direction of the CPO, who was also the department’s SAOP. Similarly, U.S. Agency for International Development’s CISO (also the S"
2893,"AOP) oversaw the agency’s privacy office, which was responsible for all key functions. While more than one organizational unit carried out privacy functions in two cases (Veterans Affairs and the Social Security Administration), all such units were overseen by the senior agency official for privacy. However, six other agencies (Commerce, Health and Human Services, Labor, Transportation, Defense, and Treasury) had privacy management structures in which the SAOP did not oversee all key privacy functions. For "
2894,"two agencies—Justice and Treasury—the SAOP had oversight over all key functions except for redress, which was handled by individual component organizations. For the other four agencies, key functions were divided among two or more organizations, and the senior privacy official did not have oversight of all of them. For example, key privacy functions at Labor were being performed not only by the office of the CIO (who is also the SAOP) but also by the Office of the Solicitor, who is independent of the CIO. L"
2895,"ikewise, the senior official at Commerce was responsible for overseeing conduct of PIAs, policy consultation, and privacy training, while a separate Privacy Act Officer was responsible for Privacy Act compliance. Without full oversight of key privacy functions, SAOPs may be limited in their ability to ensure that privacy protections are administered consistently across the organization. The fragmented way in which privacy functions have been assigned to organizational units in several agencies is at least p"
2896,"artly the result of evolving requirements in law and guidance. As requirements have evolved, organizational responsibilities have been established incrementally to meet them. For example, although the Privacy Act does not specify organizational structures for carrying out its provisions, many agencies established Privacy Act officers to address the requirements of that act and have had such positions in place for many years. In some cases, agencies designated their general counsels to be in charge of ensuri"
2897,"ng that the Privacy Act’s requirements were met. More recently, the responsibility to conduct PIAs under the E-Gov Act frequently has been given to another office, such as the Office of the CIO, because the E-Gov Act’s requirements apply to information technology, which is generally the purview of the CIO. If an SAOP was designated in such agencies without reassigning these responsibilities, that official may not have oversight and involvement in all key privacy activities. Uneven implementation of the Pape"
2898,"rwork Reduction Act also may have contributed to fragmentation of privacy functions. As previously discussed, the Paperwork Reduction Act requires agency CIOs to take responsibility for privacy policy and compliance with the Privacy Act, and thus agencies could ensure they are in compliance with the Paperwork Reduction Act by designating their CIOs as SAOPs. However, 7 out of the 12 agencies we reviewed did not designate their CIOs as SAOPs. Further, if CIOs were designated as agency SAOPs but did not have "
2899,"responsibility for compliance with the Privacy Act—as was the case at Commerce, Labor, and Health and Human Services—the SAOPs would be left without full oversight of key privacy functions. Agencies that have more than one internal organization carrying out privacy functions run the risk that those organizations may not always provide the same protections for personal information if they are not overseen by a central authority. Thus, unless steps are taken to ensure that key privacy functions are under the "
2900,"oversight of the SAOP, agencies may be limited in their ability to ensure that information privacy protections are implemented consistently across their organizations. While agencies have had the responsibility for many years to establish management structures to ensure coordinated implementation of privacy policy and compliance with the Privacy Act, recent laws and guidance have significantly changed requirements for privacy oversight and management. These laws and guidance vary in scope and specificity, b"
2901,"ut they all require the designation of a senior agency official with overall responsibility for privacy protection and compliance with statutory requirements. In adopting varied assignments for key privacy functions, not all agencies gave their SAOPs responsibility for all key privacy functions. As a result, agencies may not be implementing privacy protections consistently. While the particulars of privacy management may vary according to the size of the agency and the sensitivity of its mission, agencies g"
2902,"enerally would likely benefit from having SAOPs that serve as central focal points for privacy matters and have oversight of all key functions, as required by law and guidance. Such focal points can help ensure that agency activities provide consistent privacy protections. In order to ensure that their SAOPs function effectively as central focal points for privacy management, we recommend that the Attorney General and the Secretaries of Commerce, Defense, Health and Human Services, Labor, and Treasury take "
2903,"steps to ensure that their SAOPs have oversight over all key privacy functions. We provided a draft of this report to OMB and to the departments and agencies we reviewed: the Departments of Commerce, Defense, Health and Human Services, Homeland Security, Justice, Labor, State, Treasury, Transportation, and Veterans Affairs, as well as the Social Security Administration and the U.S. Agency for International Development, for review and comment. Five agencies provided no comments on this draft. In comments pro"
2904,"vided via email, the Associate Deputy Assistant Secretary for Privacy and Records Management at Veterans Affairs and the Audit Management Liaison at the Social Security Administration concurred with our assessment and recommendations and provided technical comments, which we incorporated in the final report as appropriate. In oral comments, the Acting Branch Chief of the Information Policy and Technology Branch at OMB also concurred with our assessment and recommendations and provided technical comments, wh"
2905,"ich we incorporated in the final report as appropriate. Commerce and Defense provided written comments that did not state whether they agreed or disagreed with our recommendations; however, both agencies stated that their privacy management structures were adequate. Their comments are reprinted in appendixes II and III respectively. Justice, Labor, and Treasury provided written comments and disagreed with our characterization of their agency SAOPs as not having oversight of all key privacy functions. Their "
2906,"comments are reprinted in appendixes IV, V, and VI respectively. The Chief Information Officer of the Department of Commerce stated that the department agreed with our characterization of the fragmentation that has resulted from recent laws and guidance that have significantly changed requirements for privacy oversight and management. However, she stated that applicable law does not require that the administration of the Privacy Act be consolidated with other privacy functions under the Office of the Chief "
2907,"Information Officer. Law and OMB guidance direct agencies to have a senior agency official, the CIO in the case of the Paperwork Reduction Act, serving as a focal point for privacy and ensuring compliance with the Privacy Act. Clearly establishing a senior official as a focal point for departmental privacy functions aligns with direction provided by law and OMB and would help ensure that the agency provides consistent privacy protections. The Senior Agency Official for Privacy at the Department of Defense s"
2908,"tated that, while privacy responsibilities are divided among the Defense Privacy Office, the CIO, and agency components, the current privacy management structure at Defense has proven to be successful over time. We did not assess the effectiveness of the privacy management structures we reviewed. However, establishing an agency official that serves as a central focal point for departmental privacy functions aligns with direction provided by law and OMB and would help ensure that the agency provides consiste"
2909,nt privacy protections. The Acting Chief Privacy and Civil Liberties Officer at Justice disagreed with our assessment that the department’s SAOP did not have oversight of redress procedures. He stated that the Chief Privacy and Civil Liberties Officer has statutory authority under the Violence Against Women and Department of Justice Reauthorization Act to assume primary responsibility for privacy policy and to ensure appropriate notifications regarding the department’s privacy policies and privacy-related i
2910,"nquiry and complaint procedures. We agree that the Chief Privacy and Civil Liberties officer has the statutory authority and responsibility for the oversight of privacy functions at Justice, including redress. However, our analysis of agency policies and procedures showed that the Chief Privacy and Civil Liberties Officer did not have an established role in oversight of redress procedures. Clearly defining the role of the Chief Privacy and Civil Liberties Officer in the departmental redress procedures would"
2911," help ensure that the SAOP has oversight of this key privacy function. In its comments, the department noted that the Office of Privacy and Civil Liberties was undertaking a review of its orders and guidance to clarify and, as appropriate, strengthen existing authorities to ensure that the department implements thoroughly the Chief Privacy and Civil Liberties Officer authorities. The Chief Information Officer at Labor disagreed with our assessment that the SAOP did not have full oversight of all key privacy"
2912," functions. He stated that Privacy Act compliance, redress, and training were addressed jointly by his office and the Office of the Solicitor. However, our review of Labor’s policies and procedures relating to privacy management showed that a joint oversight management structure had not been established. Rather, we found that while the CIO was responsible for three key privacy functions, the Office of the Solicitor was responsible for the remaining three functions. Clearly defining the role of the SAOP in P"
2913,"rivacy Act compliance, redress, and training would help ensure that the SAOP has oversight of all key privacy functions. The Assistant Secretary for Management at Treasury agreed that the SAOP should have overall responsibility for privacy protection and compliance with statutory requirements and that agencies generally would likely benefit from having SAOPs that serve as central focal points for privacy matters and have oversight of all key functions. The Assistant Secretary noted that as of March 2008, th"
2914,"e department had implemented a new privacy management structure to emphasize the importance of protecting privacy at its highest levels. However, Treasury disagreed with a statement in our draft report that it had realigned its organization in order to ensure that the SAOP had oversight of privacy functions. We recognize that privacy functions, with the exception of redress, were under the oversight of the SAOP prior to the reorganization and accordingly have deleted this statement from the final report. Tr"
2915,"easury also disagreed that its SAOP did not have full oversight of agency redress processes, stating that the department has longstanding regulations that provide departmentwide and bureau-specific policies and procedures relating to redress. While we agree that such redress policies are in place, they do not establish a role for the SAOP. Clearly defining the role of the SAOP in the departmental redress procedures would help ensure that the SAOP has oversight of this key privacy function. Lastly, Treasury "
2916,"stated it submits quarterly reports to Congress on privacy complaint and redress activities. We agree that reporting is an important privacy function; however, it is separate from redress and does not constitute oversight of Treasury redress activities. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Attorney General; the Secretaries of Com"
2917,"merce, Defense, Health and Human Services, Homeland Security, State, Treasury, Labor, Transportation, and Veterans Affairs; the Commissioner of the Social Security Administration; and the Administrator of the U.S. Agency for International Development as well as other interested congressional committees. Copies will be made available at no charge on our Web site, www.gao.gov. If you have any questions concerning this report, please call me at (202) 512-6240 or send e-mail to koontzl@gao.gov. Contact points f"
2918,"or our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. Our objectives were to (1) describe laws and guidance that set requirements for senior privacy officials within federal agencies, and (2) describe the organizational structures used by agencies to address privacy requirements and assess whether senior officials have oversight over key functions. We did not evaluate agency compliance with these"
2919," laws and guidance. To address our first objective, we reviewed and analyzed relevant laws and guidance to determine privacy responsibilities for privacy officials at agencies. We reviewed relevant laws, including the Implementing Recommendations of the 9/11 Commission Act of 2007, the Homeland Security Act of 2002, and others (see app. II for a full listing), which designate senior privacy officials and assign them privacy responsibilities. We also analyzed the Paperwork Reduction Act, which has long-stand"
2920,"ing privacy requirements assigned to agency chief information officers (CIO), and the Office of Management and Budget (OMB) guidance relating to the designation of senior agency officials with privacy responsibilities, such as Memorandum M-05-08. We also analyzed the specific privacy responsibilities identified in these laws and guidance and categorized the key privacy functions they represented. To address our second objective, we identified 12 agencies (Departments of Commerce, Defense, Health and Human S"
2921,"ervices, Homeland Security, Justice, Labor, State, Treasury, Transportation, and Veterans Affairs; the Social Security Administration, and the U.S. Agency for International Development) that either have a statutorily designated privacy officer, have a central mission for which privacy protection is a critical component, or have implemented a unique organizational privacy structure. We analyzed policies and procedures at these agencies, and interviewed senior agency privacy officials to identify the privacy "
2922,"management structures used at each of these agencies and the roles and responsibilities of senior privacy officials. We also compared the varying management structures at these agencies to identify the differences and similarities across agencies in their implementation of these structures. Further, we analyzed agency management structures to determine whether senior privacy officials at each of these agencies had full oversight over all key functions. We conducted our work from September 2007 to May 2008, "
2923,"in Washington, D.C., in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The following are recent laws and their major provisions regarding privacy protection responsibi"
2924,"lities at federal agencies. Section 222 of the Homeland Security Act of 2002, as amended, instructed the secretary of DHS to appoint a senior official with primary responsibility for privacy policy, including the following: ensuring that technologies sustain, and do not erode, privacy protections; ensuring that personal information contained in Privacy Act systems of records is handled in full compliance with fair information practices as set out in the act; evaluating legislative and regulatory proposals a"
2925,"nd conducting privacy impact assessments of proposed rules; coordinating functions with the Officer for Civil Rights and Civil Liberties; preparing an annual report to Congress (without prior comment or amendment by agency heads or OMB); and having authority to investigate and having access to privacy-related records, including through subpoena in certain circumstances. Section 1011 of this act required the Director of National Intelligence to appoint a Civil Liberties Protection Officer and gave this offic"
2926,"er the following functions: ensuring that the protection of civil liberties and privacy is appropriately incorporated into the policies and procedures of the Office of the Director of National Intelligence and the elements of the intelligence community within the National Intelligence Program; overseeing compliance by the Office of the Director of National Intelligence with all laws, regulations, and guidelines relating to civil liberties and privacy; reviewing complaints about abuses of civil liberties and"
2927," privacy in Office of the Director of National Intelligence programs and operations; ensuring that technologies sustain, and do not erode, privacy protections; ensuring that personal information contained in a system of records subject to the Privacy Act is handled in full compliance with fair information practices as set out in that act; conducting privacy impact assessments when appropriate or as required performing such other duties as may be prescribed by the Director of National Intelligence or specifi"
2928,"ed by law. Section 1174 of the Violence Against Women and Department of Justice Reauthorization Act of 2005 instructed the Attorney General to designate a senior official to assume primary responsibility for privacy policy, which included responsibility for advising the Attorney General in the following areas: appropriate privacy protections for the department’s existing or proposed information technology and systems; privacy implications of legislative and regulatory proposals; implementation of policies a"
2929,"nd procedures, including training and auditing, to ensure compliance with privacy-related laws and policies; that adequate resources and staff are devoted to meeting the department’s privacy-related functions and obligations; appropriate notifications regarding privacy policies and inquiry and complaint procedures; and privacy-related reports from the department to Congress and the President, including an annual report to Congress on activities affecting privacy. Section 522 of this act directed each agency"
2930," with appropriations provided by the act to designate a chief privacy officer with primary responsibility for privacy and data protection policy, including ensuring that technology sustains, and does not erode, privacy and that technology used to collect or process personal information allows for continuous auditing of compliance with stated privacy policies and practices; ensuring that personal information contained in Privacy Act systems of records is handled in full compliance with fair information pract"
2931,"ices as defined in the Privacy Act; evaluating legislative and regulatory proposals and conducting privacy impact assessments of proposed rules; preparing an annual report to Congress on activities affecting privacy; ensuring the protection of personal information and information systems from unauthorized access, use, disclosure, or destruction, providing employees with privacy training; and ensuring compliance with privacy and data protection policies. This law amended the National Intelligence Reform Act "
2932,"of 2004 to require the heads of covered agencies to designate no less than one senior officer to serve as a privacy and civil liberties officer. This act applies to the Departments of Defense, Homeland Security, Justice, Treasury, Health and Human Services, and State, as well as the Office of the Director of National Intelligence, and the Central Intelligence Agency. The act requires the senior privacy official to perform the following functions: assisting the agency head in considering privacy and civil li"
2933,"berties issues with regard to anti-terrorism efforts; investigating and reviewing agency actions to ensure adequate consideration of privacy and civil liberties; ensuring that the agency has adequate redress procedures, considering privacy and civil liberties when deciding to retain or enhance coordinating activities, when relevant, with the agency Inspector General; preparing periodic reports, not less than quarterly, to the agency head, Congress, and the Privacy and Civil Liberties Oversight Board. Agenci"
2934,"es covered under this act are also required to establish a direct reporting relationship between the senior privacy official and the agency head. Major contributors to this report were John de Ferrari, Assistant Director; Idris Adjerid; Shaun Byrnes; Matt Grote; David Plocher; Jamie Pressman; and Amos Tevelow."
2935,"FECA is administered by Labor’s Office of Workers’ Compensation Programs (OWCP) and currently covers more than 2.7 million civilian federal employees from more than 70 different agencies. FECA benefits are paid to federal employees who are unable to work because of injuries sustained while performing their federal duties. Under FECA, workers’ compensation benefits are authorized for employees who suffer temporary or permanent disabilities resulting from work-related injuries or diseases. FECA benefits inclu"
2936,"de payments for (1) loss of wages when employees cannot work because of work-related disabilities due to traumatic injuries or occupational diseases; (2) schedule awards for loss of, or loss of use of, a body part or function; (3) vocational rehabilitation; (4) death benefits for survivors; (5) burial allowances; and (6) medical care for injured workers. Wage-loss benefits for eligible workers with temporary or permanent total disabilities are generally equal to either 66-2/3 percent of salary for a worker "
2937,"with no spouse or dependent, or 75 percent of salary for a worker with a spouse or dependent. Wage-loss benefits can be reduced based on employees’ wage-earning capacities when they are capable of working again. OWCP provides wage-loss compensation until claimants can return to work in either their original positions or other suitable positions that meet medical work restrictions. Each year, most federal agencies reimburse OWCP for wage-loss compensation payments made to their employees from their annual ap"
2938,"propriations. If claimants return to work but do not receive wages equal to that of their prior positions—such as claimants who return to work part-time—FECA benefits cover the difference between their current and previous salaries. Currently, there are no time or age limits placed on the receipt of FECA benefits. With the passage of the Federal Employees’ Compensation Act of 1916, members of Congress raised concerns about levels of benefits and potential costs of establishing a program for injured federal "
2939,"employees. As Congress debated the act’s provisions in 1916 and again in 1923, some congressional members were concerned that a broad interpretation threatened to make the workers’ compensation program, in effect, a general pension. The 1916 act granted benefits to federal workers for work-related injuries. These benefits were not necessarily granted for a lifetime; they could be suspended or terminated under certain conditions. Nevertheless, the act placed no age or time limitations on injured workers’ rec"
2940,"eipt of wage compensation. The act did contain a provision allowing benefits to be reduced for older beneficiaries. The provision stated that compensation benefits could be adjusted when the wage-earning capacity of the disabled employee would probably have decreased on account of old age, irrespective of the injury. While the 1916 act did not specify the age at which compensation benefits could be reduced, the 1949 FECA amendments established 70 as the age at which a review could occur to determine if a re"
2941,"duction were warranted. In 1974, Congress again eliminated the age provision. Typically, federal workers participate in one of two retirement systems which are administered by the Office of Personnel Management (OPM): the Civil Service Retirement System (CSRS), or the Federal Employees’ Retirement System (FERS). Most civilian federal employees who were hired before 1984 are covered by CSRS. Under CSRS, employees generally do not pay Social Security taxes or earn Social Security benefits. Federal employees f"
2942,"irst hired in 1984 or later are covered by FERS. All federal employees who are enrolled in FERS pay Social Security taxes and earn Social Security benefits. Federal employees enrolled in either CSRS or FERS also may contribute to the Thrift Savings Plan (TSP); however, only employees enrolled in FERS are eligible for employer matching contributions to the TSP. Under both CSRS and FERS, the date of an employee’s eligibility to retire with an annuity depends on his or her age and years of service. The amount "
2943,"of the retirement annuity is determined by three factors: the number of years of service, the accrual rate at which benefits are earned for each year of service, and the salary base to which the accrual rate is applied. In both CSRS and FERS, the salary base is the average of the highest three consecutive years of basic pay. This is often called “high-3” pay. According to CRS, an injured employee cannot contribute to Social Security or to the TSP while receiving workers’ compensation because Social Security"
2944," taxes and TSP contributions must be paid from earnings, and workers’ compensation payments are not classified as earnings under either the Social Security Act or the Internal Revenue Code. As a result, the employee’s future retirement income from Social Security and the TSP may be reduced. Legislation passed in 2003 increased the FERS basic annuity from 1 percent of the individual’s high-3 average pay to 2 percent of high-3 average pay while an individual receives workers’ compensation, which would help re"
2945,"place income that may have been lost from lower Social Security benefits and reduced income from TSP. Concerns that beneficiaries remain in the FECA program past retirement age have led to several proposals to change the program. Under current rules, an age-eligible employee with 30 years of service covered by FERS could accrue pension benefits that are 30 percent of their average high-3 pay and under CSRS could accrue almost 60 percent of their high-3 average pay. Under both systems benefits can be taxed. "
2946,"FECA beneficiaries can receive up to 75 percent of their preinjury income, tax- free, if they have dependents and 66-2/3 percent without dependents. Because returning to work could mean giving up a FECA benefit for a reduced pension amount, concerns have been raised by some that the program may provide incentives for beneficiaries to continue on the program beyond retirement age. In 1996, we reported on two alternative proposals to change FECA benefits once beneficiaries reach the age at which retirement ty"
2947,"pically occurs: (1) converting FECA benefits to retirement benefits, and (2) changing FECA wage-loss benefits to a newly established FECA annuity. The first proposal would convert FECA benefits for workers who are injured or become ill to regular federal employee retirement benefits at retirement age. In 1981, the Reagan administration proposed comprehensive FECA reform, including a provision to convert FECA benefits to retirement benefits at age 65. The proposal included certain employee protections, one o"
2948,"f which was calculating retirement benefits on the basis of the employee’s pay at time of injury (with adjustments for regular federal pay increases). According to proponents, this change would improve agencies’ operations because their discretionary budgets would be decreased by FECA costs, and, by reducing caseload, it would allow Labor to better manage new and existing cases for younger injured workers. A bill recently introduced in Congress includes a similar provision, requiring FECA recipients to reti"
2949,"re upon reaching retirement age as defined by the Social Security Act. The second proposal, based on proposals that several agencies developed in the early 1990s, would convert FECA wage-loss compensation benefits to a FECA annuity benefit. These agency proposals would have reduced FECA benefits by a set percentage two years after beneficiaries reached civil service retirement eligibility. Proponents of this alternative noted that changing to a FECA annuity would be simpler than converting FECA beneficiarie"
2950,"s to the retirement system, would result in consistent benefits, and would allow benefits to remain tax-free. Proponents also argued that a FECA annuity would keep the changed benefit within the FECA program, thereby avoiding complexities associated with converting FECA benefits under CSRS and FERS. For example, converting to retirement benefits could be difficult for some employees who currently are not participating in a federal retirement plan. Also, funding future retirement benefits could be a problem "
2951,"if the FECA recipient has not been making retirement contributions. Labor recently suggested a change to the FECA program that would reduce wage-loss benefits for Social Security retirement-aged recipients to 50 percent of their gross salary at the date of injury, but would still be tax-free. Labor’s proposal would still keep the changed benefit within the FECA program. In our 1996 report, however, we identified a number of issues with both alternative proposals. For example, some experts and other stakehol"
2952,"ders we interviewed noted that age discrimination posed a possible legal challenge and that some provisions in the law would need to be addressed with new statutory language. Others noted that benefit reductions would cause economic hardships for older beneficiaries. Some noted that without the protections of the workers’ compensation program, injured employees who have few years of service or are ineligible for retirement might suffer large reductions in benefits. Moreover, opponents to change also viewed "
2953,"reduced benefits as breaking the workers’ compensation promise. Another concern was that agencies’ anticipation of reduced costs for workers’ compensation could result in fewer incentives to manage claims or to develop safer working environments. We also discussed in our 1996 report a number of issues that merit consideration in crafting legislation to change benefits for older beneficiaries. Going forward, Congress may wish to consider the following questions as it assesses and considers current reform pro"
2954,"posals: (1) How would benefits be computed? (2) Which beneficiaries would be affected? (3) What criteria, such as age or retirement eligibility, would initiate changed benefits? (4) How would other benefits, such as FECA medical and survivor benefits, be treated and administered? (5) How would benefits, particularly retirement benefits, be funded? The retirement conversion alternative raises complex issues, arising in part from the fact that conversion could result in varying retirement benefits, depending "
2955,"on conversion provisions, retirement systems, and individual circumstances. A key issue is whether or not benefits would be adjusted. The unadjusted option would allow for retirement benefits as provided by current law. The adjusted option would typically ensure that time on the FECA rolls was treated as if the beneficiary had continued to work. This adjustment could (1) credit time on FECA for years of service or (2) increase the salary base (for example, increasing salary from the time of injury by either"
2956," an index of wage increases or inflation, assigning the current pay of the position, or providing for merit increases and possible promotions missed due to the injury). Determining the FECA annuity would require deciding what percentage of FECA benefits the annuity would represent. Under previous proposals benefits would be two-thirds of the previous FECA compensation benefits. Provisions to adjust calculations for certain categories of beneficiaries also have been proposed. Under previous proposals, partia"
2957,"lly disabled individuals receiving reduced compensation would receive the lesser of the FECA annuity or the current reduced benefit. FECA annuity computations could also be devised to achieve certain benchmarks. For example, the formula for a FECA annuity could be designed to approximate a taxable retirement annuity. One issue concerning a FECA annuity is whether it would be permanent once set, or whether it would be subject to adjustments based on continuing OWCP reviews of the beneficiary’s workers’ compe"
2958,"nsation claim. Currently most federal employees are covered by FERS, but conversion proposals might have to consider differences between FERS and CSRS participants, and participants in any specialized retirement systems. Other groups that might be uniquely affected include injured workers who are not eligible for federal retirement benefits, individuals eligible for retirement conversion benefits, but not vested; and individuals who are partially disabled FECA recipients but active federal employees. With r"
2959,"egard to vesting, those who have insufficient years of service to be vested might be given credit for time on the FECA rolls until vested. There is also the question of whether changes will focus on current or future beneficiaries. Exempting current beneficiaries delays receipt of full savings from FECA cost reductions to the future. One option might be a transition period for current beneficiaries. For example, current beneficiaries could be given notice that their benefits would be changed after a certain"
2960," number of years. Past proposals have used either age or retirement eligibility as the primary criterion for changing benefits. If retirement eligibility is used, consideration must be given to establishing eligibility for those who might otherwise not become retirement eligible. This would be true for either the retirement conversion or the annuity option. At least for purposes of initiating the changed benefit, time on the FECA rolls might be treated as if it counted for service time toward retirement eli"
2961,"gibility. Deciding on the criteria that would initiate change in benefits might require developing benchmarks. For example, if age were the criteria, it might be benchmarked against the average age of retirement for federal employees, or the average age of retirement for all employees. Another question is whether to use secondary criteria to delay changed benefits in certain cases. The amount of time one has received FECA benefits is one possible example of secondary criteria. Secondary criteria might prove"
2962," important in cases where an older, injured worker may face retirement under the retirement conversion option even when recovery and return to work is almost assured. In addition to changing FECA compensation benefits, consideration should be given to whether to change other FECA benefits, such as medical benefits or survivor benefits. For example, the 1981 Reagan administration proposal would have ended survivor benefits under FECA for those beneficiaries whose benefits were converted to the retirement sys"
2963,"tem. Another issue to consider is who will administer benefits if program changes shift responsibilities—OPM administers retirement annuity benefits for federal employees, and Labor currently administers FECA benefits. Although it may be advantageous to consolidate case management in one agency, such as OPM, if the retirement conversion alternative were selected, the agency chosen to manage the case might have to develop an expertise that it does not currently possess. For example, OPM might have to develop"
2964," expertise in medical fee schedules to control workers’ compensation medical costs. For the retirement conversion alternative, another issue is the funding of any retirement benefit shortfall. Currently, agencies and individuals do not make retirement contributions if an individual receives FECA benefits; thus, if retirement benefits exceed those for which contributions have been made, retirement funding shortfalls would occur. Retirement fund shortfalls can be funded through payments made by agencies at th"
2965,"e time of conversion or prior to conversion. First, lump-sum payment could be made by agencies at the time of the conversion. This option has been criticized because the start-up cost was considered too high. Second, shortfalls could be covered on a pay-as-you-go basis after conversion. In this approach, agencies might make annual payments to cover the shortfall resulting from the conversions. Third, agencies’ and employees’ contributions to the retirement fund could continue before conversion, preventing s"
2966,"hortfalls at conversion. Proposals for the FECA annuity alternative typically keep funding under the current FECA chargeback system. This is an annual pay-as-you-go system with agencies paying for the previous year’s FECA costs. In total, these five questions provide a framework for considering proposals to change the program. In conclusion, FECA continues to play a vital role in providing compensation to federal employees who are unable to work because of injuries sustained while performing their duties. H"
2967,"owever, continued concerns that the program provides incentives for beneficiaries to remain on the program at, and beyond, retirement age have led to calls for the program to be reformed. Although FECA’s basic structure has not significantly been amended for many years, there continues to be interest in reforming the program. Proposals to change benefits for older beneficiaries raise a number of important issues, with implications for both beneficiaries and federal agencies. These implications warrant caref"
2968,"ul attention to outcomes that could result from any changes. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the committee may have at this time. For further information about this testimony, please contact Daniel Bertoni at (202) 512-7215 or bertonid@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In addition to the individual named above, ke"
2969,"y contributors to this testimony include Patrick Dibattista, H. Brandon Haller, Michelle Bracy, Tonnye Conner-White, James Rebbe, Kathleen van Gelder, and Melinda Bowman. Federal Workers’ Compensation: Better Data and Management Strategies Would Strengthen Efforts to Prevent and Address Improper Payments. GAO-08-284. Washington, D.C.: February 26, 2008. Postal Service Employee Workers’ Compensation Claims Not Always Processed Timely, but Problems Hamper Complete Measurement. GAO-03-158R. Washington, D.C.: D"
2970,"ecember 20, 2002. Oversight of the Management of the Office of Workers’ Compensation Programs: Are the Complaints Justified. GAO-02-964R. Washington, D.C.: July 19, 2002. U.S. Postal Service: Workers’ Compensation Benefits for Postal Employees. GAO-02-729T. Washington, D.C.: May 9, 2002. Office of Workers’ Compensation Programs: Further Actions Are Needed to Improve Claims Review. GAO-02-725T. Washington, D.C.: May 9, 2002. Federal Employees’ Compensation Act: Percentages of Take-Home Pay Replaced by Compen"
2971,"sation Benefits. GGD-98-174. Washington, D.C.: August 17, 1998. Federal Employees’ Compensation Act: Issues Associated With Changing Benefits for Older Beneficiaries. GGD-96-138BR. Washington, D.C.: August 14, 1996. Workers’ Compensation: Selected Comparisons of Federal and State Laws. GGD-96-76. Washington, D.C.: April 3, 1996. Federal Employees’ Compensation Act: Redefining Continuation of Pay Could Result in Additional Refunds to the Government. GGD-95-135. June 8, 1995. This is a work of the U.S. govern"
2972,"ment and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately."
2973,"DOD is perhaps the largest and most complex organization in the world and spends billions of dollars each year to maintain key business operations intended to support the warfighter, including systems and processes related to the management of contracts, finances, the supply chain, support infrastructure, and weapons systems acquisition. We have reported for years that inefficiencies in these business operations result in reduced efficiencies, ineffective performance, inadequate accountability, and lack of "
2974,"transparency. Despite various reform initiatives, DOD continues to face weaknesses in business operations that not only adversely affect the reliability of reported financial data, but also the economy, efficiency, and effectiveness of DOD’s operations. To address long-standing management problems, we began our “high-risk” program in 1990 to identify and help resolve serious weaknesses in areas that involve substantial resources and provide critical services to the public. Historically, high-risk areas have"
2975," been designated because of traditional vulnerabilities related to their greater susceptibility to fraud, waste, abuse, and mismanagement. As our high-risk program has evolved, we have increasingly used the high-risk designation to draw attention to areas associated with broad-based transformation needed to achieve greater economy, efficiency, effectiveness, accountability, and sustainability of selected key government programs and operations. For example, we first added DOD’s overall approach to business t"
2976,"ransformation to our high-risk list in 2005 because DOD had not taken the necessary steps to achieve and sustain business reform on a broad, strategic, departmentwide, and integrated basis. Furthermore, DOD continues to dominate the high-risk list. Specifically, DOD currently bears responsibility, in whole or in part, for 15 of our 27 high-risk areas. Of the 15 high-risk areas, the 8 DOD-specific high-risk areas cut across all of DOD’s major business areas. Table 1 lists the 8 DOD-specific high-risk areas. "
2977,"Also, as shown in table 1, many of these management challenges have been on the high-risk list for a decade or more. In addition, DOD shares responsibility for 7 governmentwide high-risk areas. Collectively, these high-risk areas relate to most of DOD’s major business operations that directly support the warfighter, including how servicemembers get paid, the benefits provided to their families, and the availability and condition of the equipment they use both on and off the battlefield. Congress passed legi"
2978,"slation that codified many of our prior recommendations related to DOD business systems modernization; this includes the establishment of various bodies and plans. Also as required by Congress, DOD commissioned studies examining the feasibility and advisability of establishing a CMO to oversee the department’s business transformation process. As part of this effort, the Defense Business Board, an advisory panel, examined various options and, in May 2006, endorsed the CMO concept. In December 2006, the Insti"
2979,"tute for Defense Analyses also endorsed the need for a CMO position at DOD. In May 2007, DOD submitted a letter to Congress outlining its position regarding a CMO at DOD, stating that the Deputy Secretary of Defense should assume the CMO responsibilities. Although DOD has made progress in establishing a management framework upon which to develop overall business transformation efforts, this framework currently focuses on business systems modernization rather than broader business transformation efforts. Con"
2980,"gress included provisions in the National Defense Authorization Acts for Fiscal Years 2005 and 2006 to assist DOD in addressing financial management and business systems modernization challenges—two of our high-risk areas— and DOD’s leadership has taken steps to comply with these provisions. For example, to improve financial management, DOD issued the initial Financial Improvement and Audit Readiness Plan in December 2005, which was last updated in June 2007, to guide financial improvement and financial aud"
2981,"it efforts within the department. Also, to address its business systems modernization challenges, DOD has established the following: Defense Business Systems Management Committee: The Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 required DOD to set up a committee to review and approve major updates of the defense business enterprise architecture—or transformation blueprint— and the obligation of funds for defense systems modernization. Prior to the enactment of this legislation, "
2982,"we reported that DOD had not established a governance structure and the process controls needed to ensure ownership and accountability of business systems investments. Subsequently, Congress directed DOD to establish the Defense Business Systems Management Committee to oversee DOD business transformation. In February 2005, the Deputy Secretary of Defense chartered the Defense Business Systems Management Committee, which consists of senior defense military and civilian leaders. The Deputy Secretary of Defens"
2983,"e serves as the chair of this committee and the Under Secretary of Defense for Acquisition, Technology, and Logistics serves as the vice chair of the committee. The committee is intended to establish strategic direction and plans for DOD’s business mission, oversee implementation of systemic performance in DOD’s business operations, approve business transformation plans and initiatives, ensure that funds are obligated for defense business systems modernization in accordance with the law, and recommend polic"
2984,"ies and procedures to the Secretary of Defense that enable efficient business operations throughout DOD. Investment review boards: The Ronald W. Reagan National Defense Authorization Act also required DOD to set up investment review boards to evaluate systems’ consistency with the business enterprise architecture and to provide oversight of the investment review process for business systems. Prior to the establishment of investment review boards, we had reported that billions of dollars were being spent on "
2985,business systems investments with little oversight. DOD established the investment review boards in 2005 to serve as the oversight and investment decision-making bodies for business system investments in their respective areas of responsibility. These boards assess modernization investments over $1 million and determine how the investments will improve processes and support the warfighter. Business Transformation Agency: DOD established the Business Transformation Agency in October 2005 with the intent for 
2986,"it to support the Defense Business Systems Management Committee and coordinate business transformation by ensuring adoption of DOD-wide information and process standards as defined in the business enterprise architecture. The Business Transformation Agency reports to the Under Secretary of Defense for Acquisition, Technology, and Logistics in his capacity as the vice chair of the Defense Business Systems Management Committee. The Business Transformation Agency’s charter includes responsibilities such as ide"
2987,"ntifying urgent warfighter needs that can be addressed by business solutions, articulating the strategic vision for business transformation, exercising executive oversight for DOD-wide programs, and implementing plans and tools needed to achieve DOD business transformation. In addition, the department has developed various tools and plans to enable these entities to manage its business systems modernization efforts. The tools and plans the Defense Business Systems Management Committee approves, the Business"
2988," Transformation Agency implements, and the investment review boards use to assess compliance include the following: Business enterprise architecture: DOD’s business enterprise architecture is a tool or a blueprint to guide and constrain investments in DOD organizations and systems as they relate to business operations. The business enterprise architecture provides the thin layer of corporate policies, capabilities, standards, and rules and focuses on providing tangible outcomes for a limited set of enterpri"
2989,"se-level (DOD-wide) priorities, and the components are responsible under the department’s tiered accountability approach for defining their respective component- level architectures that are aligned with the corporate business enterprise architecture. According to DOD, subsequent releases of the business enterprise architecture will continue to reflect this federated approach and will define enforceable interfaces to ensure interoperability and information flow to support decision making at the appropriate "
2990,"levels. Enterprise transition plan: DOD guidance states that the enterprise transition plan is intended to lay out a road map for achieving DOD’s business transformation by implementing changes to technology, processes, and governance consistent with DOD’s business enterprise architecture. According to DOD, the enterprise transition plan is intended to summarize all levels of transition planning information (milestones, metrics, resource needs, and system migrations) as an integrated product for communicati"
2991,"ng and monitoring progress—resulting in a consistent framework for setting priorities and evaluating plans, programs, and investments. The enterprise transition plan contains time-phased milestones, performance metrics, and a statement of resource needs for new and existing systems that are part of the business enterprise architecture. Business Transformation Agency officials said that they see the enterprise transition plan as the highest level plan for DOD business transformation. DOD released its first e"
2992,"nterprise transition plan in September 2005. DOD updates the enterprise transition plan twice a year, once in March as part of DOD’s annual report to Congress and once in September. While our prior work has acknowledged this progress, we also have reported on limitations. For example, while the latest version of the business enterprise architecture focuses on DOD-wide corporate policies, capabilities, rules, and standards, which are essential elements to meeting legislative requirements, this version has ye"
2993,"t to be augmented by the DOD component organizations’ subsidiary architectures that are also essential to meeting these requirements and the department’s goal of having a federated family of architectures. While the latest version of the enterprise transition plan provides performance measures for the enterprise and component programs, including key milestones (such as initial operating capability), it does not include other important information needed to understand the sequencing of these business investm"
2994,"ents and does not address DOD’s complete portfolio of business system investments. While the department has established and begun implementing the investment review structures and processes that are consistent with legislation, it has yet to fully define the related portfolio-based information technology investment management practices. Furthermore, DOD’s efforts have been mainly focused on business systems modernization. During our review, we examined key documents, such as DOD’s enterprise transition plan"
2995,", business transformation guidance, and minutes from the meetings of the Defense Business Systems Management Committee, and our analysis found that DOD has not yet expanded the focus beyond business systems. In addition, DOD officials stated that the Defense Business Systems Management Committee has mainly focused on providing oversight for business systems investments, rather than overall business transformation efforts, because this is what legislation has required it to do. Similarly, DOD officials state"
2996,"d that the enterprise transition plan also is focused on business systems and does not provide enough detail about overall business transformation. DOD officials added that the Business Transformation Agency is also limited to focusing mainly on business systems because its role is to support the Defense Business Systems Management Committee, which primarily provides oversight for business systems initiatives as specified in the Ronald W. Reagan National Defense Authorization Act. Additionally, DOD has not "
2997,"clearly defined or institutionalized interrelationships, roles and responsibilities, or accountability for establishing a management framework for overall business transformation. For example, the Deputy Secretary of Defense chairs an advisory board called the Deputy’s Advisory Working Group, which DOD officials have stated has a role in overall business transformation. The Deputy’s Advisory Working Group started in 2006 as an ad hoc committee, co-chaired by the Deputy Secretary of Defense and Vice Chairman"
2998," of the Joint Staff, to manage the planning process for DOD’s strategic plan, the Quadrennial Defense Review. According to DOD officials, this working group is to provide departmentwide strategic direction on various issues that it chooses. Many of the same individuals who sit on the Defense Business Systems Management Committee also serve on the Deputy’s Advisory Working Group. However, opinions differ within DOD as to whether the committee or the working group will function as the primary body responsible"
2999," for overall business transformation, and the relationship between these two entities has not been formalized. In addition, opinions differ between the two entities regarding the definition of DOD’s key business areas, with the Defense Business Systems Management Committee and the Business Transformation Agency using a broader definition of business processes than the Deputy’s Advisory Working Group and its supporting organizations. These differences hinder DOD’s ability to leverage the business systems mod"
3000,"ernization management framework to fully address broader business transformation efforts. Until the department institutionalizes a management framework that encompasses all aspects of business transformation, including establishing overall responsibility for and defining what is included in business transformation, DOD will be unable to integrate related initiatives into a sustainable, enterprisewide approach and to resolve weaknesses in business operations that we have shown are at high risk of waste, frau"
3001,"d, and abuse. DOD faces two critical challenges to achieving successful business transformation. First, DOD does not have a comprehensive, integrated, and enterprisewide plan or set of linked plans supported by a planning process that sets a strategic direction for overall business transformation efforts and monitors progress. Second, DOD lacks a full-time leadership position dedicated solely to the planning, integration, and execution of business transformation efforts. Until the department establishes a c"
3002,"omprehensive, integrated planning process and establishes full-time sustained leadership, DOD will be challenged to integrate related initiatives into a sustainable, enterprisewide approach and to resolve weaknesses in business operations that we have shown are at high risk of waste, fraud, and abuse. DOD continues to be challenged in its business transformation efforts because it has not developed a comprehensive, integrated, and enterprisewide action plan or set of linked plans for business transformation"
3003," that is supported by a comprehensive planning process. Such a plan or set of plans would help set strategic direction for overall business transformation efforts, prioritize initiatives and resources, and monitor progress through the establishment of performance goals, objectives, and rewards. Our prior work has shown that this type of plan should cover all of DOD’s key business functions; contain results-oriented goals, measures, and expectations that link institutional, unit, and individual performance g"
3004,"oals and expectations to promote accountability; and establish an effective process and related tools for implementation and oversight. Furthermore, such an integrated business transformation plan would be instrumental in establishing investment priorities and guiding the department’s key resource decisions. Our analysis shows that DOD does not have an integrated plan in place and has not fully developed a comprehensive planning process. For example, we analyzed the enterprise transition plan and determined"
3005," that the goals and objectives in the enterprise transition plan were not clearly linked to the goals and objectives in the Quadrennial Defense Review, DOD’s highest level strategic plan. In addition, the enterprise transition plan is not based on a strategic planning process. For example, it does not provide a complete assessment of DOD’s progress in overall business transformation efforts aside from business systems modernization. Furthermore, while the enterprise transition plan contains goals and milest"
3006,"ones related to business systems, the plan does not contain results- oriented goals and measures that assess overall business transformation. Finally, we determined that DOD’s business transformation efforts are currently guided by multiple plans that are developed and maintained by various offices within DOD. DOD officials acknowledged our analysis that DOD does not have an integrated plan in place. Business Transformation Agency officials see the enterprise transition plan as the highest level plan for bu"
3007,siness transformation but acknowledge that it does not currently provide an assessment of the department’s overall approach to business transformation. Business Transformation Agency officials also acknowledged that they are challenged to work across various offices to develop an integrated planning process and results-oriented measures to assess overall business transformation. These officials added that DOD is starting to develop a family of linked plans to guide and monitor business transformation. Speci
3008,"fically, DOD’s March 2007 update to the enterprise transition plan includes an approach that is intended to align other business plans with the enterprise transition plan, establish working relationships among plan owners across DOD’s major business areas, and identify interdependencies among their products. However, according to Business Transformation Agency officials and others within DOD, the alignment currently involves only ensuring data consistency across DOD’s major business plans and does not yet e"
3009,"ncompass the full integration they envision. In addition, it is not clear from discussions with these officials which committee or office within DOD will be responsible for developing a family of linked plans and a supporting comprehensive planning process. The Defense Science Board, the Defense Business Board, and the Institute for Defense Analyses agree with our analysis. These organizations have issued reports supporting DOD’s need for an integrated planning process for business transformation. In a Febr"
3010,"uary 2006 report on military transformation, the Defense Science Board concluded that DOD needed, but did not have, a multiyear business plan capable of relating resources to mission purposes. In addition, the report said that confusion existed over roles in identifying needs, proposing and choosing solutions, executing programs, and overseeing performance. The Defense Science Board concluded that an effective business plan would give decision makers a clear understanding of the impact of resource decisions"
3011,". The Defense Business Board arrived at a similar conclusion. In a May 2006 report on governance at DOD, the Defense Business Board reported that a challenge facing DOD’s business activities was the move from a hierarchical, functional approach to an enterprisewide, cross-functional, horizontal approach. The Defense Business Board recommended that DOD develop a strategic plan that contains clear goals and supporting objectives, including outcome-based metrics. In a December 2006 report about the need for a "
3012,"CMO at DOD, the Institute for Defense Analyses recommended that DOD adopt a planning structure that would ensure that the strategic-level directions and priorities drive day-to-day planning and execution. The Institute for Defense Analyses said that the planning structure should contain top-level goals, approaches, and resources and link these goals to the required resources within the executing activities. DOD continues to lack sustained leadership focused solely on business transformation. We have reporte"
3013,"d that as DOD and other agencies embark on large-scale organizational change initiatives, similar to defense business transformation, there is a compelling need to, among other things, (1) elevate attention on management issues and transformational change efforts, (2) integrate various key management and transformation efforts into a coherent and enterprisewide approach, and (3) institutionalize accountability for addressing transformation needs and leading change. Without such leadership, DOD is at risk of"
3014," not being able to sustain and ensure the success of its overall business transformation efforts, and its progress is at risk of being another in a long line of unsuccessful management reform initiatives. The Deputy Secretary of Defense has elevated the attention paid to business transformation efforts, and he and other senior leaders have clearly shown a commitment to business transformation and to addressing deficiencies in the department’s business operations. For example, the Deputy Secretary has been a"
3015,"ctively engaged in monthly meetings of both the Defense Business Systems Management Committee and the Deputy’s Advisory Working Group, and directed the creation of the Business Transformation Agency to support the Defense Business Systems Management Committee. However, these organizations do not provide the sustained leadership needed to successfully achieve overall business transformation. The Defense Business Systems Management Committee’s representatives consist of political appointees whose terms expire"
3016," when administrations change and the roles of the Deputy’s Advisory Working Group have not been institutionalized in DOD directives or charters. Without this, the committee’s very existence and role could change within or between administrations. A broad-based consensus exists among GAO and others that the status quo is unacceptable and that DOD needs a CMO to provide leadership over business transformation efforts, although there are different views concerning the characteristics of a CMO, such as whether "
3017,"the position should be codified in statute, established as a separate position from the Deputy Secretary of Defense, designated as Executive Level II or Level III, subject to a term appointment, or supported by a deputy CMO. As required by Congress, DOD commissioned studies of the feasibility and advisability of establishing a deputy secretary of defense for management to oversee the department’s business transformation process. As part of this effort, the Defense Business Board, an advisory panel, examined"
3018," various options and, in May 2006, endorsed the CMO concept. Furthermore, in December 2006, the Institute for Defense Analyses issued a study that reported on various options for the creation of a CMO position and recommended that a CMO is needed at DOD. In response to the Institute for Defense Analyses report, DOD submitted a letter to Congress in May 2007 outlining the department’s position on a CMO at DOD. However, this position does not adequately address the key leadership challenge that we discuss in "
3019,"this report—that is, the lack of a senior leader, at the right level, with appropriate authority, to focus full time on overall business transformation. In summary, DOD is proposing to Congress that the role of a CMO be assigned to the Deputy Secretary of Defense. While the Deputy Secretary may be at the right level, with the appropriate authority and responsibility to transform business operations, we have testified that the demands placed on him and other senior leaders make it difficult for them to maint"
3020,"ain the oversight, focus, and momentum needed to resolve business operational weaknesses, including the high-risk areas. Finally, DOD does not agree with codifying the CMO role in legislation, stating that doing so would restrict the flexibility of future Presidents and Secretaries of Defense to build an integrated management team. DOD would rather leave the assignment of the CMO role to the discretion of the Secretary of Defense, and DOD plans to formalize the Deputy Secretary’s CMO and business transforma"
3021,"tion duties in a DOD directive. Because of the complexity and long-term nature of business transformation, we have long advocated the establishment of a CMO position at DOD with significant authority and experience and a term that would provide sustained leadership and the time to integrate the department’s overall business transformation efforts. Major transformation initiatives often take at least 5 to 7 years in large private and public sector organizations. Codifying a separate, full-time CMO position i"
3022,"n statute would ensure continuity and help to create unambiguous expectations and underscore congressional desire to follow a professional, nonpartisan, sustainable, and institutional approach to this position. Without formally designating responsibility and accountability for results, reconciling competing priorities among various organizations and prioritizing investments will be difficult and could impede the department’s progress in addressing deficiencies in key business areas. A full-time and separate"
3023," CMO position could devote the necessary time and effort to further and sustain DOD’s progress and would be accountable for planning, integrating, and executing the department’s overall business transformation efforts. Further, we believe that the CMO should be at Executive Level II and report directly to the Secretary of Defense so that the position has the stature needed to successfully address integration challenges, address DOD’s high-risk areas with a strategic and systematic approach, and prioritize i"
3024,"nvestments across the department. By subsuming the CMO duties within the Deputy Secretary of Defense position as DOD advocates, the CMO would be at level II, but not subject to a term or able to focus full-time attention on business transformation. Finally, we advocate an extended term appointment for the CMO of at least 5 to 7 years so that the position could span administrations to sustain business transformation when key personnel changes occur. DOD’s efforts at business transformation consist of various"
3025," entities whose interrelationships are not clearly articulated and numerous plans that are not integrated across the department. Currently, there is no single individual, office, or integrated plan within DOD to provide a complete and focused assessment of the department’s business transformation efforts. DOD continues to face formidable challenges, both externally with its ongoing military operations and internally with the long-standing problems of fraud, waste, and abuse. Pervasive, decades-old managemen"
3026,"t problems related to its business operations affect all of DOD’s major business areas. While DOD has taken positive steps to address these problems, our previous work has shown a persistent pattern of limited scope of focus and a lack of integrated planning and sustained leadership. In this time of growing fiscal constraints, every dollar that DOD can save through improved economy and efficiency of its operations is important to the well-being of our nation and the legitimate needs of the warfighter. DOD c"
3027,"an no longer afford to address business transformation as it has in the past. Unless DOD elevates and integrates its efforts, billions of dollars will continue to be wasted every year. Furthermore, without strong and sustained leadership, both within and across administrations, DOD will likely continue to have difficulties in maintaining the oversight, focus, and momentum needed to implement and sustain the needed reforms to its business operations. In this regard, we continue to believe that a CMO whose so"
3028,"le focus is to integrate and oversee the overall transformation of the department’s business operations remains key to DOD’s success. To ensure successful and sustained business transformation at DOD, we recommend that the Secretary of Defense take the following two actions: Institutionalize in directives the roles, responsibilities, and relationships among various business-related entities and committees, such as the Defense Business Systems Management Committee, investment review boards, the Business Tran"
3029,"sformation Agency, and the Deputy’s Advisory Working Group, and expand the management framework to capture overall business transformation efforts, rather than limit efforts to modernizing business systems. Develop a comprehensive strategic planning process for business transformation that results in a comprehensive, integrated, and enterprisewide plan or set of interconnected functional plans that covers all key business areas and provides a clear strategic direction, prioritizes initiatives, and monitors "
3030,"progress across the department. Given DOD’s view that the Deputy Secretary of Defense should be assigned CMO duties, Congress should consider enacting legislation to establish a separate, full-time position at DOD with the significant authority and experience and a sufficient term to provide focused and sustained leadership and momentum over business transformation efforts. In written comments on a draft of this report, DOD generally concurred with our recommendations that the department institutionalize a "
3031,"management framework and develop a comprehensive strategic planning process for business transformation, and disagreed with our matter for congressional consideration that Congress enact legislation to establish a separate, full-time CMO position. The department’s comments are reprinted in appendix II. In its overall comments, DOD expressed concern about what it characterized as GAO’s belief that the department placed improper emphasis on business systems modernization to the detriment of overall business t"
3032,"ransformation efforts. In particular, DOD stated that business systems modernization is a critical step in achieving overall business transformation, and that lessons learned and governance structures developed for modernizing business systems acquisition processes are being evaluated for implementation beyond the business side. It further stated that the Deputy’s Advisory Working Group and the Defense Business Systems Modernization Committee both focus more broadly on defense business transformation. DOD a"
3033,"lso believed we had overstated the nature of “broad-based consensus” between GAO, the Institute for Defense Analyses, and the Defense Business Board about the need for a CMO in DOD, noting that the Institute for Defense Analyses had examined four alternate methods for institutionalizing the roles of the CMO and ultimately supported the department’s position that those duties be vested in the Deputy Secretary of Defense. We disagree with DOD’s characterization of our report with respect to the emphasis of th"
3034,"e department’s efforts and the nature of the broad-based consensus on the need for a CMO. The report specifically gives DOD credit for progress to date on setting up an overall framework for broader business transformation, and in no way suggests that any specific steps taken regarding modernizing business systems are detrimental to this progress. Rather, we note that the framework, as currently structured and implemented, focuses on business systems, is a foundation to build upon, and needs to be expanded "
3035,"to more fully address broader transformation issues. The report also recognizes the establishment of the Deputy’s Advisory Working Group and the Defense Business Systems Modernization Committee. While DOD suggests these two groups focus more broadly on business transformation, our work shows that DOD has not clearly defined or institutionalized interrelationships, roles and responsibilities, or accountability for broader business transformation among these entities. Also, differences of opinion exist within"
3036," DOD about the roles and scope of the various entities. Further, contrary to DOD’s view, we did not overstate the nature of the “broad-based consensus” regarding the need for a CMO. In fact, the Defense Business Board, Institute for Defense Analyses, and the department are on record in their support for establishing a CMO at DOD. Specifically, the board endorsed the CMO concept in a study completed in May 2006, the Institute for Defense Analyses identified the need for a CMO in its study completed in Decemb"
3037,"er 2006, and DOD, in a May 2007 letter, informed Congress of its view that the Deputy Secretary of Defense should assume CMO responsibilities. The Institute for Defense Analyses also recommended that Congress establish a new deputy CMO position with an Executive Level III term appointment of 7 years to provide full-time support to the Deputy Secretary in connection with business transformation issues. We believe these actions demonstrate a broad-based consensus regarding the need for a CMO and, therefore, t"
3038,"hat the status quo is unacceptable. Notwithstanding these positions, we also recognize, as stated in the report, that there are different views concerning the characteristics of a CMO, such as whether the position should be codified in statute, established as a separate position from the Deputy Secretary, designated as Executive Level II or Level III, or subject to a term appointment. As stated in this report and numerous testimonies, we believe the CMO position should be codified in statute as a separate a"
3039,"nd full-time position, designated as Executive Level II, and subject to an extended term appointment. In addition to its overall comments, DOD provided detailed comments on our two recommendations. Specifically, DOD concurred with our first recommendation that the department institutionalize in directives the roles, responsibilities, and relationships among various business-related entities and committees and expand the management framework beyond business systems modernization to capture overall business t"
3040,"ransformation efforts. In fact, DOD stated explicitly in its comments that the department is a strong advocate for institutionalizing, in its DOD Directives System, the functions, responsibilities, authorities, and relationships of its principal officials and the management processes they oversee. DOD added that the Deputy Secretary of Defense has issued a directive-type memorandum on the management of the Deputy’s Advisory Working Group and that a draft DOD directive has been prepared to define the functio"
3041,"ns of the Defense Business Systems Management Committee and elaborate its relationships with the Defense Business Transformation Agency and other key business-related entities in the department. We recognize that directives and memorandums, in some cases, do exist, and that DOD plans to finalize additional directives, particularly for the Defense Business Systems Management Committee. As noted in our report, during the course of our review, we found that DOD has not clearly defined or institutionalized inte"
3042,"rrelationships, roles and responsibilities, or accountability for establishing a management framework for overall business transformation, and that differences of opinion exist within the department regarding which of the various senior leadership committees will function as the primary body responsible for overall business transformation. Therefore, we encourage DOD to ensure that its efforts to institutionalize its management framework for business transformation in directives specifically address these m"
3043,"atters, and once directives are finalized, to take steps to clearly communicate the framework and reinforce its implementation throughout the department. Further, DOD partially concurred with our second recommendation that the Secretary of Defense develop a comprehensive strategic planning process for business transformation that results in a comprehensive, integrated, and enterprisewide plan or set of plans. Specifically, DOD stated that it has already begun to expand the scope of the enterprise transition"
3044," plan to become a more robust enterprisewide planning document and to evolve this plan into the centerpiece strategic document for transformation. DOD added that as the enterprise transition plan evolves, it will continue to improve in aligning strategy with outcomes, identifying business capability gaps, prioritizing future needs, and developing metrics to measure achievement. DOD also stated that it will continue to evolve its family of plans to address our recommendation. While DOD’s proposed actions to "
3045,"address both of our recommendations appear to be positive steps, the key to their success will be in the details of their implementation. Moreover, we continue to believe that these efforts alone will not be sufficient to bring about the desired transformation. More specifically, efforts to institutionalize and broaden the scope of a management framework and develop a comprehensive strategic planning process for business transformation will not be successful without a CMO to guide and sustain these efforts."
3046," However, DOD disagreed with our matter for congressional consideration that Congress consider enacting legislation to establish a separate, full- time CMO position at DOD to provide focused and sustained leadership and momentum over business transformation efforts, stating that no official below the Secretary of Defense, except the Deputy Secretary, has the rank and perspective to provide the strategic leadership and authoritative decision making necessary to ensure implementation of departmentwide busines"
3047,"s activities. DOD stated that the Deputy Secretary of Defense is to be designated as the CMO and that an internal directive is being revised to that effect. DOD also stated its belief that the continuity of business transformation is best ensured by institutionalized processes and organizations, the knowledge and perspective of DOD’s career workforce, clear and mutually agreed to economy and efficiency goals, and the due diligence of future administrations and Members of Congress to nominate and confirm hig"
3048,"hly qualified executives to serve at DOD. Further, DOD stated that the establishment of an additional official at the under secretary level to lead business transformation would generate dysfunctional competition among the five other Under Secretaries by creating confusion and redundancy in their roles and responsibilities. DOD added that the Deputy Secretary of Defense as the CMO has sufficient officials available to assist in managing the department and the authority necessary to refine the department’s m"
3049,"anagement structure to continue business management reform and integrate business transformation activities with the operational work of the department. Because of the complexity and long-term nature of business transformation, we have consistently reported and testified that DOD needs a CMO with significant authority and experience, a term that would provide sustained leadership, and the time to integrate overall business transformation efforts. In our view, DOD’s plan to subsume the CMO duties within the "
3050,"Deputy Secretary of Defense position and to establish this action by directive would place the responsibilities at the appropriate level—Executive Level II—but would result in a position not subject to a term or able to focus full-time attention on business transformation. Transformation is a long-term process, especially for large and complex organizations such as DOD. Therefore, a term of at least 5 to 7 years is recommended to provide sustained leadership and accountability. To ensure continuity, it shou"
3051,"ld become a permanent position, with the specific duties authorized in statute. As stated in our report, we believe codifying a separate, full-time CMO position in statute would also help to create unambiguous expectations and underscore congressional desire to follow a professional, nonpartisan, sustainable, and institutional approach to this position. We recognize that the Deputy Secretary of Defense has officials and institutional structures available to support the transformation process; however, trans"
3052,"formation cannot be achieved through a committee approach. Ultimately, a person at the right level, with the right type of experience, in a full-time position with a term appointment, and with the proper amount of responsibility, authority, and accountability is needed to lead the effort. Contrary to DOD’s view, we believe the establishment of a separate CMO position would bring leadership, accountability, focus, and direction to the department’s efforts rather than creating dysfunctional competition and ca"
3053,"using confusion. The CMO would not assume the responsibilities of the Under Secretaries of Defense or any other officials. Rather, the CMO would be responsible and accountable for planning, integrating, and executing the department’s overall business transformation effort, and would be able to give full-time attention to business transformation. As such, the CMO would be a key ally to other officials in the department in dealing with the business transformation process. Without formally designating responsi"
3054,"bility and accountability for results, reconciling competing priorities among various organizations and prioritizing investments will be difficult and could impede progress in addressing deficiencies in key business areas. We believe DOD’s position essentially represents the status quo, and that in the interest of the department and American taxpayers, the department needs a CMO to help transform its key business operations and avoid billions of dollars in waste each year. We are encouraged that this matter"
3055," is now before Congress as it prepares to deliberate on pending legislation that calls for statutorily establishing a CMO for DOD. In particular, we believe any resulting legislation should include some important characteristics for the CMO position. Specifically, a CMO at DOD should be codified in statute as a separate and full-time position that is designated as an Executive Level II appointment and reports directly to the Secretary of Defense so that the individual in this position has the stature needed"
3056," to successfully address integration challenges, adjudicate disputes, and monitor progress on overall business transformation across defense organizations. In addition, the position should be subject to an extended term appointment such that the CMO would span administrations to sustain transformation efforts when key personnel changes occur. Transformation is a long-term process, especially for large and complex organizations such as DOD. Therefore, a term of at least 5 to 7 years is recommended to provide"
3057," sustained leadership and accountability. In addition, we would recommend a requirement for advance notification should the Secretary decide to remove an individual from the CMO position. We are sending copies of this report to interested congressional committees and the Secretary of Defense. We will also make copies available to others upon request. This report is also available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please conta"
3058,"ct me at (202) 512-9619 or pickups@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other staff members who made key contributions to this report are listed in appendix III. To assess the progress the Department of Defense (DOD) has made in setting up a management framework for business transformation, we reviewed and analyzed relevant documents and current literature about the department’s business transformation and intervi"
3059,"ewed key DOD senior leaders and defense experts. Documents that we used for our review included, but were not limited to, (1) GAO reports related to DOD’s high- risk areas, including business systems modernization, development of the business enterprise architecture, and organizational transformation; (2) DOD products, including the 2006 Quadrennial Defense Review and updates to DOD’s enterprise transition plan; (3) DOD’s annual reports on business transformation to Congress (and biannual updates); (4) DOD "
3060,"testimony to Congress on the status of business transformation; and (5) meeting minutes and briefing documents, such as those from the Defense Business Systems Management Committee, the Deputy’s Advisory Working Group, and the Defense Business Board, related to DOD’s business transformation, governance, and management reforms. We obtained testimonial evidence from officials representing the Business Transformation Agency, offices within the Office of the Secretary of Defense (including the Program Analysis "
3061,"and Evaluation Directorate; Office of the Director, Administration and Management; and the Office of Business Transformation), the Joint Staff, the military departments, and defense experts. To assess the challenges DOD faces in maintaining and ensuring success in its overall business transformation efforts, we compared DOD’s efforts to key practices we found to be consistently at the center of successful organizational mergers and transformations, specifically, establishing a coherent mission and integrate"
3062,"d strategic goals to guide the transformation and ensuring that top leadership drives the transformation. We also reviewed relevant plans and related documents to assess integration among DOD’s various business-related plans. These plans included DOD’s Quadrennial Defense Review, Performance and Accountability Report, Financial Improvement and Audit Readiness Plan, Defense Acquisition Transformation Report to Congress, Supply Chain Management Improvement Plan, Focused Logistics Joint Functional Concept and "
3063,"the Focused Logistics Campaign Plan, Human Capital Strategy, and the Defense Installations Strategic Plan. In addition, we reviewed proposals for a chief management officer (CMO) at the department and obtained testimonial evidence from key DOD officials and defense experts. As part of this effort, we considered comments raised by several public and private sector officials during a forum sponsored by the Comptroller General in April 2007. The purpose of this forum was to discuss the merits of a CMO or chief"
3064," operating officer concept. We also analyzed congressionally mandated CMO reports prepared by the Defense Business Board and the Institute for Defense Analyses and reviewed DOD’s response to the study prepared by the Institute for Defense Analyses. We conducted our work from September 2006 through July 2007 in accordance with generally accepted government auditing standards. In addition to the contact named above, David Moser, Assistant Director; Thomas Beall; Renee Brown; Donna Byers; Grace Coleman; Gina F"
3065,"lacco; Barbara Lancaster; Julia Matta; and Suzanne Perkins made key contributions to this report. DOD Business Systems Modernization: Progress Continues to Be Made in Establishing Corporate Management Controls, but Further Steps Are Needed. GAO-07-733. Washington, D.C.: May 14, 2007. Business Systems Modernization: DOD Needs to Fully Define Policies and Procedures for Institutionally Managing Investments. GAO-07-538. Washington, D.C.: May 11, 2007. DOD Transformation Challenges and Opportunities. GAO-07-500"
3066,"CG. Washington, D.C.: February 12, 2007. Business Systems Modernization: Strategy for Evolving DOD’s Business Enterprise Architecture Offers a Conceptual Approach, but Execution Details Are Needed. GAO-07-451. Washington, D.C.: April 16, 2007. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Defense Business Transformation: A Comprehensive Plan, Integrated Efforts, and Sustained Leadership Are Needed to Assure Success. GAO-07-229T. Washington, D.C.: November 16, 2006. Department of D"
3067,"efense: Sustained Leadership Is Critical to Effective Financial and Business Management Transformation. GAO-06-1006T. Washington, D.C.: August 3, 2006. Business Systems Modernization: DOD Continues to Improve Institutional Approach, but Further Steps Needed. GAO-06-658. Washington, D.C.: May 15, 2006. GAO’S High-Risk Program. GAO-06-497T. Washington, D.C.: March 15, 2006. Defense Management: Additional Actions Needed to Enhance DOD’s Risk-Based Approach for Making Resource Decisions. GAO-06-13. Washington, "
3068,"D.C.: November 15, 2005. Defense Management: Foundational Steps Being Taken to Manage DOD Business Systems Modernization, but Much Remains to be Accomplished to Effect True Business Transformation. GAO-06-234T. Washington, D.C.: November 9, 2005. 21st Century Challenges: Transforming Government to Meet Current and Emerging Challenges. GAO-05-830T. Washington, D.C.: July 13, 2005. DOD Business Transformation: Sustained Leadership Needed to Address Long-standing Financial and Business Management Problems. GAO"
3069,"-05-723T. Washington, D.C.: June 8, 2005. Defense Management: Key Elements Needed to Successfully Transform DOD Business Operations. GAO-05-629T. Washington, D.C.: April 28, 2005."
3070,"The National Defense Authorization Act for Fiscal Year 2013 required that DOD develop a detailed implementation plan for carrying out its health care system reform of creating the DHA, and provide the plan to the congressional defense committees in three separate submissions in fiscal year 2013. In October 2013, DOD established the DHA to assume management responsibility for numerous functions of its medical health care system, support the services in carrying out their medical missions, manage the military"
3071,"’s health plan, oversee the medical operations within the National Capital Region, and provide 10 shared services, including oversight of medical education and training. According to DOD, a “shared services concept” is a combination of common services performed across the medical community with the goal of achieving cost savings. The DHA’s Education and Training Directorate, a shared service, is scheduled to begin operations in August 2014 and, according to DOD officials, when operational, will constitute t"
3072,"he first instance of oversight of medical education and training at the Office of the Secretary of Defense level. While the services establish training requirements, operate their own service-specific training institutions, and provide manpower to conduct the training at tri-service institutions, such as METC, the Directorate plans to provide administrative support; academic review and policy oversight; and professional development, sustainment, and program management to the military departments’ medical se"
3073,"rvices, the combatant commands, and the Joint Staff. See figure 1 below for the organizational chart of the DHA. Medical personnel receive training throughout their careers to develop and enhance their skills. Examples of the types of medical training they can receive include 1. initial training for enlisted servicemembers, which results in a new 2. sustainment training for enlisted servicemembers, which does not result in a new occupational classification but refreshes or augments initial training; 3. oper"
3074,"ational or readiness skills training, which provides training to perform in operational situations throughout the world and includes such training as burn and trauma care as well as emergency and Chemical, Biological, Radiological, Nuclear, and Explosive preparedness; and 4. executive skills training for enlisted servicemembers, officers, and civilians, which provides military health care leaders with executive management and professional administrative skills. These training courses can be presented in sha"
3075,"red or service-specific settings that involve varying degrees of a consolidated approach to course curricula, faculty instruction, equipment, and facilities. Figure 2 depicts the locations of this training and whether it is shared (“tri-service”) or service-specific training. Four DOD institutions offer medical training to servicemembers from all three services. These institutions vary in size and subject matter, and include the following: Uniformed Services University of the Health Sciences (USUHS): DOD-fu"
3076,"nded medical school in Bethesda, Maryland, with a fiscal year 2015 budget estimate of about $146 million. This university provides medical training to health professionals dedicated to a career as a physician, dentist, or nurse in DOD or the U.S. Public Health Service. Medical Education and Training Campus (METC): Provides initial skills training to most medical enlisted servicemembers in about 50 areas such as pharmacy, laboratory, and dental technology; combat medics, basic hospital corpsmen, basic medica"
3077,"l technicians; and a number of advanced medical training courses. METC resulted from a 2005 BRAC recommendation to establish a medical education and training complex that collocated medical enlisted training being conducted at five different locations by each of the military services into one location at Fort Sam Houston, Texas. (See fig. 3.) Since first becoming operational in 2010, METC has created 14 new consolidated courses while 22 of its courses were consolidated prior to METC’s creation. METC trains,"
3078," on average, about 20,000 students annually and is estimated to cost almost $27 million in fiscal year 2015. See appendix I for a list of courses taught at METC and course participants. Defense Medical Readiness Training Institute (DMRTI): Tri-service organization that is staffed by servicemembers from the Army, the Navy, and the Air Force as well as Department of the Army civilians and according to officials, had a $1.4 million budget in fiscal year 2013. This organization offers resident and nonresident j"
3079,"oint medical readiness training courses as well as professional medical programs that enable military medical personnel, both active duty and reserve, to better perform a wide range of medical and health support missions they face throughout the world. Courses include trauma care, burn care, public health emergency preparedness, humanitarian assistance, and emergency response to chemical, biological, nuclear, and other events. During fiscal year 2013, approximately 3,600 students participated in 122 course "
3080,"iterations in 51 different locations. According to officials, besides providing medical readiness training to U.S. servicemembers, DMRTI has provided this training to officials in 38 countries at the request of a combatant command. Joint Medical Executive Skills Institute (JMESI): Tri-service organization that provides military health care leaders with executive management skill programs, products, and services that are designed to enhance their performance as managers and leaders in the military healthcare"
3081," environment. The training JMESI provides centers on the Core Curriculum which is a collection of 35 executive administrative competencies required of a military hospital commander that tri- service senior leaders are responsible for reviewing and updating every 3 years. Each year approximately 200 managers graduate from JMESI’s Healthcare Management Seminar and MHS Capstone Symposium, and nearly 20,000 students participate in its online, distance learning program. In addition to tri-service training, each "
3082,"of the services operates its own education and training entities that provide additional training to their medical servicemembers. The Army and Navy education and training entities are constituent commands of the Army Medical Command and the Bureau of Medicine and Surgery, respectively, which are headed by Surgeons General. The Air Force education and training entities conduct a wide variety of training, including nonmedical training, and do not report directly to the Air Force Surgeon General. These organi"
3083,"zations include the following: Army Medical Department Center and School (AMEDD C&S): Army training headquarters located at Fort Sam Houston, Texas. The center formulates the Army Medical Department’s medical organization, tactics, doctrine, and equipment. The school educates and trains Army medical personnel. More specifically, the Academy of Health Sciences is the “school” and is part vocational institution, part community college, and part major university. The Academy of Health Sciences includes 361 pro"
3084,"grams of instructions, with 41 of them taught at METC; 2 levels of officer leader development programs; 6 Masters Degree programs; 7 Doctoral Degree programs; 94 professional postgraduate programs; as well as pre-deployment training within three main centers and a graduate school. First, the Center for Health Education and Training consists of 10 departments whose primary mission is to instruct advanced or specialty courses enhancing and building upon the initial training that enlisted soldiers receive from"
3085," METC and officers receive after finishing their basic courses. Second, the Center for Pre-Deployment Medicine analyzes, designs, and develops individual pre-deployment training courses and products and provides professional expertise and pre-deployment training to increase the technical and tactical abilities of physicians, nurses, and other healthcare professionals. Third, the Leader Training Center provides professional education, doctrinal, and individual leadership training to execute Army missions acr"
3086,"oss a full spectrum of military operations. Additionally, aviation medicine classes are taught at the US Army School of Aviation Medicine, in Fort Rucker, Alabama, and forward surgical teams preparing for overseas deployment go through training at the Army Trauma Training Center in Miami, Florida. Navy Medicine Education and Training Command (NMETC): Consists of four centers that provide education, training, and support for Navy medical personnel. The first center is the Navy Medicine Professional Developme"
3087,"nt Center headquartered in Bethesda, Maryland, which offers educational programs such as the Naval Postgraduate Dental School as well as leadership and specialty courses that focus on the practice and business of military medicine in both the operational and hospital settings delivered via in-person classes and online. The second center is the Navy Medicine Training Support Center headquartered in San Antonio, Texas. It serves as the Navy’s component command for METC students and instructors to provide admi"
3088,"nistrative and operational control of Navy personnel assigned to METC. The third center is the Navy Medicine Operational Training Center, which is headquartered in Pensacola, Florida, and consists of six detachments and nine training centers at 14 locations throughout the country that teach such areas of Navy medicine as undersea, aviation, expeditionary, special operations, and survival training. Fourth, another section of the NMETC provides medical education and training to the reserve components. Air For"
3089,"ce: There is no specific Air Force organization focused exclusively on medical training. The Air Force Surgeon General assists Air Force leadership in developing policies, plans, and programs, establishing requirements, and providing resources to the Air Force Medical Service, while the Air Force’s Air Education and Training Command (AETC) and the Air Force Material Command (AFMC) provide medical training. AETC, which is headquartered at Joint Base San Antonio—Randolph, Texas, oversees a wide variety of med"
3090,"ical and nonmedical training. AETC is responsible for 114 medical-related courses: 35 initial skills courses conducted mostly at METC; 73 sustainment or skills progression courses conducted at METC and other various locations; and 6 medical readiness courses taught at a military training site near San Antonio, Texas. AFMC, which is headquartered at Wright-Patterson Air Force Base, Ohio, includes the Air Force School of Aerospace Medicine (USAFSAM). USAFSAM is a center for aerospace medical education and tra"
3091,"ining, and offers a series of courses comprising the initial qualification training for flight surgeons, including hyperbaric medicine, occupational medicine, aviation mishap prevention, and other unique aeromedical issues pertinent to the flight environment. The school trains 6,000 students annually. DOD has outlined the areas of responsibility for its Education and Training Directorate, including consolidation and management of a number of activities currently performed by the services. However, in its pl"
3092,"ans, DOD has not demonstrated through a fully developed business case analysis how creating a shared service for education and training will result in cost savings. According to DOD’s third submission to Congress on its plans for the implementation of the DHA in October 2013, DOD proposed a number of projects or “product lines” for its shared service Education and Training Directorate. Specifically, DOD identified three product lines for the directorate, which involve (1) management of professional developm"
3093,"ent, sustainment, and related programs, including the METC, the Defense Medical Readiness and Training Institute, and the Joint Medical Executive Skills Institute; (2) academic review and policy oversight functions, including management of online courses and modeling and simulation programs; and (3) management of academic and administrative support functions, such as training and conference approval processes. According to DOD’s second submission to Congress, the overall purpose and core measure of success "
3094,"for all shared services is the achievement of cost savings. This focus differentiates the objective of establishing shared services from the six other objectives outlined in DOD’s plans for the implementation of the DHA. However, in its plans, DOD has not demonstrated how its Education and Training Directorate projects will result in cost savings through a fully developed business case analysis, including an analysis of benefits, costs, and risks. In its third submission to Congress on its implementation pl"
3095,"ans for DHA, DOD presented estimates of costs and cost savings for two “sub-product lines” concerning modeling and simulation and online learning. However, these projects do not represent the core of the directorate’s mission, but rather a portion of the academic review and policy oversight project. Further, these projects overlap with DHA’s contracting and information technology shared services. Specifically, while cost savings for modeling and simulation are allocated to the Education and Training Directo"
3096,"rate, implementation costs are to be incurred by the DHA contracting shared service. In addition, the savings for the online learning project are found within the DHA information technology shared service portfolio. Aside from these projects, DOD did not present information concerning the cost savings of its other shared service projects within the Education and Training Directorate. GAO’s Business Process Reengineering Assessment Guide states that a business case begins with (1) measuring performance and i"
3097,"dentifying problems in meeting mission goals, which is then addressed through (2) the development and selection of a new process. As noted above, the primary stated purpose of the DHA’s shared service projects is to achieve cost savings. The Guide further states that as a project matures, the business case should be enlarged and updated to present a full picture of the benefits, costs, and risks involved in moving to a new process. Such analysis is to provide a sound basis to proceed with the reengineering "
3098,"process. DOD’s own process for developing its shared services, outlined in its second submission on implementation of the DHA, states that after an assessment of the current state of performance and measures of effectiveness have been identified, performance improvement and cost reduction opportunities should be identified. It also states that new processes and initiatives are to be developed to address these challenges, along with associated implementation costs. Further, the National Defense Authorization"
3099," Act for Fiscal Year 2013 required DOD to develop business case analyses for its shared service proposals as part of its submissions on its plans for the implementation of the DHA, including, among other things, the purpose of the shared service and the anticipated cost savings. DOD does not have a fully developed business case analysis for medical education and training because it has not yet completed the first step of that analysis, which is to identify specific problems, which, given the stated purpose "
3100,"of shared services, should be directed toward the achievement of cost savings. Several of DOD’s other shared service projects present a clear linkage between (1) a stated problem, (2) proposed process changes, and (3) an estimate of benefits, costs, and risks. For example, DOD’s third submission on the implementation of DHA, states that the pharmacy shared service will address rising costs due to variation in drug purchasing, staffing, and formulary management (the problem) through the introduction of MHS-w"
3101,"ide standards and business rules (the new processes), which will result in cost savings. Similarly, the plan states that the contracting shared services will address rising costs due to fragmentation in its acquisition strategy (the problem) through a common approach to acquisition planning, program management, contract execution, management, and administration (the new processes). In contrast, DOD listed the new processes the Directorate will employ, but it did not explain the problem its proposed new proc"
3102,"esses will address, and how they will achieve cost savings. DOD officials stated that they believe that a central problem for the Directorate to address is unnecessary variation of practice between the services, and they believe that efficiencies could be generated through the consolidation of training. However, in its official plans for the Directorate, DOD has not identified this issue or any other challenge related to cost savings as the problem its shared service will address. DOD also lacks the informa"
3103,"tion to assess its current performance to then identify a problem. Specifically, DOD officials stated that they lack data on the cost of DOD’s education programs and potential redundancy within its portfolio of courses, which would allow them to identify a problem and develop processes to address these challenges. In fact, officials stated they have identified the need for developing a baseline of current medical education and training courses and associated spending as a goal for the Directorate, and there"
3104,"fore have acknowledged the lack of such information. In addition, some officials cast doubt on the potential cost savings that could be achieved. Several DOD officials told us that the creation of the Directorate represents a logical step in the course of further cooperation among the services in the area of medical training. However, senior service officials stated that the Directorate was unlikely to achieve significant savings and that its creation serves more as a functional realignment than a cost savi"
3105,"ngs endeavor. For example, officials stated that the Directorate provides an opportunity to assign a parent agency to METC, JMESI, and DMRTI, which they described as “orphan” agencies that lack a parent organization. Officials made similar comments during our 2012 review, in which we found that DOD was not able to demonstrate potential financial savings from the creation of METC, but agency officials stated at the time that they believed combining several training sites into the formation of METC had saved "
3106,"money and that other efficiencies had been achieved. GAO-14-49. particular, given that DOD continues to lack an understanding of how the establishment of the DHA will affect staff levels, its challenges in identifying cost savings and a clear mission for its education reforms could result in increases in staff levels without any savings. As we noted in our reviews of DOD’s plans for the implementation of the DHA, DOD’s submissions did not include critical information necessary to help ensure that DOD achiev"
3107,"es the goals of its reform of the MHS. Accordingly, in a recent report, the House Committee on Armed Services has expressed concern regarding DHA’s staffing requirements, cost estimates, performance metrics, and medical education and training shared service. Without a business case analysis that links (1) a stated problem, (2) proposed process changes, and (3) an estimate of benefits, costs, and risks, the role of the Directorate remains ambiguous, and it is unclear how DOD will measure its accomplishments "
3108,"and hold the Directorate accountable for achieving cost savings by sharing training and education services. Without such information, the Directorate also potentially risks increasing staff levels without achieving any cost savings. DOD established METC as part of the 2005 BRAC process to provide interservice training for enlisted service members and to achieve cost savings. However, DOD is unable to determine whether the consolidation of medical education and training for enlisted personnel at METC has res"
3109,"ulted in cost savings because it did not establish a baseline for spending on education and training prior to METC’s establishment. METC has designed processes to assess the effectiveness of its training and is taking action to improve them. DOD cannot demonstrate whether the consolidation of training at METC has resulted in cost savings. However, officials stated that while they could not document cost savings, they believe that the consolidation of training at METC has led to cost savings because of (1) i"
3110,"ncreased equipment sharing; (2) personnel reductions; and (3) cost avoidances, such as those associated with the closure of medical education facilities that were service-specific. In contrast, officials also identified areas where the consolidation of training at METC may have resulted in cost increases because of, for example, (1) the construction of new facilities; (2) relocation of students to METC; and (3) replacement of personnel within their organizations who had been transferred to METC. To fund tra"
3111,"ining at METC, the services transferred funding to a single METC budget managed by the Air Force over 3 years from fiscal year 2010 through fiscal year 2012. The services continue to fund compensation for military instructors at METC. Civilian funding was transferred to the Air Force, and officials told us that this funding is likely to be transferred to the DHA. When METC was established, the services transferred funding for their enlisted medical programs being consolidated at METC into a single METC budg"
3112,"et. However, some officials stated they are unsure whether the services’ transfers were representative of their true costs for the transferred programs prior to the creation of METC. Additionally, the funding transfers from the services were not sufficient to fund training at METC, and the Office of the Assistant Secretary of Defense for Health Affairs provided additional funding to cover this shortfall. For instance, of the total METC budget of $26.6 million in fiscal year 2012, Health Affairs provided 28 "
3113,"percent; the Air Force, 22 percent; the Army, 36 percent; and the Navy, 14 percent. Table 1 shows the funding amounts transferred by each service to fund METC, from fiscal year 2010, the first year in which the services transferred funds, until fiscal year 2012, when the services completed a permanent transfer of their funds to METC. GAO’s Business Process Reengineering Assessment Guide states that performance measures are a critical part of a comprehensive implementation process to ensure that a new proces"
3114,"s is achieving the desired results. Additionally, through our prior work on performance metrics, we have identified several important attributes of these assessment tools, including the need to develop a baseline and trend data to identify, monitor, and report changes in performance and to help ensure that performance is viewed in context. By tracking and developing a performance baseline for all measures, agencies can better evaluate progress made and whether goals are being achieved, such as cost savings "
3115,"targets. DOD did not establish and monitor baseline cost information as part of its metrics to assess performance to ensure that the establishment of METC provided costs savings. Officials told us that their focus in establishing METC was to ensure that DOD met the BRAC recommendation to co- locate enlisted medical training, not to ensure that this consolidation led to cost savings. However, the METC business plan, developed in response to the BRAC recommendation, noted that the intent of establishing METC "
3116,"was to reduce costs while leveraging best practice training programs of the three services. We found in April 2012 that DOD was unable to provide documented savings associated with the establishment of METC. We recommended that DOD employ key management practices in order to show the financial and nonfinancial outcomes of its reform efforts, and DOD concurred with our recommendation. DOD noted that it would employ key management practices in order to identify those outcomes; however, as of June 2014, DOD of"
3117,"ficials have not documented the financial outcome of the establishment of METC. DOD justified its request for the 2005 BRAC round in part based on anticipated savings. For example, DOD submitted to the 2005 BRAC Commission a recommendation for the consolidation of 26 military installations operated by individual military services into 12 joint bases to take advantage of opportunities for efficiencies arising from such consolidation and elimination of similar support services on bases located close to one an"
3118,"other. However, we found in 2012 that DOD did not have a plan for achieving cost savings. For example, during our review of DOD’s effort to implement this BRAC recommendation, joint base officials provided us with anecdotal examples of efficiencies that had been achieved at joint bases, but it was unclear whether DOD had achieved any significant cost savings to date, due in part to weaknesses in such areas as DOD’s approach to tracking costs and estimated savings. Specifically, it did not establish quantifi"
3119,"able and measurable implementation goals for how to achieve cost savings or efficiencies through joint basing. We recommended that DOD develop and implement a plan that provides measurable goals linked to achieving savings and efficiencies at the joint bases and provide guidance to the joint bases that directs them to identify opportunities for cost savings and efficiencies. DOD did not concur with our recommendation, and we noted that this position contradicts DOD’s position that joint basing would realize"
3120," cost savings. Similarly, the co-location and consolidation of training at METC was, in part, premised on the achievement of cost savings, but DOD did not establish baseline costs as part of its metrics for assessing performance. It is now likely not possible to develop baseline cost information for fiscal year 2009 to determine the extent to which the establishment of METC resulted in cost savings. However, without developing baseline cost information before undergoing future course consolidation of traini"
3121,"ng at METC and within the Education and Training Directorate, DOD will be unable to accurately assess cost savings in the future. METC has designed quality assurance processes to provide continuous, evaluative feedback related to improvements in education and training support, and is taking action to address issues regarding course accreditation and the post-graduation survey process. Certification Rates: METC monitors the national certification exam pass rates of its students, both to meet national require"
3122,"ments and to make comparisons with national averages. According to METC officials, certification rates are generally higher since the consolidation of training at METC. Currently, certification rates for seven programs exceed the national average. Internal Metrics: According to METC officials, METC regularly monitors a number of internal metrics, such as attrition, course repetition, and graduation rates. To manage performance information for all of their courses, officials produce a monthly snapshot of the"
3123,"se data to track trends in performance over time. Additionally, all of METC’s courses are to be reviewed through a comprehensive program review process conducted by the Health Care Interservice Training Office.ensure, for example, that all service and accreditation requirements are met; that faculty meet all required qualifications; and that internal and external surveys are conducted, analyzed, reported, and acted on according to policy. This office is to review 30 specific standards to help Accreditation "
3124,"Standards: METC is institutionally accredited by the Council on Occupational Education and is officially an affiliated school within the Community College of the Air Force (CCAF). Most METC courses are accredited by a relevant external accrediting body, such as the American Council on Education (ACE) or the CCAF. Surveys: The METC Memorandum of Agreement states that METC and the services will conduct external evaluations to document program efficacy and to facilitate curriculum review, by gathering feedback"
3125," to measure whether the training received was relevant and to determine whether the graduates are proficient in their job duties. METC solicits this feedback through surveys sent by the services to the supervisors of METC graduates at the gaining commands to gauge satisfaction with the training they received at METC. These surveys ask such questions as whether the graduates have the cognitive skills necessary to do their jobs, whether they have met the entry-level practice requirements of their organization"
3126,"s, and whether any job tasks should be added to the METC curriculum for their programs of study. METC officials told us that some training courses were awarded fewer recommended credits by the ACE than similar service-run courses had received prior to METC’s consolidation. Officials also stated that the consolidation of service-run curricula into single programs at METC was conducted by a contractor, and that these consolidated curricula could be improved. METC officials further noted that the ACE review of"
3127," METC’s consolidated curricula occurred after a change to that body’s process for recommending credits, and that they are unaware whether the decrease in the number of recommended credits was due to the consolidated curricula or changes to ACE’s process. METC officials told us that they are attempting to improve their programs through their regular process of curriculum review ahead of future ACE reviews of recommended credits for their courses. METC officials also told us that the post-graduate survey proc"
3128,"ess has been ongoing since before METC was established; however, these surveys have historically exhibited low response rates. For instance, one sample survey provided by METC officials had a 14 percent student response rate and a 0 percent supervisor response rate. To improve the level of feedback received from these surveys, METC officials have begun a pilot process to conduct their own post-graduation surveys, using an online survey program that can be sent directly to the students’ and supervisors’ pers"
3129,"onal email addresses. Depending on the success of the pilot, METC officials plan to extend the process throughout all of METC. DHA’s Education and Training Directorate is scheduled to begin operations in August 2014 to oversee medical education and training reform, but DOD does not have key information necessary to assess its progress in realizing the reform effort’s goal of achieving cost savings. When DOD responded to the 2005 BRAC recommendation to relocate some medical education and training programs fo"
3130,"r enlisted servicemembers at METC, DOD similarly did not have key information necessary to determine whether the consolidation of training there had resulted in cost savings. Although DOD’s plans for the implementation of the DHA acknowledge the benefits of conducting business case analyses, it has not done so for its medical education and training reforms. DOD’s inability to demonstrate that cost savings had resulted from the consolidation of training at METC risks being repeated on a larger scale in the r"
3131,"eform effort of the DHA’s Education and Training Directorate. Specifically, absent analysis demonstrating how the Directorate’s efforts will result in cost savings, the creation of the Directorate could increase costs by increasing staff levels without achieving any cost savings. In addition, without baseline cost information prior to future course consolidation of training at METC and within the Education and Training Directorate, DOD will be unable to assess potential cost savings. The risk of cost growth"
3132," also exists for any future consolidations of training at METC, which could require significant investment of time and resources without any long-term efficiencies. To help realize the reform effort’s goal of achieving cost savings, we recommend that the Assistant Secretary of Defense for Health Affairs direct the Director of the DHA to conduct a fully developed business case analysis for the Education and Training Directorate’s reform effort. In this analysis the Director should identify the cost-related p"
3133,"roblem that it seeks to address by establishing the Education and Training Directorate, explain how the processes it has identified will address the cost- related problem, and conduct and document an analysis of benefits, costs, and risks. To help ensure that DOD has the necessary information to determine the extent to which cost savings result from any future consolidation of training within METC or the Education and Training Directorate, we recommend that Assistant Secretary of Defense for Health Affairs "
3134,"direct the Director of the DHA to develop baseline cost information as part of its metrics to assess achievement of cost savings. We provided a draft of this product to DOD for comment. The Acting MHS Chief Human Capital Officer provided DOD’s comments in an email dated July 21, 2014. In that email, DOD concurred with the draft report's findings, conclusions, and recommendations. Additionally, noted in the email was that Medical Education and Training is the only shared service that has never had any type o"
3135,"f oversight by the Office of the Assistant Secretary of Defense for Health Affairs or the pre-DHA TRICARE Management Activity. Further, in that email, DOD noted that that much credit goes to the sub-working group which has worked numerous hours over the past 2 years to put this shared service together so the MHS can realize efficiencies and garner maximum value, exploit best practices from the services, and achieve standardization where it makes sense. We are sending copies of this report to the appropriate"
3136," congressional committees; the Secretary of Defense; the Assistant Secretary of Defense for Health Affairs; the Director, DHA; and the Surgeons General of the Army, the Navy, and the Air Force. In addition, the report is available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3604 or farrellb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of th"
3137,"is report. GAO staff who made major contributions to this report are included in appendix II. The Medical Education and Training Campus (METC) is the result of the 2005 Base Realignment and Closure (BRAC) Commission legislation that required the bulk of enlisted medical training in the Army, Air Force, and the Navy to be co-located at Fort Sam Houston, Texas. As a result, four major learning institutions for Navy and Air Force relocated to Fort Sam Houston, where the Army was already training its enlisted m"
3138,"edical force under the Army Medical Department Center & School’s (AMEDD C&S) Academy of Health Sciences. The Naval School of Health Sciences in San Diego, California; Naval School of Health Sciences in Portsmouth, Virginia; Navy Hospital Corps School in Great Lakes, Illinois; and the 882nd Training Group (now the 937th Training Group) at Sheppard Air Force Base moved to Fort Sam Houston, Texas. METC is now the largest military medical education and training facility in the world. METC started operating on J"
3139,"une 30, 2010. Its initial training course was radiography specialist. Other courses were phased in throughout the rest of the year and into 2011. METC became fully operational on September 15, 2011. The longest program offered is cytology, which is the study of cells, at 52 weeks; and the shortest, at 4 weeks, is patient administration. METC offers about 50 medical training programs, which are listed in table 2 along with the course participants. In addition to the contact named above, Lori Atkinson, Assist"
3140,"ant Director; Rebecca Beale; Jeffrey Heit; Mae Jones; Carol Petersen; Michael Silver; Adam Smith; and Sabrina Streagle made key contributions to this report. Military Health System: Sustained Senior Leadership Needed to Fully Develop Plans for Achieving Cost Savings. GAO-14-396T. Washington, D.C.: February 26, 2014. Defense Health Care Reform: Additional Implementation Details Would Increase Transparency of DOD’s Plans and Enhance Accountability. GAO-14-49. Washington, D.C.: November 6, 2013. Defense Health"
3141," Care: Additional Analysis of Costs and Benefits of Potential Governance Structures Is Needed. GAO-12-911. Washington, D.C.: September 26, 2012. Defense Health Care: Applying Key Management Practices Should Help Achieve Efficiencies within the Military Health System. GAO-12-224. Washington, D.C.: April 12, 2012. 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue. GAO-12-342SP. Washington, D.C.: February 28, 2012. Follow-up on 2011 Report,"
3142," Status of Actions Taken to Reduce Duplication, Overlap, and Fragmentation, Save Tax Dollars, and Enhance Revenue. GAO-12-453SP. Washington, D.C.: February 28, 2012. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. Military Personnel: Enhanced Collaboration and Process Improvements Needed for Determining Military Treatment Facility Medical Personnel Requirements. GAO-10-696. Washington, D.C.: July 29, "
3143,"2010. Defense Health Care: DOD Needs to Address the Expected Benefits, Costs, and Risks for Its Newly Approved Medical Command Structure. GAO-08-122. Washington, D.C.: October 12, 2007."
3144,"Federal agencies can use a variety of different approaches to purchase office supplies. For relatively small purchases, generally up to $3,000, authorized users can use their government purchase cards. For larger purchases, agencies may use other procedures under the Federal Acquisition Regulation, such as awarding a contract. Alternatively, GSA provides federal agencies with a simplified method for procuring office supplies through its Federal Supply Schedule program, also known as the Multiple Award Sched"
3145,"ules (MAS) or schedules program. Under the schedules program, the federal government’s largest interagency contracting program, GSA awards contracts to multiple vendors for a wide range of commercially available goods and services. The schedules program can leverage the government’s significant aggregate buying power. Also, under the schedules program, to ensure the government is getting the most value for the taxpayer’s dollar, GSA seeks to obtain price discounts equal to those that vendors offer their “mo"
3146,"st favored customers.” In November 2007, GSA initiated another approach for buying office supplies by creating blanket purchase agreements (BPA) under the schedules program. BPAs are a simplified method of fulfilling repetitive needs for supplies and services that also provide an opportunity to seek reduced pricing from vendors’ schedule prices. The approach was part of the government’s Federal Strategic Sourcing Initiative (FSSI). GSA officials acknowledged they could have done a better job promoting this "
3147,"initiative. Ultimately, GSA determined that the initiative did not meet its expectations and initiated a second strategic sourcing initiative known as FSSI Office Supplies II (OS II) in 2010. By July 2010, GSA competitively awarded 15 BPAs to 13 small businesses and 2 other businesses to support the OS II initiative. The GSA study on office supply purchases reviewed 14 categories of mostly consumable office supplies, ranging from paper and writing instruments to calendars and filing supplies. The report did"
3148," not include non-consumable items such as office furniture and computers because they are not part of the standard industry definition of office supplies. The GSA report estimated that the 10 agencies with the highest spending on office supplies accounted for about $1.3 billion, about 81 percent of the total $1.6 billion spent governmentwide on the 14 categories of office supplies during fiscal year 2009. The amounts spent by the top 10 agencies are shown in figure 1. The report found that about 58 percent "
3149,"of office supply purchases were made outside of the GSA schedules program, mostly at retail stores. The report also found that agencies often paid more—a price premium—than they would have by using the GSA schedules program or OS II. On average, GSA found that agencies paid 75 percent more than schedule prices and 86 percent more than OS II prices for their retail purchases. Table 1 shows the 14 categories of office supplies, the number of different items in each of the categories, and the retail price prem"
3150,"iums that GSA calculated for each category when compared to schedule prices. The report also concluded that buyers engaged in at least some level of price comparisons before making purchasing decisions. More specifically, the report stated that buyers may compare prices across different vendors when ordering through an electronic medium, or across available items when purchasing directly through a vendor’s online or retail store. GSA used several sources of data to analyze and compare the prices paid for 21"
3151,"9 items across 14 categories of office supplies through various purchasing options. The GSA report acknowledged some limitations with the data, but we identified additional data and other limitations that lead us to question the magnitude of some of GSA’s reported price premiums. We were not able to fully quantify the impact of these limitations. Other agencies also questioned the study’s specific findings related to price premiums, but their own studies of price premiums support GSA’s conclusion that bette"
3152,"r prices can be obtained through consolidated, leveraged purchasing. The GSA study also concluded that buyers compared prices before making purchases, but this conclusion was not based on information from actual purchase card holders. Purchasing of office supplies is highly decentralized with about 270,000 purchase cardholders and others across the government making purchases in fiscal year 2009. Because of this, GSA obtained data for its study from multiple government sources, and purchase card information"
3153," provided by the commercial banks that issue the government purchase cards. To determine the funds spent on office supplies and to conduct related analyses, GSA sorted through data from these various sources, which included about 7 million purchase transactions involving over 12 million items. GSA took a number of steps to clean the data prior to using them. For example, because a single purchase might have been reported in more than one data source, GSA removed duplicate purchases prior to its analysis. Th"
3154,"e data were further cleaned to remove items and their related costs that did not meet GSA’s definition of office supplies. To determine retail price premiums, GSA focused its analyses on 219 office supply items that were purchased in 2009 from retailers and the GSA schedules. In its report, GSA acknowledged that the data used to analyze governmentwide purchases of office supplies in 2009 had limitations, in part due to the decentralized data sources for office supply purchases and the limited time GSA had t"
3155,"o conduct its study. A significant issue GSA faced was attempting to control for variation in quantities; in other words, GSA tried to ensure that when comparing prices, it was using transactions that involved identical quantities. A purchase of pens, for example, could involve a single pen, a package of three pens, a box of a dozen, or any other quantity. GSA officials told us that the primary means they used to control for quantities was the use of the manufacturer’s part number. They explained that they "
3156,"searched available databases to identify items with identical part numbers. They told us that when they found large variations in retail prices for apparently identical items, they excluded transactions they considered to be outliers. This approach, however, may not have been adequate to account for variations in quantity. When we contacted a national organization representing manufacturers, a senior staff director told us that there is no consistent approach among manufacturers for assigning part numbers. "
3157,"Some manufacturers may assign one part number to individual items and different part numbers to packages of those same items containing different quantities, while other manufacturers may assign the same part number both to individual items and to packages of items. In addition, when we reviewed some of the individual transaction data GSA obtained for retail purchases, we identified substantial price variations for a number of drawing and graphic arts supplies and writing instruments that carried the same m"
3158,"anufacturer’s part number. Specifically, when we reviewed GSA’s retail transaction data for 10 items within the writing instruments category, we found that retail prices for 6 of the 10 items varied by more than 300 percent. For instance, for one item involving black Rollerball pens, GSA’s retail transaction data showed prices ranging from $9.96 to $44.96 for items listed with the same part number. These transactions were all with the same nationwide retailer. When asked about such substantial price differe"
3159,"nces for items with the same part number, GSA officials acknowledged that the purchase card data they used for retail prices did not always accurately identify the quantity of items involved in each transaction. The existence of substantial price differences for a number of items indicates that GSA’s attempts to compare prices may not have adequately controlled for variations in quantities. We also identified a weakness with the clarity of the GSA report with regard to how price premium estimates were calcu"
3160,"lated. Specifically, GSA’s study described a specific formula that was used to calculate the price premiums, but our review of the study’s supporting documents found that the GSA actually used a different formula to calculate price premiums for 10 of the 14 office supply categories. In a discussion with GSA officials, they agreed that the study did involve the use of two different formulas. When we used the formula described in the study to recalculate the retail price premiums for those 10 categories of of"
3161,"fice supplies, we found the price premiums would have changed from what GSA reported by less than 5 percentage points for all categories except drawing and graphic arts supplies. For that category, the recalculated price premium was 68 percent, as compared to the 278 percent reported in the study. The use of this unreported formula did not have a substantial impact on the retail price premium calculations for most categories of office supplies or the overall conclusions of the study, but the GSA report coul"
3162,"d have been more complete had it fully disclosed all the formulas used for all categories of office supplies. On the basis of their own studies, Air Force, Army, Navy, and DHS officials also questioned the specific price premiums and savings reported by GSA. Officials from these agencies told us they believed that the price premiums reported by GSA when buying outside the GSA schedule were overstated. However, the agencies agreed with GSA’s overall conclusion that better prices can be obtained through lever"
3163,"aged buys. In addition, all four agencies in our review found that the prices available through the new OS II BPAs were better than the prices available from their existing agency BPAs. For example, a DHS study found savings of about 20 percent when analyzing the prices associated with a mix of 348 items. The Air Force determined that the OS II BPAs could save about 7 percent in a study of the 125 most commonly purchased items. On the basis of this analysis, the Air Force decided to let its existing office "
3164,"supply contracts expire. Similarly, the Navy’s comparison of 71 items found that using the OS II BPAs could save about 6 percent, which led Navy officials to move purchasing to the OS II BPAs. Army officials did not provide study results, but they told us their analysis found lower price premiums than reported by GSA. An Army official said they plan to continue using existing BPA's while they transition to OS II. GSA interviewed senior-level acquisition officials to determine how office supply purchasing de"
3165,"cisions were made within their respective agencies and concluded that purchase cardholders compared costs at some level prior to making a purchase. While these officials may have had a broad understanding of agency procurement policies and practices based on their positions in their respective agencies, they were not representative of the approximately 270,000 credit cardholders making the purchasing decisions. The GSA report did not identify or collect any data about price comparisons conducted by the card"
3166,"holders. Collecting information from buyers, even through interviews or a survey of government purchase cardholders who actually made the purchases, could have provided another perspective on buyer behavior, including the extent to which price comparisons were made. GSA officials said that, given the reporting timeframe for the study, they did not have the resources or time that would have been needed to conduct a study that would have included a representative sample of the 270,000 purchase card holders. A"
3167,"ccording to initial available data, GSA’s new OS II BPAs have produced savings. The OS II initiative, more so than past efforts, is demonstrating that leveraged buying can produce greater savings and has provided improvements for managing ongoing and future strategic sourcing initiatives. GSA is using a combination of agency and vendor involvement to identify key requirements and cost drivers, increase the ease of use, and obtain the data necessary to manage the program. For example, a key aspect of the ini"
3168,"tiative is that participating vendors provide sales and other information to GSA to help monitor prices, savings, and vendor performance. On the basis of the sales data provided by OS II vendors, GSA estimates the federal government saved $16 million from June 2010 through August 2011 by using these BPAs. These savings were estimated by comparing the lowest prices of a set of over 400 items available on GSA’s schedules program contracts before OS II with prices and discounts being offered for the same items"
3169," on the OS II BPAs. Importantly, and unlike GSA’s report, GSA’s conclusions about savings realized under OS II are based on data from vendors—which they are required to collect and provide in the normal course of business—and not on data collected after the fact from sources not designed to produce information needed to estimate savings. GSA’s comparison of the market basket of best schedule prices against the OS II BPA vendors’ prices found that the BPA vendors offered prices that were an average of 8 perc"
3170,"ent lower, and the average savings is expected to fluctuate somewhat as the OS II initiative continues to be implemented. The expected fluctuation is based on anticipated changes in the mix of vendors, products, and agencies. For example, GSA found the savings, as a percentage, declined slightly as agencies with historically strong office supplies management programs increased their use of OS II. Conversely, they expect the savings percentage to increase as agencies without strong office supplies management"
3171," programs increase their use. In addition to the savings from the BPAs, GSA representatives told us that they are also seeing prices decrease on schedules program contracts as vendors that were not selected for the OS II program react to the additional price competition created by the OS II initiative by reducing their schedule prices. After the first year the OS II BPAs were in use, GSA extended the BPAs for an additional year after negotiating additional price discounts. As a result of these discussions, "
3172,"13 of the 15 BPA vendors decreased their prices by an additional 3.9 percent on average. Additionally, the BPAs included tiered discounts, which apply when specific sales volume thresholds are met. Sales realized by one of the BPA vendors reached the first tier discount level in September 2011, and the vendor has since adjusted its prices to provide the corresponding price discounts. GSA anticipates additional vendor sales to exceed the first tier discount threshold in the first option year, which will trig"
3173,"ger additional discounts. GSA expects that OS II will result in lower government-wide costs for office supplies as more agencies move from their agency-specific BPAs for office supplies to the OS II BPAs. Many agencies that had their own BPAs for office supplies did not renew their BPAs and have opted to use the OS II instead. As these agencies move to OS II, their contract management costs should decrease. For example, according to Air Force officials, instead of having personnel in every agency administer"
3174," their own BPAs for office supplies, personnel at GSA will administer the OS II program on behalf of other agencies. While this may create some additional burden for GSA, officials believe the overall government costs to administer office supply purchases should decrease. GSA has incorporated a range of activities representative of a strategic procurement approach into the OS II initiative, including aspects of managing the suppliers. These activities range from obtaining a better picture of spending on ser"
3175,"vices, to taking an enterprisewide approach, to developing new ways of doing business. All of these activities involve some level of centralized oversight and management. In addition, this approach involves activities associated with the management of the supply chain, which includes planning and managing all activities involved in sourcing and procurement decisions, as well as logistics management activities. These include coordination and collaboration with stakeholders, such as suppliers or vendors, inte"
3176,"rmediaries sometimes referred to as resellers, third party service providers, and customers or buying agencies. As part of the planning process for OS II, GSA assessed its schedules program office supply vendor pool and determined a sufficient number of vendors could meet its critical requirements. As part of the overall strategy, in addition to savings, GSA through its commodity council also identified five overarching goals for the OS II initiative, to facilitate overall management, as shown in table 2. A"
3177,"s part of preparing for the competition for OS II, GSA obtained input from the interested vendors before issuing the request for quotations by holding an industry day. For example, based on vendor input that identified shipping as a key cost driver, a $100 minimum order level was included as part of the BPA. A reverse auction process was used to carry out the competition for the BPAs, which GSA anticipated would result in more pricing discounts offered by vendors. As part of the reverse auction process, the"
3178," vendors submitted an initial quote. After GSA evaluated the quotes, the vendors were notified of the lowest quotes and provided at least one opportunity to revise their quotes, resulting in price reductions. GSA obtained commitments from agencies and help set goals for additional discounts to let businesses know that the agencies were serious in their commitment to the BPAs. This also helped GSA determine the number of BPAs that would be awarded. Because government purchase cards were the most common way t"
3179,"o purchase office supplies, OS II includes a point of sale discount, under which BPA prices are automatically charged whenever a government purchase card is used for an item covered by the BPA rather than having the buyers ask for a discount. Additionally, purchases are automatically tax exempt if the purchases are made using a government purchase card. State sales taxes were identified by GSA’s report as costing the federal agencies at least $7 million dollars in fiscal year 2009. To address concerns about"
3180," vendor oversight and management, OS II has attempted to clearly define program implementation responsibilities, including laying out GSA, vendor, and buying agency responsibilities. A key aspect of a successful acquisition program is managing the vendors or suppliers to ensure that they are meeting terms and conditions of the contract or BPA and that the program or initiative is meeting its overall goals. This includes defining performance metrics, capturing or collecting data, preparing analysis and relat"
3181,"ed reports, communicating the results of the analysis, and initiating corrective actions. GSA is capturing data on purchases and vendor performance that is assimilated and tracked through dashboards, which are high-level indicators of overall program performance. The dashboard information is used by the GSA team members responsible for oversight and is shared with agencies using OS II. Our review of GSA’s OS II vendor files found that GSA has taken a more active role in oversight and is holding the vendors "
3182,"accountable for performance. For example, GSA has issued Letters of Concern to four vendors and has issued one Cure Notice to a vendor. These letters and notices are used to inform vendors that the agency has identified a problem with the vendor’s compliance with the terms and conditions of the BPA. To support the OS II management responsibilities, GSA charges a 2 percent management fee, which is incorporated into the vendor prices. This fee, which is higher than the .75 percent fee normally charged on GSA "
3183,"schedules program sales, covers the additional program costs, such as the cost of the six officials responsible for administering the 15 BPAs, as well as their contractor support. GSA is learning lessons from OS II, its first of the second generation of strategic sourcing initiatives, and is attempting to incorporate these lessons into other strategic sourcing initiatives. While some of the lessons learned as OS II has progressed are not directly transferable to other initiatives, there are some aspects of "
3184,"it that can be applied to any strategic sourcing initiative. To this end, GSA established an office supplies commodity council to identify agencies’ goals and needs. The input provided by the commodity team was incorporated into all aspects of the program from the vendor requirements to the selection criteria. This experience is being applied to other strategic sourcing initiatives. For example, GSA took a more collaborative approach as it moved to Federal Strategic Sourcing Initiative Second Generation Dom"
3185,"estic Delivery Services II (DDS2). More specifically, GSA set up a commodity council that helped identify the program requirements and provide input on how the program operates. Vendor input was also sought and incorporated into the requirements. GSA’s office supplies report contained some data and other limitations, but it showed that federal agencies were not using a consistent approach in both where and how they bought office supplies and often paid a price premium as a result of these practices. The mag"
3186,"nitude of the price premium may be debatable, but other agencies that have conducted studies came to the same basic conclusion about the savings potential from leveraged buying. The GSA study helped set the course for a more strategic approach to buying office supplies—an approach that provides data to oversee the performance of vendors, monitor prices, and estimate savings. Additional savings are expected as more government agencies participate in the OS II initiative and further leverage the government’s "
3187,"buying power. We provided a draft of this report to GSA, DHS, and DOD. We received written comments from GSA and DHS, which are included as appendices I and II, respectively. DOD had no comments. In its comments, GSA said it was pleased that our report affirmed that savings can be achieved through leveraged purchasing and better understanding of spend data. GSA also provided additional information on its strategic sourcing initiatives. GSA noted that it would have been very resource intensive for the agency"
3188," to obtain information from a representative sample of the 270,000 purchase card holders for little added benefit. We revised our report to reflect GSA’s comment. GSA provided some suggested language and technical changes to help clarify the report, which we incorporated as appropriate. We did not use GSA's suggested language concerning the limitations we identified in its study because we believe the language in our report accurately reflects our finding on this issue. DHS stated that it appreciated our wo"
3189,"rk and provided additional information on its respective strategic sourcing initiatives. DHS also stated that it has realized savings from the OS II initiative and expects to continue to do so. We are sending copies of this report to the Administrator of General Services, the Secretaries of the Department of Homeland Security and Defense as well as the Air Force, Army, and Navy. In addition, the report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have"
3190," any questions about this report, please contact me at (202) 512-4841 or woodsw@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix III. In addition to the contact named above, James Fuquay, Assistant Director; Marie Ahearn; Morgan Delaney Ramaker; Joseph Fread; Jean Lee; Jean McSween; Kenneth Patton; Carol Petersen; Raffaele Roffo; William Russel"
3191,l; Roxanna Sun; Jeff Tessin; and Ann Marie Udale made significant contributions to this report.
3192,"The 31 DFEs we surveyed were established in various statutes as commissions, boards, authorities, corporations, endowments, institutions, agencies, and administrations. Their heads may be individuals, such as a chairperson or a director, or groups, such as commissions or boards. Individuals and members of commissions and boards are generally appointed by the President and confirmed by the Senate, but members for some entities are set statutorily without additional appointment and confirmation. For instance,"
3193," the Pension Benefit Guaranty Corporation’s statute sets the corporation’s board members as the Secretary of Labor, Secretary of the Treasury, and Secretary of Commerce, all of whom are appointed to their cabinet positions by the President and confirmed by the Senate. Each year, the Office of Management and Budget (OMB) determines and publishes a list of DFEs and their heads. OMB uses the definition under the IG Act, as amended, for the head of a DFE, which is any person or persons designated by statute as "
3194,"the head of the DFE or if no such designation exists, the chief policymaking officer or board of the DFE. It is important to note that the term governing body for purposes of this report is broad and therefore could include members in addition to the entity head under the IG Act, as amended. Table 1 shows the 31 DFEs categorized by organizational structure and entity head for 2008. Governance can be described as the process of providing leadership, direction, and accountability in fulfilling an organization"
3195,"’s mission, meeting its objectives, and providing stewardship of public resources, while establishing clear lines of responsibility for results. Accountability represents the processes, mechanisms, and other means—including financial reporting and internal controls—by which an entity’s management carries out its stewardship and responsibility for resources and performance. Commonly accepted governance practices for federal entities and nonprofit corporations have significantly evolved since the financial sc"
3196,"andals at large public companies in the early 2000s and passage of the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act outlined a framework for more effective corporate governance and introduced reforms to public company financial reporting and auditing. Although the act strengthened corporate governance only in the private sector, the federal government and nonprofit sectors have also strengthened governance and internal control requirements and practices. According to OMB, passage of the Sarbanes-Oxley"
3197," Act served as an impetus for the federal government to reevaluate its current policies related to internal control over financial reporting and management’s related responsibility. The Inspector General Act of 1978 (1978 IG Act) created offices of inspectors general at major departments and agencies to prevent and detect fraud and abuse in their departments’ and agencies’ programs and operations; conduct audits and investigations; and recommend policies to promote economy, efficiency, and effectiveness. In"
3198," 1988, the 1978 IG Act was amended to establish additional IG offices in certain federal entities designated by the legislation. Generally, the DFE IGs have the same authorities and responsibilities as those established by the 1978 IG Act, but there is a clear distinction—they are appointed and removed by their agency heads rather than by the President and are not subject to Senate confirmation. The 31 DFE IGs make up about half of all IG offices established under the IG Act, as amended, and in fiscal year "
3199,"2007 were responsible for oversight with respect to gross agency budgets that ranged from $10 million to $80.2 billion. The IG Reform Act of 2008 (2008 Reform Act) was enacted on October 14, 2008, to, among other things, enhance the independence of the inspectors general. (We have reported several times on independence issues and challenges for the IG community.) Specifically, the 2008 Reform Act provides that both the President and DFE heads must give written reasons to Congress for removing an IG at least"
3200," 30 days prior to removal. The 2008 Reform Act mandates that IGs shall submit their budget to their entity’s head, who shall include, among other things, an aggregate request for the IG in the entity’s budget proposal to the President. The President must include in the budget of the U.S. government submitted to Congress a separate statement of each IG’s budget request, and the amount requested by the President for each IG. Before the act, only the presidentially appointed IGs and three DFE IGs had such tran"
3201,"sparency over their budgets. Regarding pay, the presidentially appointed IGs have been paid at Executive Level IV, while the DFE IGs have been paid at the GS-15 grade, Senior Executive Service level, or equivalent salary level determined by their entity. The 2008 Reform Act requires that all presidentially appointed IGs be paid at Executive Level III, plus 3 percent, and all DFE IGs shall be paid at a level at or above the level of a majority of senior executives of the respective DFEs. The 2008 Reform Act "
3202,"was effective upon passage, but it provided up to 180 days to establish the Council of Inspectors General on Integrity and Efficiency. While Congress has historically weighed many political and policy factors in deciding on DFE governance structures, and applied specific accountability requirements to achieve its original objectives, current private sector guidance says that governing bodies need to be large enough to accommodate the necessary skills set, but still small enough to promote cohesion, flexibil"
3203,"ity, and effective participation. DFEs vary in their statutory size and structure as well as their statutory purpose and requirements for governance. Survey responses showed that the size of DFE governing bodies ranges from 1 to 24 members. Thirteen of the 31 DFEs had at least one vacancy in their governing body. At 2 of the DFEs— the Consumer Product Safety Commission and National Labor Relations Board—active members were outnumbered by vacancies. Only 7 of 29 DFE governing bodies have committees that deal"
3204," with governance or oversight. Committees can enhance the overall effectiveness of the governing body by ensuring focus and oversight in areas of concern. In order to improve governance and accountability at federal agencies, a variety of laws covering a range of management and administrative practices and processes have been enacted. Of 12 key governance and accountability statutes that we selected for review, 13 of 31 DFEs responded that they are statutorily required to comply with all 12 statutes. Based "
3205,"on the responses of the remaining 18 DFEs, the applicability of the 12 statutes varied, with 1 DFE—the Corporation for Public Broadcasting—stating that it is not subject to any of the 12 key governance and accountability statutes. Some entities that said they are not statutorily required to comply with the statutes indicated that they have adopted the provisions voluntarily or implemented an alternative mechanism to attain the objectives of the statute. Finally, in relation to the governing body’s effective"
3206,"ness, 19 of the 29 DFEs surveyed reported having orientation programs for the new governing body, while only 10 DFEs reported having ongoing training for governing body members. Orientation and training programs for governing body members aimed at providing information on governance practices and the regulatory environment are important for the DFE governing body’s ability to carry out its responsibilities effectively and efficiently. Corporate governance guidelines in the private sector state that governin"
3207,"g bodies should establish committees that will enhance their overall effectiveness by ensuring focus and oversight for areas of concern. Our work shows that few DFEs reportedly have audit committees, none have an ethics committee, and only a limited number have orientation and ongoing training for governing body members, which is inconsistent with the governance practices established in other sectors such as public companies or nonprofits. Congress has over many decades weighed a variety of political and po"
3208,"licy considerations, such as political independence and accountability, efficiency, and specific entity missions, in deciding on DFE governance structures, and applied specific accountability requirements, such as governing body appointment and removal authorities and governing body public meeting requirements, to achieve its original objectives. Current private sector guidance says that governing bodies need to be large enough to accommodate the necessary skills set, but still small enough to promote cohes"
3209,"ion, flexibility, and effective participation. The DFE’s governing bodies range in size from 1 to 24 members. For comparison, according to the 2006 edition of the annual Directors’ Compensation and Board Practices report by The Conference Board, the median board size of publicly traded corporations, depending on the industry, ranges from 9 to 11 members. Of the 31 DFEs, only the Corporation for Public Broadcasting, Legal Services Corporation, and United States Postal Service statutorily have 9 to 11 governi"
3210,"ng body members. Three entities— the National Science Foundation, Smithsonian Institution, and Appalachian Regional Commission—statutorily have more than 11 members, while the remaining 25 DFEs have 8 or fewer governing-body members. (See table 2.) At the time of our review, vacancies reportedly outnumbered active members on the governing bodies of the Consumer Product Safety Commission (CPSC) and the National Labor Relations Board. In recent years, Amtrak and the Federal Election Commission have also had s"
3211,"ignificant vacancies. In January 2008, four of the six commissioner seats for the Federal Election Commission were vacant. Over the past several years the number of active board members at Amtrak has fluctuated, and at least twice—between December 2007 and March 2008 and between October 2003 and June 2004—the board had only two voting members (excluding the Secretary of Transportation or his designee). Without the minimum number of members required to conduct business, a board may be legally unable to make "
3212,"certain decisions. For instance, the Federal Election Commission’s enabling legislation requires that four of its six commissioners be present for certain entity business to be carried out. Also, the National Endowment for the Humanities and the National Endowment for the Arts governing bodies, which are single-member governing bodies, are currently vacant. According to The Conference Board’s corporate governance guidelines, corporate boards should be structured so that the composition and skill set of a bo"
3213,"ard is appropriate based on the corporation’s particular challenges and strategic vision. The size of a governing body is important not only for establishing the necessary range of skills, but in promoting cohesion, flexibility, and effective participation of the members to achieve their governance objectives. Generally, the membership of DFE governing bodies is defined by the DFE’s authorizing legislation, with many DFE governing body members appointed by the President, with the advice and consent of the S"
3214,"enate. For instance, the Pension Benefit Guaranty Corporation’s governing body is statutorily composed of three members—the Secretary of Labor, Secretary of Treasury, and Secretary of Commerce. The Secretary of Labor is the chairperson and entity head under the IG Act. The Appalachian Regional Commission is statutorily composed of governors of the 13 Appalachian states and a federal cochair. The Smithsonian Board of Regents is statutorily composed of the Vice President, the Chief Justice of the United State"
3215,"s, three members of the Senate, three members of the House of Representatives, and nine other members not from Congress. In order to improve governance and accountability at federal agencies, a variety of laws covering a range of management and administrative practices and processes have been enacted. We identified 12 statutes as key to governance and accountability. The statutes, which are described in Appendix III, cover funds control, performance and financial reporting, accounting and internal control s"
3216,"ystems, human resources management, and recordkeeping and access to information. They are the: Anti-Deficiency Act (ADA), “Purpose Statute” (31 U.S.C. § 1301(a)), Improper Payments Information Act of 2002 (IPIA), Accountability of Tax Dollars Act of 2002 (ATDA), Government Performance and Results Act of 1993 (GPRA), Federal Managers’ Financial Integrity Act of 1982 (FMFIA), Federal Information Security Management Act of 2002 (FISMA), Travel, Transportation, and Subsistence (5 U.S.C. Chapter 57), Whistleblow"
3217,"er Protection Act (WPA), Ethics in Government Act of 1978 (Ethics), Freedom of Information Act (FOIA), and Government in the Sunshine Act (Sunshine). Based on results from a data request we sent to the DFEs, table 3 shows 13 of 31 reported that they are subject to all 12 key governance statutes. Reponded as subject to the te. In responding to our data request, several DFEs indicated that although they are not required to comply with a particular statute, they are in essence following the statute, having ado"
3218,"pted the provisions of the statute voluntarily or implemented an alternative mechanism to attain the statute’s objectives. (See Appendix IV.) Corporate governance guidelines in the private sector state that governing bodies should establish committees that will enhance their overall effectiveness by ensuring focus and oversight for areas of concern. In the private sector, statutes and standards require that public company boards of directors maintain certain standing committees, such as audit, nominating, e"
3219,"thics, and compensation. In addition, governing bodies have established committees to focus on issues or particular concerns of the board such as risk, technology, public policy, and corporate governance. Committees handle specific issues or topics and usually make policy recommendations for the full board to consider. Most DFEs do not have governance or internal oversight committees. However, DFEs, like all federal entities, do receive oversight by congressional committees. Of the 29 DFEs responding to our"
3220," survey, only 7—the Corporation for Public Broadcasting, Election Assistance Commission, Federal Reserve Board, Legal Services Corporation, National Science Foundation, Smithsonian Institution, and United States Postal Service—indicated that they have committees or advisory panels for enhancing governing body effectiveness that are commonly found in public companies or nonprofit organizations. As shown in table 5, 5 of those 7 have audit committees. None of the 29 governing bodies responding to our survey r"
3221,"eported having a standing ethics committee. (See table 5.) Some federal entities have applied private sector corporate governance guidelines for oversight committees in response to recent governance challenges or reports on governance and accountability practices. Some of these challenges have even resulted in board reorganization and other governance changes. For instance, in response to an IG report, the Corporation for Public Broadcasting created a governance committee for its board and revised the board"
3222,"’s by-laws to clarify the board’s and president’s roles. In response to a GAO report, the Legal Services Corporation created an audit committee and also added the responsibilities of corporate governance to its Performance Review committee, which was renamed Governance and Performance Review. Based on recommendations of the Smithsonian Institution Board of Regents’ Governance Committee, the board adopted a set of duties and responsibilities for all regents, examined the board structure, and appointed new le"
3223,"adership for each committee. In the last 3 years, the United States Postal Service has added the role of governance to the responsibilities of its Strategic Planning Committee, added the Government Relations and Regulatory Committee, and developed a plan to comply with the Postal Accountability and Enhancement Act. The Board of Governors of the Federal Reserve combines functions of finance, budget, performance review, and operations in its Board Affairs Committee. According to The Conference Board’s Corpora"
3224,"te Governance Handbook 2007, a company board’s responsibility typically includes: monitoring and evaluating senior management, reviewing and approving management’s strategic and business plans, reviewing and approving the entity’s risk management program, reviewing and approving financial objectives and plans, monitoring the entity’s performance against the strategic plan, and helping to ensure ethical behavior and compliance with laws and regulations. The Corporate Governance Handbook 2007 further states t"
3225,"hat a company board’s effectiveness depends on the quality and timeliness of information received in order to make informed decisions and perform its oversight function. Governing bodies establish committees to enhance the overall effectiveness of the board by ensuring focus on and oversight of matters of particular concern. Since the IG is responsible for preventing and detecting fraud and abuse, conducting audits and investigations, and recommending policies to promote economy, efficiency, and effectivene"
3226,"ss, the work of an IG at an entity can benefit the governing body, particularly governing body and committee efforts to focus on issues and provide oversight of the entity. Because single-member governing bodies and other noncorporate entity governing bodies have many of the same responsibilities as corporate boards of directors, we believe that public company and nonprofit corporation governance practices may provide benefits to those governing bodies. Only five of the DFE governing bodies indicated they h"
3227,"ave an audit committee, which is one of the key elements in effective corporate governance. According to the National Council on Nonprofits Association, an audit committee provides independent oversight of the organization’s accounting and financial reporting and oversees the organization’s annual audits. In the private sector, an audit committee is generally responsible for the appointment, compensation, and oversight of the external auditor; handling board communication with the external auditor regarding"
3228," financial reporting matters; and overseeing the entity’s financial reporting and the adequacy of internal control over financial reporting. In the federal government environment, the audit committee could also provide a key venue for the IG’s role in governance and in communicating with those charged with governance. Unless provided otherwise, the IG is responsible for conducting or overseeing the annual agency audit. New auditing standards reinforce the importance of communication between the financial au"
3229,"ditor and those overseeing the organization’s governance. The auditing standards require that the auditor communicate with those charged with governance, who have the duty to oversee the strategic direction of the entity and obligations related to the accountability of the entity. The standards recognize that multiple parties may be charged with governance including oversight bodies, members of legislative committees, boards of directors, audit committees, or parties contracting the audit. Without an audit "
3230,"committee, organizations may find it more difficult to ensure that weaknesses found during the financial audit as well as IG recommendations are addressed properly. None of the DFE governing bodies has a separate standing ethics committee. An ethics committee is responsible for ensuring that the organization has systems in place to provide assurance over employee compliance with the organization’s code of conduct and ethics. According to Standards for Internal Control in the Federal Government, a positive c"
3231,"ontrol environment includes integrity and ethical values that are provided by leadership through setting and maintaining the organization’s ethical tone, providing guidance for proper behavior, removing temptations for unethical behavior, and providing discipline when appropriate. The New York Stock Exchange requires that an ethics committee function be contained within the audit committee of listed companies. Although audit and ethics committees are accepted governance practices, in order to determine whet"
3232,"her a governing body should create these committees, consideration should be given to the entity’s structure, size, mission, and risk. Nineteen of the 29 DFEs responding to our survey reported having orientation programs for new governing body members, and at least 15 of the 19 programs reportedly provide key information on oversight and governance issues, such as governing body policies and communications with management. Seventeen DFEs reported that the roles and duties of their entities’ IGs are included"
3233," in the orientation program. Of 9 DFEs that reported having ongoing training for governing body members covering topics such as the fiduciary duty of board members and role of the IG, only 5 addressed some of the statutory requirements and oversight topics— such as Government in the Sunshine Act and Freedom of Information Act, travel policy, and ethics—considered necessary to keep board members updated on current federal government and management practices. DFEs are organizations unique in their missions, e"
3234,"ntity structure, governing body and oversight framework, and budget. They are also subject to varying governance and accountability statutes. Therefore, orientation and training can be especially important for new governing body members from the private sector who have not worked in the federal government and may not be familiar with the federal government statutes and environment, particularly the role of the IG and how the IG can assist the board in achieving its oversight duties. The initial training and"
3235," orientation of new governing body members is a critical area for the governing body due to the significance of the stewardship, oversight, and potential fiduciary responsibilities of individual governing body members and the governing body as a whole. Current commonly accepted practice for public companies and nonprofit corporations is to provide board members with a broad-based orientation that encompasses the organization’s mission, vision, and strategic plan; its history; the members’ obligations and pe"
3236,"rformance objectives; board policies on meetings and attendance; and board member job descriptions, including performance expectations and fiduciary obligations. Orientation and training programs help governing bodies to stay current with information on governance practices and the regulatory environment. In addition, a governing body needs to be kept up to date on key management practices and requirements in such areas as risk assessment and mitigation, internal controls, and financial reporting so that th"
3237,"e governing body can oversee management’s key processes. As the governing body’s operating environment changes, new issues—whether regulatory, current practice, or industry specific—emerge with the changes. The orientation and training programs could help members of the governing body identify and address the new issues. According to The Conference Board’s corporate governance guidelines, governing bodies should meet regularly and focus principally on broader issues, such as corporate philosophy and mission"
3238,", broad entitywide policy, strategic management, oversight and monitoring of management, and company performance against business plans. Of those we surveyed, the number of meetings that the 25 DFE governing bodies with more than 1 member held each year varied greatly from 2005 through 2007 (see table 6). It is critical that the number and length of governing body meetings allow the governing body members to appropriately fulfill their stewardship, oversight, and potential fiduciary duties, which include pr"
3239,"oviding active oversight of the entity’s strategy implementation and risk management. The IGs were created equally under the IG Act, as amended; however, the entities’ structures, governance practices, and policies and procedures vary, thereby affecting the role of the IG. These variances can be seen in different ways including the IG reporting relationship, budget or spending authority, and the entity’s governing body and management response to IG recommendations. The IG Act, as amended, requires that DFE "
3240,"IGs report to and be under the general supervision of their entity head. Most of the DFE IGs we surveyed report to the highest levels in their entities, a structure that helps to safeguard IG independence in accordance with the IG Act and generally accepted government auditing standards. GAO’s Internal Control Management and Evaluation Tool states that the IG should have sufficient levels of competent and experienced staff and that the responsibilities, scope of work, and audit plans of the IG should be app"
3241,ropriate to the agency’s needs. The IG surveys also showed that most DFE IGs had limited control over their resources and that their budgets and staffing were not always adequate to perform audits or investigations related to the missions or management challenges of their entities. Government Auditing Standards state that restrictions on funds or other resources provided to the audit organization can impair independence and adversely affect the organization’s ability to carry out its responsibilities. Nine 
3242,of the 31 DFE IGs who responded to our survey stated that they need approval from entity management for spending on specific activities such as travel and contracting and 12 DFE IGs responded that they need entity approval to hire staff. Management responsiveness to IG recommendations is another critical factor that can influence the effectiveness of IG oversight and the effect of IG work. IG responses to the survey showed that management responsiveness to recommendations and audit resolution activities als
3243,"o varied, with some DFE IGs reporting that agency responsiveness to recommendations was lacking. One entity reported having 117 outstanding recommendations, some dating to 1998. Only 10 DFEs reported that their governing bodies have written policies for monitoring the implementation of IG recommendations. Nine of those 10 have policies that require the governing body to respond in writing acknowledging the recommendations and to develop a plan to address them. Audit and oversight committees, which can help "
3244,"oversee implementation of recommendations, could assist IGs in providing effective oversight and actively tracking and resolving recommendations. The IG Act, as amended, requires that DFE IGs report to and be under the general supervision of their entity heads. The IG Act also requires IGs to perform audits in compliance with Government Auditing Standards, which state that for a government internal audit function to be independent, the head of the audit organization must be accountable to the head or deputy"
3245," head of the government entity or to those charged with governance and be located organizationally outside the staff or line management function of the unit under audit. Without any other safeguards, the independence of an IG who must report audit or investigative findings in areas under the direct responsibility of his or her supervisor may be impaired in both fact and appearance. Twenty-nine of the 31 IGs we surveyed responded that they report either to their entity head or the entity governing body. Tabl"
3246,"e 7 shows that 16 IGs responded that they meet with their entity heads at least weekly or monthly and 12 meet with them quarterly. Government Auditing Standards state that the internal audit organization, such as the IGs, should report regularly to those charged with governance. Six of the 31 IGs responded that their entity had an audit or other oversight committee that they meet with and 4 indicated that they met with the committee quarterly (See table 8). Government Auditing Standards state that multiple "
3247,"parties may be charged with governance, including oversight bodies, boards of directors, audit committees, or parties contracting for the audit. Since those charged with governance have the duty to oversee the strategic direction of the entity and obligations related to the accountability of the entity, the IG’s regular communication with the audit or other oversight committee is important for the committee to carry out its governance duties. Government Auditing Standards state that audit organizations must"
3248," be free from external impairments to independence. External impairments occur when auditors are deterred from acting objectively and exercising professional skepticism by actual or perceived pressures from management and employees of the entity. For example, an IG’s lack of control over the budgetary resources from its entity, such as the entity head restricting funds or other resources to the IG, can impair an IG’s independence and ability to carry out its responsibilities. Separate appropriation accounts"
3249," for IGs can help provide transparency about the amount of the IG’s budget and reveal trends in resources provided to them. However, until passage of the 2008 Reform Act, there was no statute, including the IG Act, requiring separate appropriations accounts for all DFE IGs. Three DFE IGs have a separate appropriation account or line item in the Budget of the U.S. Government (Legal Services Corporation, National Science Foundation, and Federal Reserve Board). Twenty-six of 31 DFE IGs responding to the survey"
3250," reported that they developed or oversaw development of their budgets, with 8 of the 26 receiving guidance from entity management which the survey responder indicated limited the size of the original request. Eight DFE IGs reported that they needed approval from entity management to spend funds for purchases, travel, training, and other IG activities (see table 9). Of the entities listed in table 9, the National Endowment for the Arts, National Endowment for the Humanities, National Archives and Records Adm"
3251,"inistration, and the Consumer Product Safety Commission IGs indicated they have never had a problem obtaining additional funds when necessary. IGs at the Federal Labor Relations Authority (FLRA) and U.S. International Trade Commission, however, informed us that they had not been able to obtain funding for staff. A recent peer review of FLRA, for instance, found that the IG did not perform the required FISMA evaluations in 2006 and 2007 because management had not responded to the IG’s requests for funds to h"
3252,"ire contract auditors. The peer reviewer recommended that the FLRA IG provide a copy of the peer review report to FLRA management and that the FLRA IG use the peer review report to seek assistance from other oversight bodies—including the appropriate subcommittees of Congress and OMB—for help in addressing the existing impairments to independence. The 2008 Reform Act mandates that IGs shall submit their budget to their entity’s head, who shall include, among other things, an aggregate request for the IG in "
3253,"their agency budget proposal to the President. The President must include in the budget submitted to Congress a separate statement of each IG’s budget request, and the amount requested by the President for each IG. This should provide more transparency to the IG budget process. GAO’s Internal Control Management and Evaluation Tool states that in assessing office of inspector general internal controls, the IG should consider whether it has sufficient levels of competent and experienced staff and that the res"
3254,"ponsibilities, scope of work, and audit plans of the IG should be appropriate to the agency’s needs. In fiscal year 2008, the 31 DFE IGs had budgets ranging from $331,000 to $233,300,000, with 5 having budgets $500,000 or under and 12 having budgets under $1,000,000. In addition to the IGs’ overall mandate to prevent and detect waste, fraud, and abuse and to promote economy and efficiency, specific audit work may arise from legal mandates, requests from entity management, requests from Congress, or from dis"
3255,"cretionary work deemed necessary by the IG. The IGs also reported that the percent of IG work spent on mandatory audits ranged from 0 to 100 percent. All 19 IGs who responded that their agencies are subject to the Accountability of Tax Dollar Act of 2002 (ATDA) reported that funding for the entity’s financial statements came from their IG budgets. In fiscal year 2008, 15 of 31 DFE IGs reported having 5 or fewer staff. Twelve of the 31 IGs responded that they need entity approval to hire staff. Limited staff"
3256,"ing may affect the ability of the IG to conduct the full range of audits required by its mandate (See table 10). Twenty of 31 IGs reported they had their own full or part-time General Counsel. The IG offices that did not have their own General Counsel had 5 or fewer staff, except for Peace Corps, which had 17. Of those that did not have their own General Counsel, all but FLRA used a member of their entity’s General Counsel staff. FLRA used the General Counsel of another entity’s Office of Inspector General."
3257," Absent adequate safeguards, cases where the IG has no access to General Counsel other than that internal to entity management could pose a potential impairment to IG independence. GAO’s Internal Control and Management Evaluation Tool states that in assessing an entity’s internal controls, the entity should consider whether its IG regularly provides recommendations to management that are evaluated and implemented when appropriate. The tool also considers whether agency management has a mechanism to ensure p"
3258,"rompt resolution of findings and recommendations from audits and other reviews. According to their survey responses, IGs made recommendations ranging in number from 0 to 593 in 2007. A number of the IGs we interviewed stated that agency responsiveness to IG and financial audit recommendations was lacking. One entity had 117 recommendations outstanding, some dating to 1998. Audit or advisory committees, which can play an oversight role in tracking and resolving recommendations, exist at only seven of the DFE"
3259,s. Ten of the 29 DFEs that responded to our survey reported that their governing bodies have written policies for monitoring the implementation of IG recommendations. Nine of those 10 have policies that require the governing body to respond in writing acknowledging the recommendations and develop a plan to address them. Eight of the 10 also require that the governing body provide a time frame for implementing the IG recommendations and that the IG make a determination about whether the recommendations have 
3260,"been implemented. The Report Consolidation Act of 2000, as implemented by OMB Circular No. A-136, Financial Reporting Requirements, requires that IGs of executive agencies summarize the most serious management challenges faced by their entities and assess their entities’ progress in addressing these challenges. The challenges and any responses from the head of the agency are to be included in the agency’s Performance and Accountability Report (PAR). Twenty-four DFE IGs developed a list of management challen"
3261,"ges annually for their entities, while Amtrak, Election Assistance Commission, Federal Reserve Board, National Credit Union Administration, Postal Regulatory Commission, and Smithsonian Institution reported they did not. Of those who prepared management challenges, 10 reported them in both their semiannual reports and their Performance and Accountability Reports. Another 10 documented management challenges only in their entity’s PAR and 2 reported them only in the IG semiannual report. Some entities documen"
3262,"ted their list of challenges in multiple places. The Legal Services Corporation IG did not report management challenges in either the semiannual report or the PAR, neither of which it is required to issue, but included them in the IG’s strategic plan. Despite the modernization of governance structures and practices that have occurred in the private sector in recent years, many DFEs, while similar to private corporations and nonprofits, have not updated their governance structures and practices. Therefore, t"
3263,"he DFEs lag in commonly accepted governance practices, such as the use of audit committees, ethics committees, and orientation and training of governing body members. For entities using funding from taxpayers and donors, effective governance, accountability, and internal control are keys to maintaining trust and credibility. Although the DFE IGs receive equal treatment under the IG Act, as amended, variations in governance structures and practices among the entities create differing environments for them. G"
3264,"overnance structures and practices can aid or hamper the work of the IGs, which were created by Congress to provide oversight and enhance the effectiveness of the mission of these entities. Reviewing and updating their governance structures, and the IG’s role, can provide DFE governing bodies with the opportunity to determine how to best use the IGs to enhance accountability and improve overall governance. As the 2008 Reform Act is implemented, some of the issues identified in our survey, such as lack of bu"
3265,"dget transparency and lack of control over budgets, may be mitigated. We are not making specific recommendations in this report, but are providing this information for consideration in future oversight of DFEs and their IGs. The information on governance structures and practices provided in this report can help inform continuing work to improve the effectiveness of government, such as the new IG Council established under the 2008 Reform Act, which can also use this information in its role of promoting and s"
3266,"upporting the effectiveness of the IG community and fostering governmentwide efforts to improve management. The information provides a basis for beginning discussions on the governance structures and practices as well as the IG role, but additional individual entity analysis that considers entity structure, size, mission, and risk should be completed in order to determine whether the governance or IG practice would provide value. We requested comments on a draft of this report from all 31 DFE entity heads a"
3267,"nd IGs. Of the entity heads and IGs responding, a number provided technical comments that we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. We will then send copies of this report to other appropriate congressional committees, the DFE entity heads, and the DFE IGs. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you have any "
3268,"questions concerning this report, please contact me at (202) 512-2600 or franzelj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in Appendix V. Our reporting objectives were to describe (1) the statutory structure of the governing body for each designated federal entity (DFE) organization and (2) the inspector generals’ (IG) roles within the governance structure"
3269," and management of their respective entities. We conducted this engagement from September 2007 to January 2009 in accordance with all sections of GAO’s Quality Assurance Framework that are relevant to our objective. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any"
3270," findings and conclusion. To obtain the information needed for our two reporting objectives, we reviewed and summarized information from a variety of sources, including the enabling legislation of each DFE; the IG Act, as amended; the 2007 Performance and Accountability Report (PAR) or 2007 Annual Report of each DFE; the Office of Management and Budget’s (OMB) FY 2007 list of designated federal entities and federal entities; and prior GAO reports on inspectors general, accountability, and governance at the "
3271,"DFEs. Based on prior work, we identified relevant current private sector guidance for governance that included the following: The Conference Board, Corporate Governance Handbook, 2007: Legal Standards and Board Practices. National Council of Nonprofit Associations, Financial Accountability Lipman, F.D. and L.K. Lipman, Corporate Governance Best Practices: Strategies for Public, Private, and Not-For-Profit Organizations. American Bar Association, Guide to Nonprofit Corporate Governance in the Wake of Sarbane"
3272,"s-Oxley. Organization for Economic Cooperation and Development (OECD), OECD Principles of Corporate Governance. We also conducted a survey of the DFE entity heads and DFE IGs and conducted follow-up interviews as needed. We also submitted a data request of the DFE general counsels to ascertain whether their entities were statutorily required to comply, voluntarily complied, or do not follow 12 key governance and accountability statutes that we selected for review. We express no opinion on the applicability "
3273,"of the 12 statutes selected to any of the DFEs. We summarized survey, data request, and interview results for entity head and management control and supervision over the IG, budgets, use of resources, and other operational issues. We identified key factors regarding the effectiveness of the IG and summarized survey results and other information for impact on IG effectiveness. Much of the data presented in this report were obtained from the two surveys directed to the DFE entity heads and the DFE IGs. The DF"
3274,"E entity head survey included questions about governing body committees, meetings, orientation, training, financial statement audits, IG oversight, and internal controls. The DFE IG survey included questions about IG experience, staffing, budget, supervision, salary, communications, and resources. Since the population for both samples was known to be 31, we surveyed all DFE entity heads and DFE IGs. We identified inquiry areas based on the congressional request, previously conducted literature searches on g"
3275,"overnance responsibilities and structures, and our prior internal experience and reporting on related topics. A listing of numerous relevant publications is printed as appendix VI. We conducted a pretest of our questionnaire for DFE entity heads and for DFE IGs. We directed our DFE entity head survey to the entity head designated by OMB under the IG Act, as amended. We directed our DFE IG survey to the IG for each entity. We e-mailed the entity head questionnaires on March 25 and 26, 2008, and the IG questi"
3276,"onnaires on March 25, 2008. Those entity heads not completing the questionnaire were e-mailed replacement questionnaires on April 16, 2008. Those IGs not completing the questionnaire were e- mailed replacement questionnaires on April 11, 2008. On May 21, 2008, we also made follow-up phone calls to nine entity heads and three IGs who had yet to complete the survey. We received 29 of 31 entity head questionnaires and all 31 of the IG questionnaires as of September 16, 2008. We also augmented our work by condu"
3277,"cting a data request to obtain information from DFE general counsels. The data request included 12 questions about key governance and accountability statutes we selected and whether the entity was statutorily required to comply with, voluntarily complied with, or was neither statutorily required to follow nor voluntarily chose to comply with the statute. To determine the key governance and accountability statutes for our data request, we reviewed relevant prior GAO reports and compared published governance "
3278,"practices to the statutes. We directed our data request to the general counsel of the individual DFEs. We e-mailed the data requests on June 17 and 18, 2008. Those general counsels not completing the data request were e-mailed replacement data requests on August 1, 2008. On August 19, 2008, we also made phone calls to five general counsels. We received all 31 data requests. Statutory inspectors general were established by Congress after a series of events in the 1970s that included: a 1975 study by a subcom"
3279,"mittee of the House of Representatives that found inadequacies in internal audit and investigative procedures in the Department of Health, Education, and Welfare, and a 1977 study by the House Intergovernmental and Human Resources Subcommittee that found serious deficiencies in a number of audit and investigative efforts including a systemic lack of (1) central leadership for audits and investigations, (2) auditor and investigator independence, (3) procedures to ensure Congress would be informed of serious "
3280,"problems, and (4) programs that looked for possible fraud or abuse. The Inspector General Act of 1978 (IG Act) was intended to address these issues by providing for independent IGs appointed by the President. The act charged the IGs with conducting and supervising audits and investigations; recommending policies to promote economy, efficiency, and effectiveness; and preventing and detecting fraud and abuse in their agencies’ programs and operations. IGs are also required to report on the results of their au"
3281,"dits and investigations and prepare semiannual reports to agency heads and the Congress. Between 1978 and 1988, Congress passed legislation to establish statutory IGs in 8 additional agencies. The House Subcommittee on Legislation and National Security, Committee on Government Operations asked GAO to study the internal audit capabilities of smaller federal agencies. In May of 1984 GAO issued Status of Internal Audit Capabilities of Federal Agencies Without Statutory Inspectors General. Based on 99 responses"
3282," to surveys of 105 federal organizations, GAO uncovered many of the issues that led to the establishment of 12 IGs in the IG Act. These included auditors supervised by officials responsible for the programs under review, leading to lack of auditor independence; inadequate audit coverage of vulnerable agency operations; lack of evaluation of significant fraud problems; and audit resolution and follow-up systems that did not meet government requirements. In a June 1986 follow-up report, Nonstatutory Audit and"
3283," Investigative Groups Need to Be Strengthened, GAO reviewed 41 agencies without statutory IGs and found lack of independent and sufficient audit capabilities within agencies continued to be a problem. In its conclusion to the report, GAO supported legislation that had been recently introduced in Congress that would extend IG Act protections and requirements to most existing executive branch audit units. The Inspector General Act Amendments of 1988 and the Government Printing Office Inspector General Act of "
3284,"1988 established statutory IGs in 5 additional departments and agencies, the Government Printing Office, and 33 designated federal entities (DFE) listed in the act. Under the 1988 amendments, the IGs established in the 5 departments and agencies were to be appointed by the President with Senate confirmation while the DFE IGs were to be appointed by entity heads. Various other statutes since 1978 have amended the IG Act to add or remove entities required to have IGs. Since the designated federal entities (DF"
3285,"Es) were established with different missions and during different years, the statutory requirements for the identified key governance and accountability statutes vary. Following are the key governance and accountability statutes identified that cover funds control and budgeting, performance and financial reporting, accounting and internal control systems, human resources management, and recordkeeping and access to information. Antideficiency Act (codified as amended in 31 U.S.C. 1341, 1342, 1351, and 1517)—"
3286,"Prohibits officers and employees of the government from obligating or expending funds in advance of or in excess of appropriations. Purpose Statute (31 U.S.C. § 1301(a))—Requires federal agencies and all U.S. government corporations, both mixed ownership and wholly owned, to use appropriated funds only for the purposes provided in the law. Improper Payments Information Act of 2002 (Public Law 107- 300)—Requires agencies to identify susceptible programs and activities, estimate their improper payments, and r"
3287,"eport on actions to reduce improper payments. Accountability of Tax Dollars Act of 2002 (Public Law 107-289)— The Chief Financial Officers Act of 1990 (CFO Act), as amended by the Government Management Reform Act of 1994 (GMRA), requires the 24 agencies of the federal government covered by the CFO Act, including some independent agencies, to submit annual audited financial statements to the Office of Management and Budget (OMB) and Congress. The financial statements must be prepared in accordance with gener"
3288,"ally accepted accounting principles and audited in accordance with generally accepted government auditing standards. The Accountability of Tax Dollars Act of 2002 (ATDA) expanded this requirement to include most other federal executive agencies. Government Performance and Results Act of 1993 (Public Law 103-62)—Requires an annual performance report. The annual performance report shall reflect, among other things, the agency’s or corporation’s progress in achieving the performance goals set out in its annual"
3289," performance plan, which implements a mandatory longer-term strategic plan. Federal Managers’ Financial Integrity Act of 1982 (FMFIA) (31 U.S.C. 3512 (c), (d))—Provides the statutory basis for management’s responsibility for and assessment of internal control. OMB Circular No. A-123, Management’s Responsibility for Internal Control (rev. Dec. 21, 2004), sets out the guidance for implementing the statute’s provisions, including agencies’ assessment of internal control under the standards prescribed by the Co"
3290,"mptroller General. Agencies are required to annually provide a statement of assurance on the effectiveness of internal control. U.S. government corporations are not subject to FMFIA, but they are subject to similar requirements under the Government Corporation Control Act, which incorporates by reference the FMFIA standards in requiring U.S. government corporations to include in their annual management reports a statement on internal accounting and administrative control systems. Federal Information Securit"
3291,"y Management Act of 2002 (FISMA) (Public Law 107-347)—Requires the development and implementation of an entitywide information security program. As part of that program, FISMA requires entity heads to periodically (1) perform risk assessments of the harm that could result from information security problems, such as the unauthorized disclosure or destruction of information; (2) test and evaluate the effectiveness of elements of the information security program; and (3) provide security awareness training to "
3292,"personnel and contractors. FISMA also requires the federal entity to annually have its IG or an external auditor perform an independent evaluation of the entity’s information security programs and practices to determine their effectiveness and to annually submit a report on the adequacy and effectiveness of information systems to OMB, GAO, and Congress. Travel, Transportation, and Subsistence (5 U.S.C. Chapter 57) and Federal Travel Regulation—Statutory requirements and executive branch policies for travel "
3293,"by federal civilian employees and others authorized to travel at government expense. Whistleblower Protection Act (5 U.S.C. 2302)—Provides certain protections to employees of federal agencies and, to a limited extent, U.S. government corporations, when they engage in “whistleblowing,” which involves reporting evidence of illegal or improper federal employer activities to the relevant authorities. Ethics in Government Act of 1978(Public Law 95-521)—Governs ethical conduct, including public financial disclosu"
3294,"re requirements, and limits outside earned income and activities. Freedom of Information Act (5 U.S.C. 552)—Requires that federal entities make their records available for public inspection and copying unless one of the listed FOIA exemptions applies, such as for records pertaining to medical files, internal personnel practices, or trade secrets. Government in the Sunshine Act(5 U.S.C. 552b; Public Law 94- 409)—Requires that all board meetings, including meetings of any executive committee of the board, mus"
3295,"t be open to public observation, unless an exception applies. This appendix contains profiles of the 31 designated federal entities (DFEs) and their offices of inspectors general (IG). The National Railroad Passenger Corporation was statutorily established to meet the nation’s intercity passenger transportation needs. Amtrak’s board statutorily consists of seven voting members and one ex- officio, nonvoting member (the President of Amtrak). The voting members are appointed by the President and confirmed by "
3296,"the Senate for a 5-year term. The President may choose to appoint the Secretary of Transportation to be a voting member. The Secretary of Transportation does not require the advice and consent of the Senate. As of October 2008, Amtrak had five voting board members including the Secretary of Transportation, and two vacancies. Audit and Finance; Government Relations, Legal, and Corporate Affairs; Personnel and Compensation; Security, Safety, and Environmental Affairs; and Service Development, Marketing, Produ"
3297,ct Management and Customer Service. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were 166 recommendations for which management action was still needed. The Appalachian Regional Commission is a federal-state partnership that works with the people of App
3298,"alachia to create opportunities for self- sustaining economic development and improved quality of life. The commission’s purpose is to reduce the substantial socioeconomic gaps between Appalachia and the rest of the nation. The commission, a federal program, attempts to reduce these gaps by awarding grants to various projects such as workforce training, highway construction, small business start-up assistance, and education programs. The ARC has a 14-member commission composed of a cochairman and the govern"
3299,ors of 13 Appalachian states. The federal cochairman is appointed by the President and confirmed by the Senate. The governors select a state cochairman from their number. The commission has an executive director responsible for carrying out the administrative functions of the commission and directing commission staff. Only the federal cochairman and his or her staff are federal employees. None. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and acc
3300,"ountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were six outstanding recommendations. The Federal Reserve System (Federal Reserve), the central bank of the United States, is charged with conducting the nation’s monetary policy. Through its supervisory and regulatory banking functions, the Federal Reserve maintains the safety and soundness of the nation’s financial sy"
3301,"stem. The Federal Reserve also maintains the stability of the financial system and provides services to depository institutions, the U.S. government, and foreign official institutions. The seven members of the Board of Governors of the Federal Reserve System are appointed by the President and confirmed by the Senate. A full term is 14 years. A member who serves a full term may not be reappointed. The chairman and the vice chairman of the board are designated by the President from among the members and are c"
3302,"onfirmed by the Senate. They serve a term of 4 years. A member’s term on the board is not affected by his or her status as chairman or vice chairman. The Committee on Board Affairs combines functions of finance, budget, performance review, and operations. Regulations are assigned to the committees on Supervisory and Regulatory Affairs and Consumer and Community Affairs. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to t"
3303,"heir entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were 16 outstanding recommendations. The Broadcasting Board of Governors oversees all U.S. government and government-sponsored, nonmilitary, international broadcasting. These functions are carried out by the individual BBG international broadcasters: the Voice of America, Alhurra, Radio Sawa, Radio Farda, Radio Free Europe/Radio Liberty, Radio "
3304,"Free Asia, and Radio and TV Marti, with the assistance of the International Broadcasting Bureau. The board has nine members, eight appointed by the President and confirmed by the Senate, and the Secretary of State. The President appoints one member as chairman subject to the advice and consent of the Senate. No more than four members, excluding the Secretary of State, may be of the same political party. Members serve 3 years, excepting the Secretary of State, and receive compensation for time spent on BBG m"
3305,atters at the Level IV rate of the Executive Schedule. The Secretary of State does not receive any compensation for service to the board. All members are eligible for expense related to travel. Voice of America; International Broadcasting Bureau; Office of Cuba Broadcasting; Radio Free Europe/Radio Liberty; Radio Free Asia; Middle East (MBN); Personnel; and Language Service Review. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability s
3306,"tatutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were no outstanding recommendations. The Commodity Futures Trading Commission protects market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options, and fosters open, competitive, and financially sound futures and option markets. The President appoints, and the Sena"
3307,"te confirms, five commissioners with demonstrated knowledge in futures trading or its regulation, or the production, merchandising, processing, or distribution of one or more of the commodities or other goods and articles, services, rights, and interests covered by 7 U.S.C. Chapter 1. No more than three commissioners can be of the same political party, and one commissioner is appointed as the chairman by the President, by and with the advice and consent of the Senate. Commissioners serve 5-year terms and ge"
3308,nerally serve until their successor is appointed and qualified. The chairman serves at the pleasure of the President. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There was one outstanding recommendation. The Consumer Product Safety Commission protects the p
3309,"ublic against unreasonable risks of injury from consumer products; assists consumers in evaluating the comparative safety of consumer products; develops uniform safety standards for consumer products and minimizes conflicting state and local regulations; and promotes research and investigation into the causes and prevention of product-related deaths, illnesses, and injuries. There are five commissioners, who are appointed by the President, with the advice and consent of the Senate. Commission members can be"
3310," removed by the President for neglect of duty or malfeasance in office, but for no other reason. Commissioners are appointed to 7-year terms, with any vacancies filled for the remainder of the term. No more than three members may be of the same political party. The chairman is appointed by the President from among the members of the commission and confirmed by the Senate. The commission elects a vice chairman annually to act in the absence or disability of the chairman or in the case of a vacancy in the off"
3311,"ice of the chairman. The chairman, subject to commission approval, appoints the various officers for the commission’s operations. At least 30 days before the beginning of each fiscal year, the commission must establish an agenda for commission action. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicabi"
3312,"lity of these statutes to each entity. There were no outstanding recommendations. The Corporation for Public Broadcasting is a steward of the federal government’s investment in public broadcasting. It helps support the operations of more than 1,000 locally owned and operated public television and radio stations nationwide and is a source of funding for research, technology, and program development for public radio, television, and related on-line services. The CPB board has nine members, appointed by the Pr"
3313,"esident with advice and consent of the Senate to terms of 6 years. No more than five may be members of the same political party. Annually, the board elects a chairman from its members as well as one or more vice chairmen. The board also selects the president of the corporation and appoints other corporate officers. A member whose term has expired may serve until his successor has taken office or until the end of the calendar year, whichever comes first. No member may serve in excess of two consecutive terms"
3314,". The members of the board are not considered officers or employees of the United States. Members receive $150 per day for meetings and board work, including travel time and are reimbursed for actual, reasonable, and necessary expenses. No member may receive compensation of more than $10,000 in any fiscal year. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the ge"
3315,"neral counsel. We did not independently analyze the applicability of these statutes to each entity. There were six outstanding recommendations. The Denali Commission is a federal-state partnership designed to provide critical utilities, infrastructure, and economic support throughout Alaska. There are seven board members including the federal cochair. Six of the seven positions are statutorily defined as the Governor of the State of Alaska, who serves as the state cochair; the President of the University of"
3316," Alaska; the President of the Alaska Municipal League; the President of the Alaska Federation of Natives; the Executive President of the Alaska State AFL/CIO; and the President of the Associated General Contractors of Alaska. The Secretary of Commerce appoints the federal cochair from a list of nominations from the President pro temporare of the Senate and the Speaker of the House of Representatives. The federal cochair serves for 4 years and may be reappointed. Except for the federal cochair, members recei"
3317,ve a basic rate of pay at Level IV of the Executive Schedule plus travel expenses for time spent on commission work. The commission must meet at least twice a year. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were 27 outstanding recommendations as of 
3318,"March 31, 2008. The EAC, established by the Help America Vote Act of 2002, serves as a national clearinghouse and resource for information and review of procedures with respect to the administration of federal elections. The commission has four members appointed by the President with the advice and consent of the Senate. The commission selects the chair and vice chair, who may not be from the same political party, from among its members. The chair and vice chair each serve 1-year terms and may only serve in"
3319, that position once during each term of office. Members serve for 4 years and may only serve two terms. Each member is compensated at the annual rate of basic pay for Level IV of the Executive Schedule. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were
3320," 41 recommendations outstanding. The Equal Employment Opportunity Commission enforces laws that prohibit discrimination based on race, color, religion, sex, national origin, disability, or age in hiring, promoting, firing, setting wages, testing, training, and all other terms and conditions of employment. The commission has five members, no more than three of whom may be from the same political party. They are appointed by the President with the advice and consent of the Senate. The President also designate"
3321,s two of the members to be the chairman and vice chairman. The chairman runs the commission’s operations. Members serve for 5 years. None. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were 12 recommendations outstanding. The Farm Credit Administration 
3322,"is responsible for ensuring the safe and sound operation of the banks, associations, affiliated service organizations, and other entities that collectively comprise what is known as the Farm Credit System, and for protecting the interests of the public and those who borrow from Farm Credit institutions or invest in Farm Credit securities. The FCA board has three members appointed by the President with the advice and consent of the Senate. One member is designated by the President as the chairman and also se"
3323,rves as the CEO. Members serve for 6 years and may not be reappointed unless they were appointed to fill unexpired terms of 3 years or less. (1) GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were three outstanding recommendations. The Federal Communicat
3324,"ions Commission regulates interstate and foreign commerce in communications by radio, television, wire, satellite, and cable. It is responsible for the provision of rapid, efficient nationwide and worldwide communication services at reasonable rates. Its responsibilities also include the use of communications for promoting safety of life and property and for strengthening the national defense. Five commissioners are appointed by the President, with the advice and consent of the Senate for a term of 5 years."
3325," The President designates one commissioner to be chairman. Commissioners receive an annual rate of pay at Level IV of the Executive Schedule, with the chairman receiving Level III. The commission has the authority to appoint the officers and staff of the FCC and determine their compensation. Meetings of the commission must be held no less than once a month. No data. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their"
3326," entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were no outstanding recommendations. The FEC ensures the campaign finance process is fully disclosed and that laws regarding campaign finance are enforced. It also enforces the Federal Election Campaign Act (FECA) and oversees the Presidential public funding program. The commission is made up of six members, who are appointed by the President and c"
3327,"onfirmed by the Senate. Each member serves a single, 6- year term. By law, no more than three commissioners can be members of the same political party, and at least four votes are required for any official commission action. A new chairman is chosen each year from among the members, with no member serving as chairman more than once during his or her term. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. Th"
3328,"e table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were 51 outstanding recommendations. The Federal Housing Finance Board ensures the safety and soundness of the Federal Home Loan Banks, their access to the capital markets, and the fulfillment of their housing finance mission. Under the Housing and Economic Recovery Act (HERA) of 2008 (Pub. L. No. 110-289, 122 Stat. 2654 (July 30, 2008)), the FHFB will cease "
3329,"to exist 1 year after the effective date of HERA, or July 30, 2009, to be replaced by the Federal Housing Finance Agency (FHFA). HERA also amended the IG Act to require that the FHFA have an IG appointed by the President and confirmed by the Senate. The board is comprised of four members appointed by the President and confirmed by the Senate, who serve a 7-year term, and the Secretary of HUD. The President designates one of the board members as chairman. No more than three may be of the same political party"
3330, and terms are staggered to end every other year. Members filling a vacancy serve only the remainder of the predecessor’s term. None. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were no outstanding recommendations. The Federal Labor Relations Authorit
3331,"y oversees the federal service labor- management relations program. It administers the law that protects the right of employees of the federal government to organize, bargain collectively, and participate through labor organizations of their own choosing in decisions affecting them. The authority also ensures compliance with the statutory rights and obligations of federal employees and the labor organizations that represent them in their dealings with federal agencies. The authority is comprised of three bo"
3332,"ard members who are appointed to 5-year terms by the President and confirmed by the Senate. No more than two may be from the same political party. The President designates one member to be chairman, who acts as chief executive and administrative officer of the authority. The chairman is compensated at Level III of the Executive Schedule and the other members are compensated at Level IV. None. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accou"
3333,ntability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were 179 outstanding recommendations. The Federal Maritime Commission is responsible for regulating the waterborne foreign commerce of the United States. It ensures that U.S. ocean-borne trades are open to all on fair and equitable terms and protects against concerted activities and unlawful practices. The commission is c
3334,"omprised of five commissioners, who are appointed by the President and confirmed by the Senate to 5-year terms. The President designates one of the commissioners as chairman. No more than three may be members of the same political party. The chairman is the chief executive and administrative officer for the commission. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response o"
3335,"f the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were no outstanding recommendations. The Federal Trade Commission enforces the laws that prohibit business practices that are deceptive or unfair to consumers; promotes informed consumer choice and public understanding of the competitive process; and seeks to accomplish its mission without impeding legitimate business activity. The commission is comprised of five commissioners, nominated by the "
3336,"President and confirmed by the Senate, each serving a 7-year term. The President chooses one commissioner to act as chairman. No more than three commissioners can be of the same political party. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were three o"
3337,utstanding recommendations. The Legal Services Corporation’s mission is to promote equal access to justice and to provide high-quality civil legal assistance to low-income persons. The board has 11 members appointed by the President and confirmed by the Senate for 3-year terms. The board elects a chairman annually from among its members and appoints the president of the corporation. The board must meet at least four times per year. Audit; Finance; Governance and Performance Review; Operations and Regulation
3338,"s; Provision for the Delivery of Legal Services. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were no outstanding recommendations. The National Archives and Records Administration safeguards and preserves the records of our government, ensuring that th"
3339,"e people can discover, use, and learn from this documentary heritage; establishes policies and procedures for managing U.S. government records; manages the Presidential Libraries system; and publishes the laws, regulations, and presidential and other public documents. The Archivist is appointed by the President and confirmed by the Senate. There is no set term of office. The Archivist chooses the Deputy Archivist. Not applicable. GAO sent a data request to the general counsel of each DFE asking about the ap"
3340,"plicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were no outstanding recommendations. The National Credit Union Administration is responsible for chartering, insuring, and supervising federal credit unions and administering the National Credit Union Share Insurance Fund. The administration also administers the Community Development "
3341,"Revolving Loan Fund and manages the Central Liquidity Facility, a mixed-ownership government corporation that supplies emergency loans to member credit unions. The management of NCUA is vested in a full-time, three-member board appointed by the President and confirmed by the Senate. No more than two board members can be from the same political party, and each member serves a staggered 6-year term. The NCUA board normally meets monthly, except August. (571) GAO sent a data request to the general counsel of e"
3342,"ach DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were no outstanding recommendations. The National Endowment for the Arts, established by Congress in 1965 as an independent federal agency, is the official arts organization of the United States government. It is dedicated to supporting excellence in the art"
3343,"s, both new and established; bringing the arts to all Americans; and providing leadership in arts education. The NEA is headed by a chairperson appointed by the President and confirmed by the Senate. The chairperson serves for 4 years and may be reappointed or serve until a successor is appointed. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel."
3344," We did not independently analyze the applicability of these statutes to each entity. There were no outstanding recommendations. The National Endowment for the Humanities is an independent federal agency established by Congress in 1965 to support research, education, preservation, and public programs in the humanities. NEH is directed by a chairperson, who is appointed by the President and confirmed by the U.S. Senate, for a term of 4 years. The chairperson is eligible for reappointment and may continue to "
3345,serve until a successor has been appointed and qualified. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were no outstanding recommendations. The National Labor Relations Board is vested with the power to prevent and remedy unfair labor practices committ
3346,ed by private sector employers and unions and to safeguard employees’ rights to organize and determine whether to have unions as their bargaining representative. The chairman and four board members are selected by the President and confirmed by the Senate. Board members serve staggered 5-year terms. The President designates one member to serve as chairman of the board. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to th
3347,"eir entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were 20 outstanding recommendations. The National Science Foundation promotes the progress of science and engineering through the support of research and education programs. The National Science Board (NSB) is made up of 24 members appointed by the President and confirmed by the Senate, and the NSF director is an ex officio member. Members serve"
3348," 6-year terms; one-third of the board is appointed every 2 years. NSB members are drawn from industry and universities, and represent a variety of science and engineering disciplines and geographic areas. The NSB meets about six times a year. It reviews and approves major NSF awards and new programs and initiates and conducts studies and reports on a broad range of policy topics. The NSB also publishes occasional policy papers or statements on issues of importance to U.S. science and engineering. Audit and "
3349,Oversight; Strategy and Budget; Programs and Plans; Education and Human Resources; and Executive. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were 76 outstanding recommendations. The mission of the Peace Corps is to help the people of interested count
3350,"ries in meeting their need for trained men and women, and to help promote better mutual understanding between Americans and citizens of other countries. The director and deputy director are appointed by the President and confirmed by the Senate. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability o"
3351,"f these statutes to each entity. There were 113 outstanding recommendations. The Pension Benefit Guaranty Corporation provides for timely and uninterrupted pension benefits payments to participants and beneficiaries of voluntary private pension plans. PBGC is administered by a director who reports to a board of directors, which consists of the Secretaries of Labor, Commerce, and Treasury. The Secretary of Labor is chairman of the board and calls meetings. Members serve without compensation, but are reimburs"
3352,ed for expenses incurred during board business. The corporation is aided by a seven-member Advisory Committee appointed by the President. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were 113 outstanding recommendations. The Postal Regulatory Commissio
3353,"n oversees the Market Dominant and Competitive Products of the U.S. Postal Service, adjusts as necessary lists of these products, and reviews related complaints. The commission is composed of five commissioners, each of whom is appointed by the President, with the advice and by consent of the Senate, for a term of 6 years. The Chairman is designated by the President. A commissioner may continue to serve after the expiration of his or her term for up to 1 year. No more than three members of the commission ma"
3354,y be members of the same political party. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were no outstanding recommendations. The Securities and Exchange Commission administers federal securities laws that seek to provide protection for investors; to ens
3355,"ure that securities markets are fair; and, when necessary, to provide the means to enforce securities laws through sanctions. The SEC consists of five commissioners appointed by the President and confirmed by the Senate, with staggered 5-year terms. One of them is designated by the President as chairman of the commission—the agency’s chief executive. No more than three of the commissioners may belong to the same political party. (531) GAO sent a data request to the general counsel of each DFE asking about t"
3356,"he applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were 59 outstanding recommendations. The Smithsonian Institution is an independent trust instrumentality of the United States which comprises an extensive museum and research complex. It is dedicated to the increase and diffusion of knowledge. The Board of Regents has 17 members,"
3357," including the Vice President, the Chief Justice of the United States, 3 members of the U.S. Senate, and 3 members of the House of Representatives. Nine other persons other than members of Congress, 2 of whom must be Washington D.C. residents and 7 from U.S. states, make up the remainder. House members serve for 2 years, the Senate members serve their term as Senators, and the other 9 members serve for 6 years. The board elects its own chancellor, who is the presiding officer of the Board of Regents. The bo"
3358,ard also elects the Secretary of the institution and three board members as an executive committee. At least 8 members must be present for the meeting to have a quorum. Members are paid travel expenses to attend meetings but their service is otherwise gratuitous. Audit and Review; Executive; Compensation and Human Resources; Facilities; Finance; Investment; Governance and Nominating; Advancement; and Strategic Planning and Programs. GAO sent a data request to the general counsel of each DFE asking about the
3359," applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were 61 outstanding recommendations. The United States International Trade Commission administers U.S. trade remedy laws within its mandate; provides the President, the United States Trade Representative, and Congress with analysis, information, and support on matters of tariffs an"
3360,"d international trade and competitiveness; and maintains the Harmonized Tariff Schedule of the United States. The USITC is headed by six commissioners who are nominated by the President and confirmed by the U.S. Senate. No more than three commissioners may be members of the same political party. The commissioners serve overlapping terms of 9 years each, with a new term beginning every 18 months. The chairman and vice chairman are designated by the President from among the current commissioners for 2- year t"
3361,"erms. The chairman and vice chairman must be from different political parties, and the chairman cannot be from the same political party as the preceding chairman. GAO sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There was one outstanding recommendation. The miss"
3362,"ion of the USPS is to provide the nation with reliable, affordable, universal mail service. The Board of Governors of USPS is composed of 11 members. It includes nine governors who are appointed by the President and confirmed by the Senate and the Postmaster General and the Deputy Postmaster General. The nine governors select the Postmaster General, who becomes a member of the board, and those 10 select the Deputy Postmaster General, who also serves on the board. The Postmaster General serves at the pleasur"
3363,"e of the governors for an indefinite term. The Deputy Postmaster General serves at the pleasure of the governors and the Postmaster General. Members of the Board of Governors serve for 7 years. Each governor receives $300 per day for not more than 42 days of meetings each year and travel expenses, in addition to an annual salary of $30,000. Audit and Finance; Compensation and Management Resources; Government Relations and Regulatory; Governance and Strategic Planning; and Ad Hoc Committee on Operations. GAO"
3364," sent a data request to the general counsel of each DFE asking about the applicability of 12 governance and accountability statutes to their entity. The table below reflects the response of the general counsel. We did not independently analyze the applicability of these statutes to each entity. There were 212 outstanding recommendations. Jeanette Franzel (202) 512-2600 or franzelj@gao.gov. In addition to the person named above, major contributors to this report were Kimberly McGatlin (Assistant Director), L"
3365,"isa Crye, Francis Dymond, Joel Grossman, Jacquelyn Hamilton, Maxine Hattery, Jennifer Henderson, Jack Hufnagle, Chelsea Lounsbury, and Tory Wudtke. Inspectors General: Independent Oversight of Financial Regulatory Agencies. GAO-09-524T. Washington, D.C.: March 25, 2009. Inspectors General: Actions Needed to Improve Audit Coverage of NASA. GAO-09-88. Washington, D.C.: December 18, 2008. Legal Services Corporation: Improvements Needed in Governance, Accountability, and Grants Management and Oversight. GAO-08-"
3366,"833T. Washington, D.C.: May 22, 2008. Smithsonian Institution: Board of Regents Has Implemented Many Governance Reforms, but Ensuring Accountability and Oversight Will Require Ongoing Action. GAO-08-632 . Washington, D.C.: May 15, 2008. Federal Oversight: The Need for Good Governance, Transparency, and Accountability. GAO-07-788CG. Washington, D.C.: April 16, 2007. Smithsonian Institution: Status of Efforts to Address a Range of Funding and Governance Challenges. GAO-08-250T. Washington, D.C.: December 12, "
3367,"2007. Inspectors General: Limitations of IG Oversight at the Department of State. GAO-08-135T. . Washington, D.C.: October 31, 2007. Legal Services Corporation: Governance and Accountability Practices Need to Be Modernized and Strengthened. GAO-07-993. Washington, D.C.: August 15, 2007. Pension Benefit Guaranty Corporation: Governance Structure Needs Improvements to Ensure Policy Direction and Oversight. GAO-07-808. Washington, D.C.: July 6, 2007. Inspectors General: Proposals to Strengthen Independence and"
3368," Accountability. GAO-07-1021T. Washington, D.C.: June 20, 2007. Inspectors General: Activities of the Department of State Office of Inspector General. GAO-07-138. Washington, D.C.: March 23, 2007. Corporate Governance: NCUA’s Controls and Related Procedures for Board Independence and Objectivity Are Similiar to Other Financial Regulators, but Opportunities Exist to Enhance Its Governance Structure. GAO-07-72R. Washington, D.C.: November 30, 2006. Suggested Areas for Oversight for the 110th Congress. GAO-07-"
3369,"235R. Washington, D.C.: November 17, 2006. Intercity Passenger Rail: National Policy and Strategies Needed to Maximize Public Benefits from Federal Expenditures. GAO-07-15. Washington, D.C.: November 13, 2006. Highlights of the Comptroller General’s Panel on Federal Oversight and the Inspectors General. GAO-06-931SP. Washington, D.C.: September 11, 2006. United Nations: Funding Arrangements Impede Independence of Internal Auditors. GAO-06-575. Washington, D.C.: April 25, 2006. Activities of the Treasury Ins"
3370,"pector General for Tax Administration. GAO-05-999R. Washington, D.C.: September 27, 2005. Amtrak: Management and Accountability Issues Contribute to Unprofitability of Food and Beverage Service. GAO-05-761T. Washington, D.C.: June 9, 2005. Kennedy Center: Stronger Oversight of Fire Safety Issues, Construction Projects, and Financial Management Needed. GAO-05-334. Washington, D.C.: April 22, 2005. Tax-Exempt Sector: Governance, Transparency, and Oversight Are Critical for Maintaining Public Trust. GAO-05-561"
3371,"T. Washington, D.C.: April 20, 2005. Activities of the Amtrak Inspector General. GAO-05-306R. Washington, D.C.: March 4, 2005. Inspectors General: Enhancing Federal Accountability. GAO-04-117T. Washington, D.C.: October 8, 2003. Department of Health and Human Services: Review of the Management of Inspector General Operations. GAO-03-685. Washington, D.C.: June 10, 2003. Inspectors General: Office Consolidation and Related Issues. GAO-02-575. Washington, D.C.: August 15, 2002. Inspectors General: Comparison "
3372,"of Ways Law Enforcement Authority Is Granted. GAO-02-437. Washington, D.C.: May 22, 2002. Inspectors General: Department of Defense IG Peer Reviews. GAO-02-253R. Washington, D.C.: December 20, 2001. U.S. Export-Import Bank: Views on Inspector General Oversight. GAO-01-1038R. Washington, D.C.: September 6, 200l. HUD Inspector General: Actions Needed to Strengthen Management and Oversight of Operation Safe Home. GAO-01-794. Washington, D.C.: June 29, 2001."
3373,"DOD and VA offer health care benefits to active duty servicemembers and veterans, among others. Under DOD’s health care system, eligible beneficiaries may receive care from military treatment facilities or from civilian providers. Military treatment facilities are individually managed by each of the military services—the Army, the Navy, and the Air Force. Under VA, eligible beneficiaries may obtain care through VA’s integrated health care system of hospitals, ambulatory clinics, nursing homes, residential r"
3374,"ehabilitation treatment programs, and readjustment counseling centers. VA has organized its health care facilities into a polytrauma system of care that helps address the medical needs of returning servicemembers and veterans, in particular those who have an injury to more than one part of the body or organ system that results in functional disability and physical, cognitive, psychosocial, or psychological impairment. Persons with polytraumatic injuries may have injuries or conditions such as TBI, amputatio"
3375,"ns, fractures, and burns. Over the past 6 years, DOD has designated over 30,000 servicemembers involved in Operations Iraqi Freedom and Enduring Freedom as wounded in action. Servicemembers injured in these conflicts are surviving injuries that would have been fatal in past conflicts, due, in part, to advanced protective equipment and medical treatment. The severity of their injuries can result in a lengthy transition from patient back to duty, or to veteran status. Initially, most seriously injured service"
3376,"members from these conflicts, including activated National Guard and Reserve members, are evacuated to Landstuhl Regional Medical Center in Germany for treatment. From there, they are usually transported to military treatment facilities in the United States, with most of the seriously injured admitted to Walter Reed Army Medical Center or the National Naval Medical Center. According to DOD officials, once they are stabilized and discharged from the hospital, servicemembers may relocate closer to their homes"
3377," or military bases and are treated as outpatients by the closest military or VA facility. As part of the Army’s Medical Action Plan, the Army has developed a new organizational structure—Warrior Transition Units—for providing an integrated continuum of care for servicemembers who generally require at least 6 months of treatment, among other factors. Within each unit, the servicemember is assigned to a team of three key staff and this team is responsible for overseeing the continuum of care for the serviceme"
3378,"mber. The Army refers to this team as a “Triad,” which consists of a (1) primary care manager—usually a physician who provides primary oversight and continuity of health care and ensures the quality of the servicemember’s care; (2) nurse case manager—usually a registered nurse who plans, implements, coordinates, monitors, and evaluates options and services to meet the servicemember’s needs; and (3) squad leader—a noncommissioned officer who links the servicemember to the chain of command, builds a relations"
3379,"hip with the servicemember, and works along side the other parts of the Triad to ensure the needs of the servicemember and his or her family are met. The Army established 32 Warrior Transition Units, to provide a unit in every medical treatment facility that has 35 or more eligible servicemembers. The Army’s goal is to fill the Triad positions according to the following ratios: 1:200 for primary care managers; 1:18 for nurse case managers at Army medical centers that normally see servicemembers with more ac"
3380,ute conditions and 1:36 for other types of Army medical treatment facilities; and 1:12 for squad leaders. Returning injured servicemembers must potentially navigate two different disability evaluation systems that generally rely on the same criteria but for different purposes. DOD’s system serves a personnel management purpose by identifying servicemembers who are no longer medically fit for duty. The military’s process starts with identification of a medical condition that could render the servicemember un
3381,"fit for duty, a process that could take months to complete. The servicemember is evaluated by a medical evaluation board (MEB) to identify any medical conditions that may render the servicemember unfit. The member is then evaluated by a physical evaluation board (PEB) to make a determination of fitness or unfitness for duty. If found unfit, and the unfit conditions were incurred in the line of duty, the PEB assigns the servicemember a combined percentage rating for those unfit conditions using VA’s rating s"
3382,"ystem as a guideline, and the servicemember is discharged from duty. This disability rating, along with years of service and other factors, determines subsequent disability and health care benefits from DOD. For servicemembers meeting the minimum rating and years of duty thresholds, monthly disability retirement payments are provided; for those not meeting these thresholds, a lump-sum severance payment is provided. As servicemembers in the Army navigate DOD’s disability evaluation system, they interface wit"
3383,"h staff who play a key role in supporting them through the process. MEB physicians play a fundamental role as they are responsible for documenting the medical conditions of servicemembers for the disability evaluation case file. In addition, MEB physicians may require that servicemembers obtain additional medical evidence from specialty physicians such as a psychiatrist. Throughout the MEB and PEB process, a physical evaluation board liaison officer serves a key role by explaining the process to servicememb"
3384,"ers, and ensuring that the servicemembers’ case files are complete before they are forwarded for adjudication. The board liaison officer informs servicemembers of board results and of deadlines at key decision points in the process. The military also provides legal counsel to servicemembers in the disability evaluation process. The Army, for example, provides them with legal representation at formal board hearings. The Army will provide military counsel, or servicemembers may retain their own representative"
3385," at their own expense. In addition to receiving benefits from DOD, veterans may receive compensation from VA for lost earning capacity due to service-connected disabilities. Although a servicemember may file a VA claim while still in the military, he or she can only obtain disability compensation from VA as a veteran. VA will evaluate all claimed conditions, whether they were evaluated previously by the military service’s evaluation process or not. If the VA finds that a veteran has one or more service-conn"
3386,"ected disabilities with a combined rating of at least 10 percent, VA will pay monthly compensation. The veteran can claim additional benefits over time, for example, if a service-connected disability worsens. To improve the timeliness and resource utilization of DOD’s and VA’s separate disability evaluation systems, the agencies embarked on a planning effort of a joint disability evaluation system that would enable servicemembers to receive VA disability benefits shortly after leaving the military without g"
3387,"oing through both DOD’s and VA’s processes. A key part of this planning effort included a “table top” exercise whereby the planners simulated the outcomes of cases using four potential options that incorporated variations of following three elements: (1) a single, comprehensive medical examination to be used by both DOD and VA in their disability evaluations; (2) a single disability rating performed by VA; and (3) incorporating a DOD-level evaluation board for adjudicating servicemembers’ fitness for duty. "
3388,"Based on the results of this exercise, DOD and VA implemented the selected pilot design using live cases at three Washington, D.C.-area military treatment facilities including Walter Reed Army Medical Center in November 2007. Key features of the pilot include (see fig. 1): a single physical examination conducted to VA standards as part of the disability ratings prepared by VA, for use by both DOD and VA in determining disability benefits; and additional outreach and non-clinical case management provided by "
3389,"VA staff at the DOD pilot locations to explain VA results and processes to servicemembers. The Army has made strides increasing key staff positions in support of servicemembers undergoing medical treatment as well as disability evaluation, but faces a number of challenges to achieving or maintaining stated goals. Although the Army has made significant progress in staffing its Warrior Transition Units, several challenges remain, including hiring medical staff in a competitive market, replacing temporarily bo"
3390,"rrowed personnel with permanent staff, and getting eligible servicemembers into the units. With respect to supporting servicemembers as they navigate the disability evaluation process, the Army has reduced caseloads of key support staff, but has not yet reached its goals and faces challenges with both hiring and meeting current demands of servicemembers in the process. Since September 2007, the Army has made considerable progress in staffing its Warrior Transition Units, increasing the number of staff assig"
3391,"ned to Triad positions by almost 75 percent. As of February 6, 2008, the Army had about 2,300 personnel staffing its Warrior Transition Units. In February 2008, the Army reported that its Warrior Transition Units had achieved “full operational capability,” which was the goal established in the Army’s Medical Action Plan. The Warrior Transition Units reported that they had met this goal even though some units had staffing shortages or faced other challenges. The Army’s January 2008 assessment defined full op"
3392,"erational capability across a wide variety of areas identified in the Army’s Medical Action Plan, not just personnel fill. For example, the assessment included whether facilities and barracks were suitable and whether a Soldier and Family Assistance Center was in place and providing essential services. In addition, the commander assessed whether the unit could conduct the mission- essential tasks assigned to it. As a result, such ratings have both objective and subjective elements, and the Army allows comma"
3393,"nders to change the ratings based on their judgment. Location (size of Warrior Transition Unit population) Fort Hood, Texas (957) Walter Reed Army Medical Center, Washington, D.C. (674) Fort Lewis, Washington (613) Fort Campbell, Kentucky (596) Fort Drum, New York (395) Fort Polk, Louisiana (248) Fort Knox, Kentucky (243) Fort Irwin & Balboa, California (89) Fort Belvoir, Virginia (43) Fort Huachuca, Arizona (41) Redstone Arsenal, Alabama (17) The Army is confronting other challenges, as well, including rep"
3394,"lacing borrowed staff in Triad positions with permanently assigned staff without disrupting the continuity of care for servicemembers. We previously reported in September 2007 that many units were relying on borrowed staff to fill positions—about 20 percent overall. This practice has continued; in February 2008, about 20 percent of Warrior Transition Unit staff continued to be borrowed from other positions. Army officials told us that using borrowed staff was necessary to get the Warrior Transition Units im"
3395,"plemented quickly and has been essential in staffing units that have experienced sudden increases in servicemembers needing care. Army officials told us that using borrowed staff is a temporary solution for staffing the units, and these staff will be transitioned out of the positions when permanent staff are available. Replacing the temporary staff will result in turnover among Warrior Transition Unit staff, which can disrupt the continuity of care provided to servicemembers. Another lingering challenge fac"
3396,"ing the Army is getting eligible servicemembers into the Warrior Transition Units. In developing its approach, the Army envisioned that servicemembers meeting specific criteria, such as requiring more than 6 months of treatment or having a condition that requires going through the Medical Evaluation Board process, would be assigned to the Warrior Transition Units. Since September 2007, the Warrior Transition Unit population has increased by about 80 percent—from about 4,350 to about 7,900 servicemembers. Ho"
3397,"wever, although the percentage of eligible servicemembers going through the Medical Evaluation Board process who were not in a Warrior Transition Unit has been cut almost in half since September 2007, more than 2,500 eligible servicemembers were not in units, as of February 6, 2008. About 1,700 of these servicemembers (about 70 percent) are concentrated in ten locations. (See table 2.) Warrior Transition Unit commanders conduct risk assessments of eligible servicemembers to determine if their care can be ap"
3398,"propriately managed outside of the Warrior Transition Unit. These assessments are to be conducted within 30 days of determining that the servicemember meets eligibility criteria. For example, a servicemember’s knee injury may require a Medical Evaluation Board review—a criterion for being placed in a Warrior Transition Unit—but the person’s unit commander can determine that the person can perform a desk job while undergoing the medical evaluation process. According to Army guidance, servicemembers eligible "
3399,"for the Warrior Transition Unit will generally be moved into the units, that it will be the exception, not the rule, for a servicemember to not be transferred to a Warrior Transition Unit. Army officials told us that the population of 2,500 servicemembers who had not been moved into a Warrior Transition Unit consisted of both servicemembers who had just recently been identified as eligible for a unit but had not yet been evaluated and servicemembers whose risk assessment determined that their care could be "
3400,"managed outside of a unit. Officials told us that servicemembers who needed their care managed more intensively through Warrior Transition Units had been identified through the risk assessment process and had been moved into such units. As eligible personnel are brought into the Warrior Transition Units, however, it could exacerbate staffing shortfalls in some units. To minimize future staffing shortfalls, Army officials told us that they are identifying areas where they anticipate future increases in the n"
3401,"umber of servicemembers needing care in a Warrior Transition Unit and would use this information to determine appropriate future staffing needs of the units. Another emerging challenge is gathering reliable and objective data to measure progress. A central goal of the Army’s efforts is to make the system more servicemember- and family-focused and the Army has initiated efforts to determine how well the units are meeting servicemembers’ needs. To its credit, the Army has developed a wide range of methods to "
3402,"monitor its units, among them a program to place independent ombudsmen throughout the system as well as town hall meetings and a telephone hotline for servicemembers to convey concerns about the Warrior Transition Units. Additionally, through its Warrior Transition Program Satisfaction Survey, the Army has been gathering and analyzing information on servicemembers’ opinions about their nurse case manager and the overall Warrior Transition Unit. However, initial response rates have been low, which has limite"
3403,"d the Army’s ability to reliably assess satisfaction. In February 2008, the Army started following up with nonrespondents, and officials told us that these efforts have begun to improve response rates. To obtain feedback from a larger percentage of servicemembers in the Warrior Transition Units, the Army administered another satisfaction survey in January 2008. This survey, which also solicited servicemembers’ opinions about components of the Triad and overall satisfaction with the Warrior Transition Units,"
3404," garnered a more than 90 percent response rate from the population surveyed. While responses to the survey were largely positive, the survey is limited in its ability to accurately gauge the Army’s progress in improving servicemember satisfaction with the Warrior Transition Unit, because it was not intended to be a methodologically rigorous evaluation. For example, the units were not given specific instructions on how to administer the survey, and as a result, it is not clear the extent to which servicememb"
3405,"ers were provided anonymity in responding to the survey. Units were instructed to reach as many servicemembers as possible within a 24-hour period in order to provide the Army with immediate feedback on servicemembers’ overall impressions of the care they were receiving. Injured and ill servicemembers who must undergo a fitness for duty assessment and disability evaluation rely on the expertise and support of several key staff—board liaisons, legal personnel, and board physicians— to help them navigate the "
3406,"process. Board liaisons explain the disability process to servicemembers and are responsible for ensuring that their disability case files are complete. Legal staff and medical evaluation board physicians can substantially influence the outcome of servicemembers’ disability evaluations because legal personnel provide important counsel to servicemembers during the disability evaluation process, and evaluation board physicians evaluate and document servicemembers’ medical conditions for the disability evaluat"
3407,"ion case file. With respect to board liaisons, the Army has expanded hiring efforts and met its goals for reducing caseloads at most treatment facilities, but not at some of the facilities with the most servicemembers in the process. In August 2007, the Army established an average caseload target of 30 servicemembers per board liaison. As of February 2008, the Army had expanded the number of board liaisons by about 22 percent. According to the Army, average caseloads per liaison have declined from 54 servic"
3408,"emembers at the end of June 2007 to 46 at the end of December 2007. However, 11 of 35 treatment facilities continue to have shortages of board liaisons and about half of all servicemembers in the disability evaluation process are located at these 11 treatment facilities. (See fig. 2.) Due to their caseloads, liaisons we spoke with at one location had difficulty making appointments with servicemembers, which has challenged their ability to provide timely and comprehensive support. The Army plans to hire addi"
3409,"tional board liaisons, but faces challenges in keeping up with increased demand. According to an Army official responsible for staff planning, the Army reviews the number of liaisons at each treatment facility weekly and reviews Army policy for the target number of servicemembers per liaison every 90 days. The official also identified several challenges in keeping up with increased demand for board liaisons, including the increase in the number of injured and ill servicemembers in the medical evaluation boa"
3410,"rd process overall, and the difficulty of attracting and retaining liaisons at some locations. According to Army data, the total number of servicemembers completing the medical evaluation board process increased about 19 percent from the end of 2006 to the end of 2007. In addition to gaps in board liaisons, according to Army documents, staffing of dedicated legal personnel who provide counsel to injured and ill servicemembers throughout the disability evaluation processes is currently insufficient. Ideally,"
3411," according to the Army, servicemembers should receive legal assistance during both the medical and physical evaluation board processes. While servicemembers may seek legal assistance at any time, the Office of the Judge Advocate General’s policy is to assign dedicated legal staff to servicemembers when their case goes before a formal physical evaluation board. In June 2007, the Army assigned 18 additional legal staff—12 Reserve attorneys and 6 Reserve paralegals— to help meet increasing demands for legal su"
3412,"pport throughout the process. As of January 2008, the Army had 27 legal personnel—20 attorneys and 7 paralegals—located at 5 of 35 Army treatment facilities who were dedicated to supporting servicemembers primarily with the physical evaluation board process. However, the Office of the Judge Advocate General has acknowledged that these current levels are insufficient for providing support during the medical evaluation board process, and proposed hiring an additional 57 attorneys and paralegals to provide leg"
3413,"al support to servicemembers during the medical evaluation board process. The proposed 57 attorneys and paralegals include 19 active-duty military attorneys, 19 civilian attorneys, and 19 civilian paralegals. On February 21, 2008, Army officials told us that 30 civilian positions were approved, consisting of 15 attorneys and 15 paralegals. While the Army has plans to address gaps in legal support for servicemembers, challenges with hiring and staff turnover could limit their efforts. According to Army offic"
3414,"ials, even if the plan to hire additional personnel is approved soon, hiring of civilian attorneys and paralegals may be slow due to the time it takes to hire qualified individuals under government policies. Additionally, 19 of the 57 Army attorneys who would be staffed under the plan would likely only serve in their positions for a period of 12 to 18 months. According to a Disabled American Veterans representative with extensive experience counseling servicemembers during the evaluation process, frequent r"
3415,"otations and turnover of Army attorneys working on disability cases limits their effectiveness in representing servicemembers due to the complexity of disability evaluation regulations. With respect to medical evaluation board physicians, who are responsible for documenting servicemembers medical conditions, the Army has mostly met its goal for the average number of servicemembers per physician at each treatment facility. In August 2007, the Army established a goal of one medical evaluation board physician "
3416,"for every 200 servicemembers. As with the staffing ratio for board liaisons, the ratio for physicians is reviewed every 90 days by the Army and the ratio at each treatment facility is reviewed weekly, according to an Army official. As of February 2008, the Army had met the goal of 200 servicemembers per physician at 29 of 35 treatment facilities and almost met the goal at two others. Despite having mostly met its goal for medical evaluation board physicians, according to Army officials, the Army continues t"
3417,"o face challenges in this area. For example, according to an Army official, physicians are having difficulty managing their caseload even at locations where they have met or are close to the Army’s goal of 1 physician for 200 servicemembers due not only to the volume of cases but also their complexity. According to Army officials, disability cases often involve multiple conditions and may include complex conditions such as TBI and PTSD. Some Army physicians told us that the ratio of servicemembers per physi"
3418,"cian allows little buffer when there is a surge in caseloads at a treatment facility. For this reason, some physicians told us that the Army could provide better service to servicemembers if the number of servicemembers per physician was reduced from 200 to 100 or 150. In addition to increasing the number of staff who support this process, the Army has reported other progress and efforts underway that could further ease the disability evaluation process. For example, the Army has reported improving outreach"
3419," to servicemembers by establishing and conducting standardized briefings about the process. The Army has also improved guidance to servicemembers by developing and issuing a handbook on the disability evaluation process, and creating a web site for each servicemember to track his or her progress through the medical evaluation board. Finally, the Army told us that efforts are underway to further streamline the process for servicemembers and improve supporting information technology. For example, the Army est"
3420,"ablished a goal to eliminate 50 percent of the forms required by the current process. While we are still assessing the scope, status, and potential impact of these efforts, a few questions have been raised about some of them. For example, according to Army officials, servicemembers’ usage of the medical evaluation board web site has been low. In addition, some servicemembers with whom we spoke believe the information presented on the web site was not helpful in meeting their needs. One measure of how well t"
3421,"he disability evaluation system is working does not indicate that improvements have occurred. The Army collects data and regularly reports on the timeliness of the medical evaluation board process. While we have previously reported that the Army has few internal controls to ensure that these data were complete and accurate, the Army recently told us that they are taking steps to improve the reliability of these data. We have not yet substantiated these assertions. Assuming current data are reliable, the Arm"
3422,"y has reported not meeting a key target for medical evaluation board timeliness and has even reported a negative trend in the last year. Specifically, the Army’s target is for 80 percent of the medical evaluation board cases to be completed in 90 days or less, but the percent that met the standard declined from 70 percent in October through December 2006, to 63 percent in October through December 2007. Another potential indicator of how well the disability evaluation process is working is under development."
3423," Since June 2007, the Army has used the Warrior Transition Program Satisfaction Survey to ask servicemembers about their experience with the disability evaluation process and board liaisons. However, according to Army officials in charge of the survey, response rates to survey questions related to the disability process were particularly low because most surveyed servicemembers had not yet begun the disability evaluation process. The Army is in the process of developing satisfaction surveys that are separat"
3424,"e from the Warrior Transition Unit survey to gauge servicemembers’ perceptions of the medical and physical evaluation board processes. DOD and VA have joined together to quickly pilot a streamlined disability evaluation process, but evaluation plans currently lack key elements. In August 2007, DOD and VA conducted an intensive 5-day “table top” exercise to evaluate the relative merits of four potential pilot alternatives. Though the exercise yielded data quickly, there were trade-offs in the nature and exte"
3425,"nt of data that could be obtained in that time frame. In November 2007, DOD and VA jointly initiated a 1-year pilot in the Washington, D.C. area using live cases, although DOD and VA officials told us they may consider expanding the pilot to other locations beyond the current sites around July 2008. However, pilot results may be limited at that and other critical junctures, and pilot evaluation plans currently lack key elements, such as criteria for expanding the pilot. Prior to implementing the pilot in No"
3426,"vember 2007, the agencies conducted a 5-day “table top” exercise that involved a simulation of cases intended to test the relative merits of 4 pilot options. All the alternatives included a single VA rating to be used by both agencies. However, the exercise was designed to evaluate the relative merits of certain other key features, such as whether DOD or VA should conduct a single physical examination, and whether there should be a DOD-wide disability evaluation board, and if so, what its role would be. Ult"
3427,"imately, the exercise included four pilot alternatives involving different combinations of these features. Table 3 summarizes the pilot alternatives. The simulation exercise was formal in that it followed a pre-determined methodology and comprehensive in that it involved a number of stakeholders and captured a broad range of metrics. DOD and VA were assisted by consultants who provided data collection, analysis, and methodological support. The pre-determined methodology involved examining previously decided"
3428," cases, to see how they would have been processed through each of the four pilot alternatives. The 33 selected cases intentionally reflected decisions originating from each of the military services and a broad range and number of medical conditions. Participants in the simulation exercise included officials from DOD, each military service, and VA who are involved in all aspects of the disability evaluation processes at both agencies. Metrics collected included case outcomes including the fitness decision, t"
3429,"he DOD and VA ratings, and the median expected days to process cases. These outcomes were compared for each pilot alternative with actual outcomes. In addition, participants rank ordered their preference for each pilot alternative, and provided feedback on expected servicemember satisfaction as well as service and organization acceptance. They also provided their views on legislative and regulatory changes and resource requirements to implement alternative processes, and identified advantages and disadvanta"
3430,"ges of each alternative. This table top exercise enabled DOD and VA to obtain sufficient information to support a near-term decision to implement the pilot, but it also required some trade-offs. For example, the intensity of the exercise— simulating four pilot alternatives, involving more than 40 participants over a 5-day period—resulted in an examination of only a manageable number of cases. To ensure that the cases represented each military service and different numbers and types of potential medical cond"
3431,"itions, a total of 33 cases were judgmentally selected by service: 8 Army, 9 Navy, 8 Marine, and 8 Air Force. However, the sample used in the simulation exercise was not statistically representative of each military service’s workload; as such it is possible that a larger and more representative sample could have yielded different outcomes. Also, expected servicemember satisfaction was based on the input of the DOD and VA officials participating in the pilot rather than actual input from the servicemembers "
3432,"themselves. Based on the data from this exercise, the Senior Oversight Committee gave approval in October 2007 to proceed with piloting an alternative process with features that scored the highest in terms of participants’ preferential voting and projected servicemember satisfaction. These elements included a single VA rating (as provided in all the alternatives tested) and a comprehensive medical examination conducted by VA. The selected pilot design did not include a DOD-wide disability evaluation board. "
3433,"Rather, the services’ physical evaluation boards would continue to determine fitness for duty, as called for under Alternative 2. DOD and VA officials have described to us a plan for expanding the pilot that is geared toward quick implementation, but may have limited pilot results available to them at a key juncture. With respect to time frames, the pilot, which began in November 2007, is scheduled to last 1 year, through November 2008. However, prior to that date, planners have expressed interest in expand"
3434,"ing the pilot outside the Washington metropolitan area. Pilot planners have told us that around July 2008— which is not long after the first report on the pilot is due to Congress— they may ask the Senior Oversight Committee to decide on expansion to more locations based on data available at that time. They suggested that a few additional locations would allow them to collect additional experience and data outside the Washington, D.C. area before decisions on broader expansion are made. According to DOD and"
3435," VA officials, time frames for national expansion have not yet been decided. However, DOD also faces deadlines for providing Congress an interim report on the pilot’s status as early as October 2008, and for issuing a final report. While expanding the pilot outside the Washington, D.C. area will likely yield useful information to pilot planners, due to the time needed to fully process cases, planners may have limited pilot results available to guide their decision making. As of February 17, 2008, 181 cases "
3436,"were currently in the pilot process, but none had completed the process. After conducting the simulation exercise, pilot planners set a goal of 275 days (about 9 months) for a case to go through the entire joint disability evaluation process. If the goal is an accurate predictor of time frames, potentially very few cases will have made it through the entire pilot process by the time planners seek to expand the pilot beyond the Washington area. As a result, DOD and VA are accepting some level of risk by expa"
3437,"nding the pilot solely on the basis of early pilot results. In addition to having limited information at this key juncture, pilot planners have yet to designate criteria for moving forward with pilot expansion and have not yet selected a comparison group to identify differences between pilot cases and cases processed under the current system, to allow for assessment of pilot performance. DOD and VA are collecting data on decision times and rating percentages, but have not identified how much improvement in "
3438,"timeliness or consistency would justify expanding the pilot process. Further, pilot planners have not laid out an approach for measuring the pilot’s performance on key metrics— including timeliness and accuracy of decisions—against the current process. Selection of the comparison group cases is a significant decision, because it will help DOD and VA determine the pilot’s impact, compared with the current process, and help planners identify needed corrections and manage for success. An appropriate comparison"
3439," group might include servicemembers with a similar demographic and disability profile. Not having an appropriate comparison group increases the risk that DOD and VA will not identify problem areas or issues that could limit the effectiveness of any redesigned disability process. Pilot officials stated that they intend to identify a comparison group of non-pilot disability evaluation cases, but have not yet done so. Another key element lacking from current evaluation plans is an approach for surveying and me"
3440,"asuring satisfaction of servicemembers and veterans with the pilot process. As noted previously, several high-level commissions identified servicemember confusion over the current disability evaluation system as a significant problem. Pilot planners told us that they intend to develop a customer satisfaction survey and use customer satisfaction data as part of their evaluation of pilot performance but, as of February 2008, the survey was still under development. Even after the survey has been developed, res"
3441,"ults will take some time to collect and may be limited at key junctures because the survey needs to be administered after servicemembers and veterans have completed the pilot process. Without data on servicemember satisfaction, the agencies cannot know whether or the extent to which the pilot they are implementing has been successful at reducing servicemember confusion and distrust over the current process. Over the past year, the Army has made substantial progress toward improving care for its servicemembe"
3442,"rs. After problems were disclosed at Walter Reed in early 2007, senior Army officials assessed the situation and have since dedicated significant resources—including more than 2,000 personnel—and attention to improve this important mission. Today, the Army has established Warrior Transition Units at its major medical facilities and doctors, nurses, and fellow servicemembers at these units are at work helping wounded, injured, and ill servicemembers through what is often a difficult healing process. Some cha"
3443,"llenges remain, such as filling all the Warrior Transition Unit personnel slots in a competitive market for medical personnel, lessening reliance on borrowed personnel to fill slots temporarily, and getting servicemembers eligible for Warrior Transition Unit services into those units. Overall, the Army is to be commended for its efforts thus far; however, sustained attention to remaining challenges and reliable data to track progress will be important to sustaining gains over time. For those servicemembers "
3444,"whose military service was cut short due to illness or injury, the disability evaluation is an extremely important issue because it affects their service retention or discharge and whether they receive DOD benefits such as retirement pay and health care coverage. Once they become veterans, it affects the cash compensation and other disability benefits they may receive from VA. Going through two complex disability evaluation processes can be difficult and frustrating for servicemembers and veterans. Delayed "
3445,"decisions, confusing policies, and the perception that DOD and VA disability ratings result in inequitable outcomes have eroded the credibility of the system. The Army has taken steps to increase the number of staff that can help servicemembers navigate its process, but is challenged to meet stated goals. Moreover, even if the Army is able to overcome challenges and sufficiently ramp up staff levels, these efforts will not address the systemic problem of having two consecutive evaluation systems that can le"
3446,"ad to different outcomes. Considering the significance of the problems identified, DOD and VA are moving forward quickly to implement a streamlined disability evaluation that has potential for reducing the time it takes to receive a decision from both agencies, improving consistency of evaluations for individual conditions, and simplifying the overall process for servicemembers and veterans. At the same time, DOD and VA are incurring some risk with this approach because the cases used were not necessarily r"
3447,"epresentative of actual workloads. Incurring some level of risk is appropriate and perhaps prudent in this current environment; however, planners should be transparent about that risk. For example, to date, planners have not yet articulated in their planning documents the extent of data that will be available at key junctures, and the criteria they will use in deciding to expand the pilot beyond the Washington, D.C. area. More importantly, decisions to expand beyond the few sites currently contemplated shou"
3448,"ld occur in conjunction with an evaluation plan that includes, at minimum, a sound approach for measuring the pilot’s performance against the current process and for measuring servicemembers’ and veterans’ satisfaction with the piloted process. Failure to properly assess the pilot before significant expansion could potentially jeopardize the systems’ successful transformation. Mr. Chairman, this completes our prepared remarks. We would be happy to respond to any questions you or other Members of the Subcomm"
3449,"ittee may have at this time. For further information about this testimony, please contact Daniel Bertoni at (202) 512-7215 or bertonid@gao.gov, or John H. Pendleton at (202) 512-7114 or pendletonj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made major contributions to this testimony are listed in appendix I. In addition to the contacts named above, Bonnie Anderson, Assistant Director; Michele Grgich, Ass"
3450,"istant Director; Janina Austin; Susannah Compton; Cindy Gilbert; Joel Green; Christopher Langford; Bryan Rogowski; Chan My Sondhelm; Walter Vance; and Greg Whitney, made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holde"
3451,r may be necessary if you wish to reproduce this material separately.
3452,"Federal crop insurance protects participating farmers against the financial losses caused by events such as droughts, floods, hurricanes, and other natural disasters. In 1995, crop insurance premiums were about $1.5 billion. USDA’s Risk Management Agency administers the federal crop insurance program through FCIC. Federal crop insurance offers farmers two primary types of insurance coverage. The first—called catastrophic insurance—provides protection against extreme crop losses for the payment of a $50 proc"
3453,"essing fee, whereas the second—called buyup insurance—provides protection against more typical smaller crop losses in exchange for a premium paid by the farmer. FCIC conducts the program primarily through private insurance companies that sell and service federal crop insurance—both catastrophic and buyup—for the federal government and retain a portion of the insurance risk. FCIC also offers catastrophic insurance through the local offices of USDA’s Farm Service Agency. FCIC pays the companies a fee, called "
3454,"an administrative expense reimbursement, that is intended to reimburse the companies for the expenses reasonably associated with selling and servicing crop insurance to farmers. The reimbursement is calculated as a percentage of the premiums received, regardless of the expenses incurred by the companies. Beginning in 1994, companies were required to report expenses in a consistent format following standard industry guidelines to provide FCIC with a basis for establishing future reimbursement rates. For buyu"
3455,"p crop insurance, FCIC reduced the administrative expense reimbursement from a base rate of 34 percent of the premiums on policies sold from 1988 through 1991 to 31 percent of the premiums from 1994 through 1996. The 1994 reform act requires FCIC to reduce the reimbursement rate to no more than 29 percent of total premiums in 1997, no more than 28 percent in 1998, and no more than 27.5 percent in 1999. FCIC can set the rate lower than these mandated ceilings. In addition, the companies earn profits when ins"
3456,"urance premiums exceed losses on policies for which they retain risk. These profits are called underwriting gains. Since 1990, companies selling crop insurance have earned underwriting gains totaling more than $500 million. FCIC had agreements with 22 companies in 1994 and 19 companies in 1995 to sell and service federal crop insurance. In 1995, the insurance companies sold about 80 percent of all federal crop insurance, while USDA’s Farm Service Agency sold the remainder. In performing our review, we exami"
3457,"ned expenses at nine companies representing about 85 percent of the total federal crop insurance premiums written by private companies in 1994 and 1995. We chose the companies considering factors such as premium volume, location, and type of ownership. In 1994 and 1995, FCIC’s administrative expense reimbursements to participating companies selling buyup insurance—31 percent of premiums—were higher than the expenses that can be reasonably associated with the sale and service of federal crop insurance. For t"
3458,"he 2-year period, FCIC reimbursed the nine companies we reviewed about $580 million. For this period, the companies reported expenses of about $542 million to sell and service crop insurance—a difference of about $38 million. However, our review showed that about $43 million of the companies’ reported expenses could not be reasonably associated with the sale and service of federal crop insurance. Therefore, we believe that these expenses should not be considered by FCIC in determining an appropriate future "
3459,"reimbursement rate for administrative expenses. Furthermore, we found that a number of the reported expenses appeared excessive for reimbursement through a taxpayer-supported program and suggest an opportunity to further reduce future reimbursement rates for administrative expenses. Finally, a variety of factors have emerged since the period covered by our review that have increased companies’ revenues or may decrease their expenses, such as higher crop prices and premium rates and reduced administrative re"
3460,"quirements. These factors should be considered in determining future reimbursement rates. Our review showed that about $43 million of the companies’ reported expenses could not be reasonably associated with the sale and service of federal crop insurance. These expenses, which we believe should not be considered in determining an appropriate future reimbursement rate for administrative expenses, included expenses for acquiring competitors’ businesses, protecting companies from underwriting losses, sharing co"
3461,"mpany profits through bonuses or management fees, and lobbying expenses. Among the costs reported by the crop insurance companies that did not appear to be reasonably associated with the sale and service of crop insurance to farmers were those related to costs the companies incurred when they acquired competitors’ business. These costs potentially aided the companies in vying for market share and meant that one larger company, rather than several smaller companies, was delivering crop insurance to farmers. "
3462,"However, this consolidation was not required for the sale and service of crop insurance to farmers, provided no net benefit to the crop insurance program, and according to FCIC, was not an expense that FCIC expected its reimbursement to cover. For example, one company took over the business of a competing company under a lease arrangement. The lease payment totaled $3 million in both 1994 and 1995. About $400,000 of this payment could be attributed to actual physical assets the company was leasing, and we r"
3463,"ecognized that amount as a reasonable expense. However, the remaining $2.6 million—which the company was paying each year for access to the former competitor’s policyholder base—provided no benefit to the farmer and no net value to the crop insurance program. Likewise, we saw no apparent benefit to the crop insurance program from the $1.5 million the company paid executives of the acquired company over the 2-year period as compensation for not competing in the industry. In total, we identified costs in this"
3464, general category totaling about $12 million for the 2-year period. We also found that two companies included payments to commercial reinsurers among their reported crop insurance delivery expenses. These are payments the companies made to other insurance companies to expand their protection against potential underwriting losses. This commercial reinsurance allows companies to expand the amount of insurance they are permitted to sell under insurance regulations while limiting their underwriting losses. The 
3465,"cost of reinsurance relates to company decisions to manage underwriting risks rather than to the sale and service of crop insurance to farmers. We discussed this type of expense with FCIC, and it agreed that this expense should be paid from companies’ underwriting revenues and thus should not be considered in determining a future reimbursement rate for administrative expenses. For the two companies that reported reinsurance costs as an administrative expense, these expenses totaled $10.7 million over the 2 "
3466,"years. Furthermore, we found that some companies included as administrative expenses for selling and servicing crop insurance, expenses that resulted from decisions to distribute profits to (1) company executives and employees through bonuses or (2) parent companies through management fees. We found that profit-sharing bonuses were a significant component of total salary expenses at one company, equaling 49 percent of basic salaries in 1994 and 63 percent in 1995. These bonuses totaled $9 million for the 2 "
3467,"years. While company profit sharing may benefit a company in competing with another company for employees, the bonuses do not contribute to the overall sale and service of crop insurance or serve to enhance program objectives. Furthermore, while we recognize that performance-based employee bonuses and bonuses paid to agents represent reasonable expenses, the profit-sharing bonuses in this example did not appear to be reasonable program expenses because they were paid out of profits after all necessary progr"
3468,"am expenses were paid. Additionally, we identified profit-sharing bonuses totaling $2.1 million reported as expenses at three other companies for 1994 and 1995. In total, we found expenditures in this general category amounting to $12.2 million over the 2 years. Similarly, we noted that two companies reported expenditures for management fees paid to parent companies as crop insurance administrative expenses. Company representatives provided few examples of tangible benefits received in return for their paym"
3469,"ent of the management fee. We recognized management fees as a reasonable program expense to the extent that companies could identify tangible benefits received from parent companies. Otherwise, we considered payment of management fees to be a method of sharing income with the parent company and paid in the form of a before-profit expense item rather than a dividend. These expenses totaled $1.1 million for the 2 years. FCIC’s standard reinsurance agreement with the companies precludes them from reporting exp"
3470,"enditures for lobbying as crop insurance delivery expenses. Despite this prohibition, we found that the companies included a total of $418,400 for lobbying in their expenses reported for 1994 and 1995. The vast majority of these expenses involved the portion of companies’ membership dues attributable to lobbying by crop insurance trade associations. Adjusting for these and other expenses reported in error, we determined, and FCIC concurred, that the expense rate for companies’ expenses reasonably associated"
3471," with the sale and service of buyup crop insurance in 1994-95 was about 27 percent of premiums. This is about 4 percentage points, or $81 million, less than the reimbursement FCIC provided. Of these 4 percentage points, 2 points reflect companies’ reported expenses that were less than their reimbursement; the remainder reflect adjustments to their reported expenses that did not appear to be reasonably associated with the sale and service of crop insurance. In addition, we found a number of expenses reported"
3472," by the companies that, although associated with the sale and service of crop insurance, seemed to be excessive for a taxpayer-supported program. While difficult to fully quantify, these types of expenditures suggest that opportunities exist for the government to reduce its future reimbursement rate for administrative expenses while still adequately reimbursing companies for the reasonable expenses of selling and servicing crop insurance policies. For example, in the crop insurance business, participating c"
3473,"ompanies compete with each other for market share through the sales commissions paid to independent insurance agents. To this end, companies offer higher commissions to agents to attract them and their farmer clients from one company to another. When an agent switches from one company to another, the acquiring company increases market share, but there is no net benefit to the crop insurance program. On average, the nine companies in our review paid agents sales commissions of 16 percent of buyup premiums th"
3474,"ey sold in 1994 and 16.2 percent in 1995. However, one company paid more—an average of about 18.1 percent of buyup premiums sold in 1994 and 17.5 percent in 1995. When this company, which accounted for about 15 percent of all sales in these 2 years, is not included in the companies’ average, commission expenses for the other eight companies averaged 15.6 percent of buyup premiums in 1994 and 15.8 percent in 1995. This company paid its agents about $6 million more than the amount it would have paid had it us"
3475,"ed the average commission rate paid by the other eight companies. Furthermore, in our review of company-reported expenses, at eight of the nine companies, we found instances of expenses that seemed to be excessive for conducting a taxpayer-supported program. For example, we found that one company in our sample for 1994 reported expenses of $8,391 to send six company managers (four accompanied by their spouses) to a 3-day meeting at a resort location. The billing from the resort included rooms at $323 per ni"
3476,"ght, $405 in golf green fees, $139 in charges at a golf pro shop, and numerous restaurant and bar charges. Our sample for 1995 included a $31,483 billing from the same resort for lodging and other costs associated with a company “retreat” costing $46,857 in total. In another instance, as part of paying for employees to attend industry meetings at resort locations, we found that one company paid for golf tournament entry fees, tickets to an amusement park, spouse travel, child care, and pet care, and reporte"
3477,"d these as crop insurance delivery expenses. Our review of companies’ expenses also showed that some companies’ entertainment expenditures appeared excessive for selling and servicing crop insurance to farmers. For example, one company spent about $44,000 in 1994 for a Canadian fishing trip for a group of company employees and agents. It also spent about $18,000 to rent and furnish a sky box at a baseball stadium. Company officials said that the expenditures were necessary to attract agents to the company. "
3478,"These expenditures were reported as travel expenses in 1994 and as advertising expenses in 1995. Moreover, the company’s 1995 travel expenses included $22,000 for a trip to Las Vegas for several company employees and agents. Similarly, our sample of companies’ expenditures disclosed payments for season tickets to various professional sports events at two other companies; and six companies paid for country club memberships and related charges for various company officials and reported these as expenses to se"
3479,"ll and service crop insurance. While a number of the companies believe that the type of expenses described above are important to maintaining an effective sales force and supporting their companies’ mission, we, along with FCIC, believe that most of these expenses appear to be excessive for a program supported by the American taxpayers. Since the period covered by our review, a variety of factors have emerged that have increased companies’ revenues or may decrease companies’ expenses. Crop prices and premiu"
3480,"m rates increased in 1996 and 1997, thereby generating higher premiums. This had the effect of increasing the reimbursements paid to companies for administrative expenses by about 3 percent of premiums without a proportionate increase in workload for the companies. Moreover, FCIC and the industry’s efforts to simplify the program’s administrative requirements may reduce companies’ workload, thereby reducing their administrative expenses. As of January 1997, FCIC had completed 26 simplification actions and w"
3481,"as continuing to study 11 additional potential actions. Neither FCIC nor the companies could precisely quantify the amount of savings that companies can expect from these changes, but they agreed that the changes were necessary and collectively may reduce costs. In 1995, the government’s total cost to deliver catastrophic insurance policies was less through USDA than through private companies. The total cost to the government to deliver catastrophic insurance consists of three components: (1) the basic sale"
3482,"s and service delivery costs, (2) offsetting income from processing fees paid by farmers, and (3) company-earned underwriting gains. When only the first and second components were considered, the costs to the government for both delivery systems were comparable. However, the payment of an underwriting gain to companies, the third component, made the total 1995 cost of delivery through private companies more expensive to the government. With respect to the first component—basic sales and service delivery cos"
3483,"ts—the cost to the government was higher in 1995 when provided through USDA. The government’s costs for basic sales and service delivery through USDA included expenses associated with activities such as selling and processing policies; developing computer software; training adjusters and adjusting claims. These costs also included indirect or overhead costs, such as general administration, rent, and utilities. Also included in the 1995 direct and indirect costs for USDA’s delivery were the Department’s one-"
3484,"time start-up costs for establishing its delivery system. Direct costs for basic delivery through USDA amounted to about $91 per crop policy, and indirect costs amounted to about $42 per crop policy, for a total basic delivery cost to the government of about $133 per crop policy. The basic delivery cost to the government for company delivery consisted of the administrative expense reimbursement paid to the companies by FCIC and the cost of administrative support provided by USDA’s Farm Service Agency. The a"
3485,"dministrative expense reimbursement paid to the companies amounted to about $73 per crop policy, and USDA’s support costs amounted to about $10 per crop policy, for a total basic delivery cost to the government for company delivery of about $83 per crop policy. The second component—offsetting income from farmer-paid processing fees—reduced the basic delivery costs to the government for both delivery systems. For USDA’s delivery, processing fees paid by farmers and remitted to the Treasury reduced the govern"
3486,"ment’s basic delivery cost of about $133 by an average of $53 per crop policy. For company delivery, fees paid by farmers and remitted to the government reduced the government’s basic delivery cost of about $83 by $7 per crop policy. For company delivery, the effect on the cost to the government was relatively small because the 1994 reform act authorized the companies to retain the fees they collected from farmers up to certain limits. Only those fees that exceeded these limits were remitted back to the gov"
3487,"ernment. Combining the basic sales and service delivery costs and the offsetting income from farmer-paid processing fees, the government’s costs were comparable for both delivery systems. The third component—underwriting gains paid by FCIC only to the companies—is the element that made delivery through the companies more expensive in 1995. The insurance companies can earn underwriting gains in exchange for taking responsibility for any claims resulting from those policies for which the companies retain risk"
3488,". In 1995, companies earned an underwriting gain of an estimated $45 million, or about a 37-percent return, on the catastrophic premiums for which they retained risk. This underwriting gain increased the government’s delivery cost for company delivery by $127 per crop policy. Underwriting gains are, of course, not guaranteed. In years with a high incidence of catastrophic losses, companies could experience net underwriting losses, meaning that they would have to pay out money from their reserves in excess o"
3489,"f the premium paid to them by the government, potentially reducing the government’s total cost of company delivery in such years. The 37-percent underwriting gain received by the companies on catastrophic policies in 1995 substantially exceeded FCIC’s long-term target. According to FCIC, the large underwriting gains in 1995 may have been unusual in that there were relatively few catastrophic loss claims and many farmers did not provide sufficient data on their production capabilities. In 1996, however, the "
3490,"underwriting gains on catastrophic policies were even higher—$58 million. The current arrangement for reimbursing companies for their administrative expenses—under which FCIC pays private companies a fixed percentage of premiums—has certain advantages, including ease of administration. However, expense reimbursement based on a percentage of premiums does not necessarily reflect the amount of work involved to sell and service crop insurance policies. Alternative reimbursement arrangements, including, among o"
3491,"thers, those that would (1) cap the reimbursement per policy or (2) pay a flat dollar amount per policy plus a reduced fixed percentage of premiums, offer the potential to better match FCIC’s reimbursements with companies’ administrative expenses. Each alternative has advantages and disadvantages, and we make no recommendation concerning which alternative, if any, should be pursued. With respect to the first alternative, FCIC could reduce its total expense reimbursements to companies by capping, or placing "
3492,"a limit on, the amount it reimburses companies for the sale and service of crop insurance policies. Savings would vary depending on where the cap is set. Capping the expense reimbursement at around $1,500 per policy, for example, would result in a potential savings of about $74 million while affecting less than 10 percent of the individual policies written in 1995. Under the current reimbursement arrangement, as policy premiums increase, the companies’ reimbursement from FCIC for administering the policies "
3493,"increases. However, the workload, or cost, associated with administering the policy does not increase proportionately. Therefore, for policies with the highest premiums, there is a large differential between FCIC’s reimbursement and the costs incurred to administer those particular policies. For example, in 1995, the largest 3 percent of the policies received about one-third of the total reimbursement. In fact, the five largest policies in 1995 generated administrative expense reimbursements ranging from ab"
3494,"out $118,000 to $472,000. Alternatively, FCIC could reduce its total expense reimbursements to companies by paying a flat dollar amount per policy plus a reduced fixed percentage of premiums. FCIC could reimburse companies a fixed amount for each policy written to pay for the fixed expenses associated with each policy as well as a percentage of premium to compensate companies for the variable expenses associated with the size and value of a policy. For example, paying a flat $100 per policy plus 17.5 percen"
3495,"t of premium could result in a potential savings of about $67 million. FCIC has included this alternative in its proposed 1998 standard reinsurance agreement with the industry. As we discuss in more detail in our report, while these and other alternative reimbursement methods could result in lower cost reimbursements to insurance companies, some methods may increase FCIC’s own administrative expenses for reporting and compliance. Some alternatives may also assist smaller companies to compete more effectivel"
3496,"y with larger companies and/or encourage more service to smaller farmers than does the current system. Companies generally prefer FCIC’s current reimbursement method because of its administrative simplicity. In conclusion, we recommended that the Administrator of the Risk Management Agency determine an appropriate reimbursement rate for selling and servicing crop insurance and include this rate in the new reinsurance agreement currently being developed between FCIC and the companies. Furthermore, we recomme"
3497,"nded that the Administrator explicitly convey the type of expenses that the administrative reimbursement is intended to cover. USDA’s Risk Management Agency agreed with our recommendations and has included these changes in the proposed 1998 agreement now being developed. The crop insurance industry disagreed with the methodology, findings, conclusions, and recommendations presented in our report. It expressed concern that we were not responsive to the mandate in the 1994 act and did not appropriately analyz"
3498,"e company data. It also expressed concern that implementing GAO’s recommendations could destabilize the industry. We carefully reviewed the industry’s comments and continue to believe that our report fulfills the intent of the mandate, our methodology is sound, our report’s findings and conclusions are well supported, and our recommendations offer reasonable suggestions for reducing the costs of the crop insurance program. This completes my prepared statement. I will be happy to respond to any questions you"
3499," may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts."
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3501,"DOD’s Joint Exercise Program provides an opportunity for combatant commanders to (1) train to the mission capability requirements described in the Joint Mission-Essential Task List and (2) support theater or global security cooperation requirements as directed in theater or in global campaign plans. All nine of the combatant commands, as well as the four military services, conduct exercises as a part of the Joint Exercise Program. The mission for the four combatant commands we visited are as follows: NORTHC"
3502,"OM conducts homeland defense, civil support, and security cooperation to defend and secure the United States and its interests. PACOM, with assistance from other U.S. government agencies, protects and defends the United States, its people, and its interests. In conjunction with its allies and partners, PACOM’s goal is to enhance stability in the Indo-Asia-Pacific region by promoting security cooperation, responding to contingencies, deterring aggression, and when necessary, fighting to win. STRATCOM conduct"
3503,"s global operations in coordination with other combatant commands, military services, and appropriate U.S. government agencies to deter and detect strategic attacks against the United States, its allies, and partners. TRANSCOM provides a full-spectrum of global mobility solutions and related enabling capabilities for supported customers’ requirements in peace and war. The key players with roles and responsibilities in the Joint Exercise Program are as follows: Principal Deputy Assistant Secretary of Defense"
3504," for Readiness, whose responsibilities include administering the Combatant Commanders Exercise Engagement and Training Transformation account; Director for Joint Force Development Joint Staff (J7), whose responsibilities include managing the Combatant Commanders Exercise Engagement and Training Transformation account and providing enabling capabilities that support combatant commands’ and the military services’ training; combatant commands, who develop, publish, and execute command Joint Training Plans and "
3505,"joint training programs for command staff and assigned forces; and military services, whose responsibilities include providing trained and ready forces for joint employment and assignment to combatant commands. In fiscal year 2016, the Combatant Commanders Exercise Engagement and Training Transformation account provided approximately $600 million dollars to fund more than 150 training events. Funding from this account covers items such as personnel travel and per diem for planning conferences and exercise s"
3506,"upport events, transportation of cargo, airlift, sealift and port handling, intra-theater transportation for participating units, consultant advisory and assistance service, equipment and supplies, and operation and maintenance for training support facilities and equipment. From fiscal year 2013 through fiscal year 2016, funding for this account decreased by about $149 million, or by 20 percent, while the number of exercises conducted remained relatively unchanged (see fig. 1). DOD officials told us that in"
3507," part as a result of reduced funding for the Joint Exercise Program they have at times reduced the scope of exercises or sought alternative methods, such as relying on organic lift capabilities of Service components or partnering with another combatant command to execute exercises. Other factors that could impact the ability of combatant commands to execute exercises include the availability of forces; diplomatic (political and military) considerations; and real world events, such as natural disasters. Thou"
3508,"gh DOD officials stated that these factors are largely outside of the sphere of combatant commander influence and therefore are not included in the original planning of the exercises, officials stated that they use various approaches to try to mitigate the effect these factors have on their ability to carry out their respective joint exercise programs. If these factors cannot be mitigated, the combatant command might cancel a joint exercise, a mitigation strategy of last resort. DOD has developed a body of "
3509,"guidance for the Joint Exercise Program and is working to update a key outdated guidance document that identifies overarching roles and responsibilities for military training in accordance with a congressional requirement in a House Committee on Armed Services report accompanying the National Defense Authorization Act for Fiscal Year 2017. DOD-wide guidance, policies, and procedures addressing various aspects of the Joint Exercise Program are contained in the following documents: DODD 1322.18, Military Trai"
3510,"ning, (Jan. 13, 2009), is the overarching guidance for military training and identifies the roles and responsibilities for training military individuals; units; DOD civilian employees; and contractors, among others. The Program Goals and Objectives document provides guidance for all programs and activities that utilize funds from the Combatant Commanders Exercise Engagement and Training Transformation account. CJCSI 3500.01H, Joint Training Policy for the Armed Forces of the United States, (April 25, 2014),"
3511," establishes guidance for the Joint Training System—an integrated, requirements-based, four-phased approach that is used to align a combatant commander’s Joint Training Strategy with assigned missions to produce trained and ready individuals, staff, and units. The Joint Training System is used by combatant commanders to execute the Joint Exercise Program as shown in figure 2. See appendix II for a more detailed description of the Joint Training System. CJCSN 3500.01, 2015-2018 Chairman’s Joint Training Guid"
3512,"ance, (Oct. 30, 2014), provides the Office of the Chairman of the Joint Chiefs of Staff’s joint training guidance to all DOD components for the planning, execution, and assessment of joint individual and collective training for fiscal years 2015 through 2018. CJCSM 3500.03E, Joint Training Manual for the Armed Forces of the United States, (April 20, 2015), provides guidance and procedures for the Joint Training System. Specifically, it focuses on determining joint training requirements, planning and executi"
3513,"ng joint training, and assessing joint training. CJCSM 3511.01, Joint Training Resources of the Armed Forces of the United States, (May 26, 2015), provides detailed guidance on joint funding, joint transportation, and joint training support resources for joint training exercises. CJCSI 3150.25F, Joint Lessons Learned Program, (June 26, 2015), provides guidance for gathering, developing, and disseminating joint lessons learned for the armed forces for joint training exercises. Each of the combatant commands "
3514,"we visited had developed their own implementation guidance, which is consistent with DOD’s guidance for the Joint Exercise Program. While DOD has a body of guidance for the Joint Exercise Program, DODD 1322.18 – key overarching guidance for military training that identifies roles and responsibilities for training, including the for the Joint Exercise Program–is outdated. Specifically, this directive assigns significant roles and responsibilities relevant to the Joint Exercise Program to U.S. Joint Forces Co"
3515,"mmand, a combatant command that has not existed since August 2011. For example, according to DODD 1322.18, U.S. Joint Forces Command is responsible for working through the Office of the Chairman of the Joint Chiefs of Staff to manage joint force training, accredit joint training programs for designated joint tasks, and provide Combatant Commanders Exercise Engagement and Training Transformation funds to support the Joint Exercise Program. According to subsequent guidance issued in April 2014, the Office of "
3516,"the Chairman of the Joint Chiefs of Staff was assigned the roles and responsibilities formerly performed by U.S. Joint Forces Command. Additionally, the Office of the Assistant Secretary of Defense for Readiness, instead of U.S. Joint Forces Command, now administers the Combatant Commanders Exercise Engagement and Training Transformation account, which funds the Joint Exercise Program. In House Report 114-537, the House Committee on Armed Services also noted that DODD 1322.18 is outdated and does not accoun"
3517,"t for significant organizational changes that have occurred within the department—specifically, the disestablishment of U.S. Joint Forces Command and the establishment of the Assistant Secretary of Defense for Readiness. Consequently, the report directs DOD to update its guidance and brief the committee on its progress updating the guidance by December 1, 2016. According to an official from Office of the Assistant Secretary of Defense for Readiness, the office responsible for DODD 1322.18, the department is"
3518," aware that the directive is outdated and is working on updating it but is unsure of when the update process will be completed. Specifically, according to this DOD official, the department is working to determine whether the directive can be updated through an administrative update, which requires less coordination and time to process than doing so through a total reissuance of guidance. When DOD completes the update and includes information on current roles and responsibilities, the key guidance regarding "
3519,"the Joint Exercise Program should be consistent with other guidance. DOD has implemented an approach to assess the return on investment for the Joint Exercise Program. The Director of the Joint Assessment and Enabling Capability office stated that officials from that office provide the combatant commands with guidance for how to develop performance measures to assess the effectiveness of the Joint Exercise Program. Specifically, the combatant commands, in conjunction with this office, develop performance me"
3520,"asures using an approach that is aimed at ensuring the performance measures are specific, measurable, achievable, realistic, and time-phased (commonly referred to as the SMART rubric). The Director of the Joint Assessment and Enabling Capability office reviews the performance measures created by the combatant commands against the SMART rubric and provides input and coaching on improving the measures through an ongoing and collaborative process. See appendix III for a more detailed explanation of DOD’s appro"
3521,"ach for assessing individual joint exercises. The Joint Assessment and Enabling Capability office is working with individual combatant commands to develop measures to assess the return on investment of the Joint Exercise Program using the SMART rubric approach. For example, NORTHCOM officials told us that they are working with the Joint Assessment and Enabling Capability office to develop a better method to measure the return on investment for NORTHCOM joint exercises because the ones they currently use, su"
3522,"ch as the number of joint mission-essential tasks in an exercise, do not reveal any information that would be helpful for decision making. The officials stated that they are still trying to determine the threshold for the amount of information that is necessary to measure return on investment for their joint exercises. Further, officials stated that they were drafting performance measures to assess return on investment to submit to their leadership for approval. Additionally, TRANSCOM officials told us that"
3523," they too are working with the Joint Assessment and Enabling Capability office but have not yet determined how to effectively gauge return on investment for training dollars spent on its exercises. According to DOD and combatant command officials we interviewed, readiness is their key performance measure and they have ongoing efforts to develop more tangible, quantifiable measures to determine the return on investment for conducting exercises. However, according to combatant command officials, return on inv"
3524,"estment is sometimes intangible and may not be seen immediately. Officials stated that it could take years to recognize the return on investment for conducting an exercise. For example, PACOM officials told us that they conducted two multinational planning exercises and a multinational force standard operating procedures workshop designed to increase the speed of initial response forces to an emergent issue and enhance relationships with partner countries for several years. According to PACOM officials, the"
3525," return on that investment, however, was not realized until April 25, 2015, when a region northwest of Kathmandu, Nepal, was devastated by a 7.8 magnitude earthquake and the after-action report for that earthquake indicated that PACOM’s exercises were vital in preparing the Nepal Army for its response. DOD uses two key information technology systems—JTIMS and the Execution Management System—to manage the execution of the Joint Exercise Program, but DOD does not have assurance that the Execution Management S"
3526,"ystem produces quality information. DOD uses JTIMS as the system of record for the Joint Exercise Program and combatant commanders plan and manage their joint training exercises through JTIMS. JTIMS automates the management of joint exercise training data through a web-based system and supports the application of the four phases of the Joint Training System. Specifically, JTIMS, which is managed by the Office of the Chairman of the Joint Chiefs of Staff, is used, among other things, to (1) request and track"
3527," forces for joint training exercises, (2) publish the Joint Training Plan, (3) document and manage joint training programs, and (4) capture the assessments of exercises. Chairman of the Joint Chiefs of Staff policy requires the use of JTIMS for a number of fields. For example, guidance requires, among other things, that the combatant commands enter key information about a training exercise, such as its objectives, intended audience (i.e., the joint forces being trained), lessons learned, and observations on"
3528," performance, and costs. However, the extent to which these fields are used, and the quality of the data entered varies by combatant command. Combatant commands and other DOD entities rely on the information entered in JTIMS to both conduct their exercises and participate in exercises sponsored by other combatant commands. However, during the course of our review, we were informed of and observed significant variation in the type and quality of information entered in JTIMS. For example, officials from one c"
3529,"ombatant command stated that an exercise description entered by another combatant command did not provide sufficient detail, therefore making it difficult to understand the focus of the exercise. In addition, TRANSCOM officials randomly selected exercises in JTIMS to show us the type of information entered in the system and we noted that the level of detail provided sometimes varied significantly by combatant command. Furthermore, officials from two of the four combatant commands we visited stated that some"
3530,"times the information captured in JTIMS is not useful and could negatively affect their ability to coordinate training with other combatant commands or extract pertinent information about exercises from the system that would be helpful in planning them. According to an Office of the Chairman of the Joint Chiefs of Staff official, it is important that combatant commands enter information in JTIMS in a consistent and standardized manner so that the information is easily understood and useful for all joint exe"
3531,"rcise training participants and planners. The Office of the Chairman of the Joint Chiefs of Staff and combatant command officials told us that the lack of standardized information in JTIMS is due to the absence of detailed instructions in guidance on inputting information into JTIMS. Consequently, to help improve the consistency and standardization of information across combatant commands, the Office of the Chairman of the Joint Chiefs of Staff published a user guide for JTIMS that is intended to mitigate i"
3532,"nconsistencies in the information entered there, standardize the use of the system across DOD, and improve the overall understanding of the system. According to this official, the user guide was completed in October 2016. The Office of the Chairman of the Joint Chiefs Staff plans to periodically update the user guide to keep pace with joint training policy updates, JTIMS software upgrades, and joint training enterprise business rule modifications. In addition to providing step-by-step instructions on using "
3533,"JTIMS, the guide also provides examples of the type of information that should be entered in specified fields. Such information should help improve the overall understanding of and bring consistency to the use of JTIMS across the combatant commands. DOD uses the Execution Management System, a web-based database, to track and oversee the most recent execution performance data, hereafter referred to as data, for the Joint Exercise Program. The Execution Management System is intended to capture the most recent"
3534," data for the Joint Exercise Program. According to officials, it is important to have accurate and current data in the Execution Management System because it provides instant status of the over- and underexecution of funds for the Joint Exercise Program, which is critical to the efficient and effective execution of the Joint Exercise Program. Moreover, officials from the Assistant Secretary of Defense for Readiness office stated that data from this system are used to report how funds are being expended for "
3535,"the Joint Exercise Program to both DOD decision makers and Congress. In April 2016, the Office of the Assistant Secretary of Defense for Readiness issued guidance on the use of the Execution Management System to the combatant commands. This guidance, referred to as the Execution Management System Standard Operating Procedure and User Guide, states that Joint Exercise Program managers are required to (1) enter the most recent obligation and expenditure amounts for any transactions funded through the Combatan"
3536,"t Commanders Exercise Engagement and Training Transformation account on a monthly basis and (2) upload supporting documentation for transactions. The guide also specifies the type of supporting documents that should be uploaded into the Execution Management System, such as awarded contracts, invoices, and travel payments. Prior to issuing guidance in April 2016, an official responsible for administering the Combatant Commanders Exercise Engagement and Training Transformation account stated that the combatan"
3537,"t commands were informed of the requirement to upload supporting documentation into the Execution Management System in 2011. NORTHCOM, STRATCOM, and PACOM officials told us that they were aware of this requirement prior to April 2016. TRANSCOM officials initially stated that they were unaware of the requirement; however, our review of the Execution Management System revealed that they were uploading supporting documentation for some fiscal years prior to the guidance being issued. During our review of the E"
3538,"xecution Management System, we found that the combatant commands we visited had not fully implemented the guidance and that the quality of information in the system was questionable. Specifically, we found that: The Execution Management System is missing supporting documentation. Based on our review, we found that two— STRATCOM and NORTHCOM—of the four combatant commands we visited had uploaded supporting documentation, as required by the Execution Management System guidance, for fiscal years 2013-16. A thi"
3539,"rd combatant command, TRANSCOM, uploaded supporting documentation for fiscal years 2013, 2014, and 2016, but did not upload supporting documentation for fiscal year 2015. The fourth combatant command, PACOM, did not upload supporting documentation for fiscal years 2013, 2014, and 2015, but began uploading supporting documentation in August 2016 for fiscal year 2016 after we informed an official in the Office of the Assistant Secretary of Defense for Readiness that the command had not been uploading supporti"
3540,"ng documentation in accordance with the Execution Management System guidance. TRANSCOM and PACOM officials stated that one of the reasons they did not upload supporting documentation, as required by guidance, was due to the volume of travel and other related documents generated in executing joint training exercises. Officials stated that it was overly burdensome to upload all of these documents. Nonetheless, an official from the Office of the Assistant Secretary of Defense for Readiness stated the combatant"
3541," commands need to do their due diligence in uploading supporting documentation in order to ensure proper accountability of Combatant Commanders Exercise Engagement and Training Transformation funds. This official further stated that efforts are underway, that includes establishing a new method for how funds are distributed to stakeholders, to identify approaches that will reduce the data entry burden at the stakeholder level. Documentation for expenditures uploaded into the Execution Management System did n"
3542,"ot match reported total expenditures for any of the four combatant commands we visited. Based on our review of a nongeneralizable sample of supporting documentation for fiscal years 2014 through 2016 that was uploaded into the Execution Management System, we found that the sum of the individual expenditures reported in supporting documentation did not match the corresponding total expenditures entered in the system for any of the four combatant commands we visited. According to one combatant command officia"
3543,"l familiar with this system, individual expenditures reported in supporting documents should be reconcilable to yearly cumulative totals for expenditures. However, when we attempted to link the sum of individual expenditures reported in uploaded supporting documentation to total expenditures data entered into the Execution Management System by combatant command officials, we were unable to do so for three of the four combatant commands we visited. For example, in fiscal year 2015, NORTHCOM uploaded more tha"
3544,"n 100 documents that supported how funds were obligated or committed. Our review found that the uploaded documentation supported approximately $12.7 million in funds that were committed. However, the figure entered in the Execution Management System was about $11.9 million. Similarly, in fiscal year 2014, TRANSCOM supporting documentation showed that commitments totaled approximately $66.8 million while the figure entered in the Execution Management System was approximately $4.6 million. Officials stated th"
3545,"at the reason that the supporting documentation does not match the figures entered in the Execution Management System is that some supporting documentation had not been uploaded. Nonetheless, the inability to reconcile supporting documentation with the expenditures entered in the Execution Management System undermines the quality of the data in the system and inhibits DOD decision makers, particularly those in the Office of the Assistant Secretary of Defense for Readiness, from providing adequate oversight "
3546,"of how funds are being expended in support of the Joint Exercise Program goals. Moreover, the inconsistent uploading of the required supporting documentation and difficulty in reconciling individually reported transactions with cumulative values entered into the system suggests that weaknesses exist in the Execution Management System data entry procedures, which impacts the quality of the data entered in the system. Therefore, it calls into question the use of the Engagement Management System which, accordi"
3547,"ng to DOD officials, had been established to provide real-time, accurate information on the execution of Joint Exercise Program funds to decision makers. DOD has not implemented key processes to help ensure that the Execution Management System produces quality information. Further weakening the quality of the reporting, tracking, and reconciliation of data recorded in the Execution Management System is that none of the four combatant commands we visited, the Office of the Chairman of the Joint Chiefs of Sta"
3548,"ff, and the Office of the Assistant Secretary of Defense for Readiness had instituted key systemic processes to help ensure that the data entered in the Execution Management System produce quality information—that is, information that is appropriate, current, complete, accurate, accessible, and timely. Standards for Internal Control in the Federal Government states that a variety of control activities should be used for information systems to support the completeness, accuracy, and validity of information p"
3549,"rocessing, and the production of quality information. In addition, management should evaluate information processing to ensure that it is complete, accurate, and valid. Further, these standards state that appropriate documentation of transactions should be readily available for examination. Using these internal controls could reduce to an acceptable level the risk that a significant mistake could occur and remain undetected and uncorrected. Individuals from all four of the combatant commands we visited stat"
3550,"ed that only one person at their combatant command was responsible for entering data into the Execution Management System for their respective command and that, although they believed their entries were reliable, no quality assurance oversight was conducted on their work. An official from the Office of the Assistant Secretary of Defense for Readiness stated that periodic reviews are conducted on data entered in the Execution Management System but that these reviews are mainly focused on the execution rates "
3551,"of funds and not on whether the data entered produces quality information. Further, according to an official from the Office of the Chairman of the Joint Chiefs of Staff, the checks they perform on the data entered in the Execution Management System are similar to those conducted by the Office of the Assistant Secretary of Defense for Readiness, in that they are focused on whether or not monthly expenditures have been entered into the system in order to ensure that monthly benchmarks are met and less on whe"
3552,"ther or not the data entered produces quality information. According to officials from two of the four combatant commands we visited, sometimes they receive phone calls from the Office of the Chairman of the Joint Chiefs of Staff or the Office of the Assistant Secretary of Defense for Readiness to validate certain data entries because they seemed erroneous based on an informal review. However, no officials at the combatant commands we visited, the Office of the Chairman for the Joint Chiefs of Staff, or the"
3553," Office of the Assistant Secretary of Defense for Readiness could demonstrate systemic processes for ensuring that the Execution Management System produced quality information. The absence of quality assurance processes can affect the quality of the information produced by the system that DOD uses to determine its most recent execution rates and defend the Joint Exercise Program’s budget. As previously discussed, the combatant commands are not following guidance requiring them to upload supporting documenta"
3554,"tion, and DOD lacks effective internal controls to help ensure the reliability of the data in the system. DOD officials acknowledged the issues we identified regarding inadequate supporting documentation and data reliability within the Execution Management System. A senior DOD official from the Office of the Assistant Secretary of Defense, Readiness (Resources) stated that DOD plans to address these control weaknesses with respect to the Combatant Commander Exercise Engagement and Training Transformation ac"
3555,"count for the Joint Exercise Program as part of its implementation of DOD’s FIAR Guidance beginning in fiscal year 2018 to ensure that the account is audit ready. DOD established the FIAR Plan as its strategic plan and management tool for guiding, monitoring, and reporting on the department’s ongoing financial management improvement efforts and for communicating the department’s approach to addressing its financial management weaknesses and achieving financial statement audit readiness. To implement the FIA"
3556,"R Plan, the DOD Comptroller issued the FIAR Guidance, which provides a standard methodology for DOD components to follow to assess their financial management processes and controls and to develop and implement financial improvement plans. These plans, in turn, are intended to provide a framework for planning, executing, and tracking essential steps and related supporting documentation needed to achieve auditability. We believe that if DOD appropriately follows the steps outlined in FIAR guidance when execut"
3557,"ing the Combatant Commander Exercise Engagement and Training Transformation account, it may help improve the quality of funds execution data from this account and make the account audit ready. However, as previously stated, FIAR guidance will not be implemented with the Joint Exercise Program until fiscal year 2018 and the effectiveness of the guidance cannot be fully determined until after that time. In the meanwhile, according to a senior DOD official, DOD plans to continue using the Execution Management "
3558,"System which is intended to capture the most recent data for the Joint Exercise Program and inform management decision-making regarding joint exercise investments. Without ensuring the required supporting documentation is uploaded and implementing effective internal controls to ensure that data entered in the Execution Management System produces quality information, DOD and other key decision makers may not have the correct financial execution information to defend the Joint Exercise Program’s budget. DOD h"
3559,"as developed a body of guidance for the Joint Exercise Program. In addition, DOD has implemented an approach to develop performance measures to assess the effectiveness of the Joint Exercise Program. Further, DOD uses JTIMS and the Execution Management System to manage the Joint Exercise Program. JTIMS is the system of record for executing the Joint Exercise Program and the Office of the Chairman of the Joint Chiefs of Staff officials developed a user guide intended to help bring more standardization to the"
3560," system, thereby making the information more useful to other combatant commands. The Execution Management System is used to oversee and report on most recent execution performance data for Joint Exercise Program funding. However, not all of the combatant commands were following guidance requiring them to upload supporting documentation, making it difficult for DOD to have oversight on expenditures for the Joint Exercise Program. Finally, DOD and the combatant commands lack systemic processes for ensuring th"
3561,"at the Execution Management System produces quality information. Without ensuring that supporting documentation is uploaded and implementing effective internal controls to ensure the completeness and accuracy of financial information captured for the Joint Exercise Program, DOD and other key decision makers may not have the correct financial information to defend the Joint Exercise Program’s budget. To better ensure quality financial execution information is available to guide the Joint Exercise Program, we"
3562," recommend that the Secretary of Defense direct the Office of the Assistant Secretary of Defense for Readiness to take the following two actions: direct the combatant commanders to take steps to comply with current Execution Management System guidance to upload supporting documentation that is reconcilable to funds executed from the Combatant Commanders Exercise Engagement and Training Transformation account; and as the department implements financial improvement plans in accordance with the FIAR guidance, "
3563,"it should include specific internal control steps and procedures to address and ensure the completeness and accuracy of information captured for the Joint Exercise Program’s Combatant Commanders Exercise Engagement and Training Transformation account. We provided a draft of this report to DOD for review and comment. In its written comments, which are summarized below and reprinted in appendix IV, DOD partially concurred with both recommendations. DOD also provided technical comments, which we incorporated a"
3564,"s appropriate. DOD partially concurred with our recommendation to direct the combatant commanders to take steps to comply with current Execution Management System guidance to upload supporting documentation that is reconcilable to funds executed from the Combatant Commanders Exercise Engagement and Training Transformation account. In its comments, DOD stated that the Execution Management System is not a system of record but rather a “desk-side” support tool that relies on manual inputs and uploads and that "
3565,"the reconciliation of obligation and execution related to Joint Exercise Program funding occurs elsewhere. DOD further noted that the Office of the Assistant Secretary of Defense for Readiness (OASD(R)) issued guidance and routinely reinforces the best practices use of the Execution Management System tool to ensure it produces quality information. Lastly, DOD noted in its comments that that it may not continue using the Execution Management System beyond fiscal year 2017. We recognize that the Execution Man"
3566,"agement System is not a system of record. However, as we also note in the report, it is a tool used by DOD to make decisions regarding the Joint Exercise Program because the Defense Finance and Accounting Services (DFAS) Accounting Report Monthly 1002, the system of record, lags behind. Additionally, we acknowledge that DOD issued guidance for the Execution Management System in April 2016, but our work found that the guidance was not routinely reinforced. For example, as we identified in our report, two of "
3567,"the four combatant commands we visited had not, in fact, uploaded supporting documentation, as required by the Execution Management System guidance, for fiscal years 2013-2016. While the Execution Management System may not be funded beyond fiscal year 2017, we continue to believe that as long as the Execution Management System remains in use and for the reasons discussed in the report, combatant commanders should take the necessary steps to comply with existing guidance that requires the uploading of suppor"
3568,"ting documentation into the Execution Management System so that when DOD managers make decisions regarding the Joint Exercise Program funding, they use information from a financial data system that is reconcilable and auditable. DOD partially concurred with our recommendation that states that as the department implements financial improvement plans in accordance with the FIAR guidance, it should include specific internal control steps and procedures to address and ensure the completeness and accuracy of inf"
3569,"ormation captured for the Joint Exercise Program’s Combatant Commanders Exercise Engagement and Training Transformation account. In its comments, DOD described OASD(R) as having a supporting role in the execution of FIAR plans, which are implemented by Washington Headquarters Services and the Office of Secretary of Defense-Comptroller, and that these agencies provide specific internal controls, processes and procedures for ensuring completeness and accuracy of obligation and execution data. DOD also stated "
3570,"that the Execution Management System is not a component of FIAR and may not be funded after fiscal year 2017, and that moving toward audit readiness, necessary steps and procedures will be put into place to strengthen auditability. As we stated in the report, the FIAR guidance provides a standard methodology and framework for assessing and developing a system of internal controls to achieve auditability. However, as we recommended, DOD still needs to implement specific internal control steps and procedures "
3571,"as it implements this guidance to ensure the completeness and accuracy of the Joint Exercise Program’s Combatant Commanders Exercise Engagement and Training Transformation account’s financial information. Further, as we reported the FIAR guidance will not be implemented in the Joint Exercise Program until fiscal year 2018 and the effectiveness of the guidance cannot be fully determined until after that time. Accordingly, we continue to believe that the recommendation remains valid. We are sending copies of "
3572,"this report to the appropriate congressional committees, the Secretary of Defense; the Under Secretary of Defense for Personnel and Readiness; the Chairman of the Joint Chiefs of Staff; and the Commanders of U.S. Northern Command, U.S. Pacific Command, U.S. Strategic Command, and U.S. Transportation Command. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5431 or russellc@gao"
3573,.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix V. This report (1) describes guidance the Department of Defense (DOD) has developed for its Joint Exercise Program and DOD’s approach to assess the effectiveness of the program and (2) evaluates the extent to which DOD uses two key information systems—the Joint Training Information Management System (JTIMS) and the Execution M
3574,"anagement System–to manage the Joint Exercise Program. DODD 1322.18, Military Training (January 13, 2009) CJCSI 3500.01H, Joint Training Policy for the Armed Forces of the United States (April 25, 2014) CJCSM 3150.25A, Joint Lessons Learned Program (September 12, 2014) CJCSN 3500.01, 2015-2018 Chairman’s Joint Training Guidance (October 30, 2014) CJCSM 3500.03E, Joint Training Manual for the Armed Forces of the United States (April 20, 2015) CJCS Guide 3501, The Joint Training System: A Guide for Senior Lea"
3575,"ders (May 5, 2015) CJCSM 3511.01H, Joint Training Resources for the Armed Forces of the United States (May 26, 2015) CJCSI 3150.25F, Joint Lessons Learned Program (June 26, 2015) NORAD and NORTHCOM, Joint Training System (JTS) Handbook (May 1, 2013) NORAD and NORTHCOM Instruction 16-166, Lessons Learned Program and Corrective Action Program (September 19, 2013) NORAD and NORTHCOM, JTPs, (December 10, 2015) PACOM Instruction 0509.1, Joint Lessons Learned and Issue Resolution Program (April 7, 2010) PACOM Ins"
3576,"truction 0508.12, Joint Training Enterprise in U.S. Pacific Command (October 15, 2012) SI 508-09, Exercise Program (May 3, 2013) SI 509-01, After Action, Issue Solution/Resolution and Lessons Learned Program, October 14, 2015) SI 508-03, JTIMS Procedures (November 8, 2015) USTRANSCOM Pamphlet 38-1, Organization and Functions (May 1, 2008) USTRANSCOM Instruction 36-13, Training, Education, and Professional Development Program (May 23, 2013) USTRANSCOM Instruction 36-36, Joint Training and Education Program ("
3577,"August 29, 2014) USTRANSCOM Instruction 10-14, Joint Lessons Learned Program (November 9, 2015) We judgmentally selected these combatant commands for our site visits to achieve a mix of geographical and functional commands, as well as the funds that had been apportioned to the combatant commands in fiscal year 2016 from the Combatant Commanders Exercise Engagement and Training Transformation account, size of command, and location. We reviewed DOD’s approach to make performance measures specific, measurable,"
3578," achievable, realistic, and time-phased (commonly referred to as the SMART rubric) to assess the return on investment for the Joint Exercise Program. In addition, we reviewed performance measures reportedly used to assess the ability of the training audience to accomplish training objectives for exercises, as well as measures used to assess the return on investment for conducting an exercise. We also reviewed performance documentation and information captured in JTIMS, as well as a nongeneralizable sample o"
3579,"f commander summary reports or after-action reports from seven combatant command joint exercises to understand the content of these reports. Finally, we interviewed senior officials from the Office of the Assistant Secretary of Defense for Readiness, including the Joint Assessment and Enabling Capability office, the Office of the Chairman of the Joint Chiefs of Staff, as well as officials from the four selected combatant commands. We did not review or evaluate the quality of any assessments that DOD has con"
3580,"ducted for its joint exercises. We reviewed the assessments to the extent that it was possible to ensure that an assessment process existed. To evaluate DOD’s use of JTIMS and the Execution Management System to manage the Joint Exercise Program, we reviewed guidance for JTIMS and the Execution Management System. In addition, we observed data associated with a nongeneralizable sample of joint exercises maintained in JTIMS. We also reviewed and analyzed a nongeneralizable sample of cumulative financial data a"
3581,"nd supporting documentation, if any, entered by combatant command users in the Execution Management System for the Joint Exercise Program during fiscal years 2013-16 to examine the internal controls that were in place. We reviewed a nongeneralizable sample of supporting documentation uploaded into the Execution Management System for fiscal years 2014 through 2016 to make a determination about compliance with guidance issued by DOD for the Execution Management System and the Standards for Internal Control in"
3582," the Federal Government. Further, we compared individual transactions reported in the supporting documentation with the corresponding cumulative data entered into the system. We also reviewed the FIAR plan— DOD’s strategic plan and management tool for guiding, monitoring, and reporting on the department’s ongoing financial management improvement efforts and for communicating the department’s approach to addressing its financial management weaknesses and achieving financial statement audit readiness— and gui"
3583,"dance. Additionally, we spoke with cognizant officials from the four combatant commands we visited, the Office of the Chairman of the Joint Chiefs of Staff, and the Office of the Assistant Secretary of Defense for Readiness about the systems used to execute and manage the Joint Exercise Program. Further, we attended sessions at the 3-day Annual Review for the Combatant Commanders Exercise Engagement and Training Transformation Enterprise on the budget for fiscal years 2018 through 2022. We attended sessions"
3584," that were most pertinent to this engagement. For example, since the services were not included in the scope of our review, we did not attend their sessions. We conducted site visits to collect testimonial and documentary evidence about DOD’s Joint Exercise Program at the following locations: Cost Assessment and Program Evaluation Office, Arlington, Virginia Force Readiness and Training in the Office of the Assistant Secretary of Defense for Readiness, Arlington, Virginia Joint Assessment and Enabling Capab"
3585,"ility office, Alexandria, Virginia Joint Staff (J7), Arlington, Virginia Joint Staff (J7) Suffolk, Virginia U.S. Northern Command, Peterson Air Force Base, Colorado U.S. Pacific Command, Camp H. M. Smith, Hawaii U.S. Strategic Command, Offutt Air Force Base, Nebraska U.S. Transportation Command, Scott Air Force Base, Illinois We conducted this performance audit from June 2015 to February 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perfor"
3586,"m the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Guidance from the Office of the Chairman of the Joint Chiefs of Staff outlines the process that is used by the combatant commands to develop joint training programs, plan and execute joint training, and assess training for the Depart"
3587,"ment of Defense’s (DOD) Joint Exercise Program. This process, referred to in the guidance as the Joint Training System, is characterized as an integrated, requirements-based, four-phased methodology used to align the Joint Training Strategy with assigned missions to produce trained and ready individuals, staff, and units. According to the guidance, the Joint Training System has four phases through which the combatant commands execute the Joint Exercise Program. Phase I—Requirements. During this phase, an or"
3588,"dered listing of tasks is developed describing the armed force’s ability to perform activities or processes that combatant commanders require to execute their assigned missions. This listing is referred to as the Universal Joint Task List and it provides a common language to describe warfighting requirements for combatant commanders. From this list, the most essential mission capability tasks—mission-essential tasks—are identified by the combatant commander. Using the commander’s criteria, mission-essential"
3589," tasks are prioritized to form the Joint/Agency Mission-Essential Task List. In addition to combatant commanders’ priority, key documents pertinent to U.S. national strategy, such as the Unified Command Plan, Guidance for Employment of the Force, and other joint doctrine, are analyzed to determine the most essential mission capability requirements for the combatant command. The Joint/Agency Mission-Essential Task List provides the foundation for deriving joint training requirements used to develop Joint Tra"
3590,"ining Plans and training and exercise inputs to theater campaign plans. Training requirements are derived from training proficiency assessments, mission training assessments, and lessons learned that result from the Phase IV (Assessment) of the Joint Training System. Phase II—Plans. The plans phase is initiated by conducting an assessment of current capability against the Joint Mission-Essential Task List and relevant lessons learned to identify gaps in training. To address those gaps, the Joint Training Pl"
3591,"an is established and identifies who is to be trained; what they will be trained in; what the training objectives are; and when, where, and how the training will occur. Joint Training Plans, along with training and exercise inputs into theater campaign plans, are developed, coordinated, and published in the Joint Training Information Management System (JTIMS) to identify a commander’s training guidance, audiences, objectives, events, and support resources, and to identify the coordination needed to attain t"
3592,"he required levels of training proficiency. Phase III—Execution. During this phase, events planned in the Joint Training Plan are conducted and the training audience’s performance objectives are observed and evaluated. Joint training events are developed and executed using the five-stage Joint Event Life Cycle methodology captured and reviewed in JTIMS. Task Performance Observations—which identify whether the training audience achieved the stated level of performance to the standards specified in the traini"
3593,"ng objectives—and the Training Proficiency Evaluations for each training objective associated with the training event are also captured in JTIMS. Further, facilitated after-action reports are developed to highlight potential issues or best practices to support the assessments in Phase IV (Assessment). Validated observations from the training event are exported into JTIMS. Phase IV—Assessment. During this phase, leadership within the combatant command determines which organizations within the command are abl"
3594,"e to perform at the level required to meet the task standards and which missions the command is trained to accomplish. Assessments are a commander’s responsibility. To complete Task Performance Assessments for each task, commanders consider Task Performance Evaluations, lesson learned, and personal observations of the joint training exercise. An assessment ranking of trained, partially trained, or untrained is assigned to each task listed under a training objective. JTIMS supports the assessment of joint tr"
3595,"aining by automating the ability of joint organizations to produce Task Performance Assessments. The Task Performance Assessments are analyzed to create the mission training assessment that is provided to a combatant commander on a monthly basis. The mission training assessment is on how well the command can execute its assigned missions. These training assessments provide input into the next training cycle. Lessons learned, after-action reports, and issues requiring resolution outside of the command are id"
3596,"entified during this phase. Combatant command officials we visited stated that, in accordance with guidance from the Chairman of the Joint Chiefs of Staff, they used the Joint Training System as the process for conducting training assessments of individual joint exercises to determine each command’s overall readiness to perform command missions. These assessments occur during Phases III (Execution) and IV (Assessment) of the Joint Training System. During Phase III, for example, command trainers collect task"
3597," performance observations for each training objective identified in the Joint Training Information Management System (JTIMS). These task performance observations identify whether the individuals and units participating in the training exercise achieved the level of performance stated in standards specified in the training objectives. Training proficiency evaluations are conducted for each training objective associated with the exercise. During Phase IV, combatant commanders consider the proficiency evaluati"
3598,"ons, as well as after-action and commander summary reports, to determine a combatant command’s ability to perform assigned missions at the minimum acceptable level under a specified set of conditions. According to an official from the Joint Assessment and Enabling Capability office, a subordinate office to the Office of the Assistant Secretary of Defense for Readiness that provides strategic- level assessments of joint training and joint training enablers throughout the Department of Defense (DOD), includin"
3599,"g to combatant commands, performance measures that are specific, measurable, achievable, realistic, and time-phased (commonly referred to as the SMART rubric) are used to assess the Joint Exercise Program. DOD officials stated that developing performance measures for joint exercises has not been an easy task and that they are constantly working to improve their performance measures. Specifically, in an effort to develop, improve, and provide quality assurance for specific performance measures, the Joint Ass"
3600,"essment and Enabling Capability office works with the combatant commands to ensure that they are using the right measures to evaluate the training audience’s ability to perform tasks to specific standards. In addition, the Joint Assessment and Enabling Capability office hosts monthly meetings with combatant command stakeholders to discuss assessment topics, including performance measures. Additionally, the Joint Assessment and Enabling Capability office hosts at least one working group meeting at the annual"
3601," worldwide joint training conference to conduct face-to-face discussions and reviews of assessment-related tasks for joint training. According to an annual report from the Joint Staff Director for Joint Force Development, the Joint Assessment and Enabling Capability office is available to assist combatant command stakeholders with assessment-related tasks for the Joint Exercise Program, as requested. Guy A. LoFaro, Assistant Director; Patricia Donahue; Pamela Nicole Harris; Amie Lesser; Sabrina Streagle; So"
3602,"nja S. Ware; and Cheryl A. Weissman made key contributions to this report. Civil Support: DOD Needs to Clarify Its Roles and Responsibilities for Defense Support of Civil Authorities during Cyber Incidents. GAO-16-332. Washington, D.C: April, 4, 2016. Military Base Realignments and Closures: More Guidance and Information Needed to Take Advantage of Opportunities to Consolidate Training. GAO-16-45. Washington, D.C.: February 18, 2016. Operational Contract Support: Actions Needed to Enhance the Collection, In"
3603,"tegration, and Sharing of Lessons Learned. GAO-15-243. Washington, D.C.: March 16, 2015. Defense Headquarters: DOD Needs to Reevaluate Its Approach for Managing Resources Devoted to the Functional Combatant Commands. GAO-14-439. Washington, D.C.: June 26, 2014. Defense Headquarters: DOD Needs to Periodically Review and Improve Visibility of Combatant Commands’ Resources. GAO-13-293. Washington, D.C.: May 15, 2013. Defense Management: Perspectives on the Involvement of the Combatant Commands in the Developme"
3604,"nt of Joint Requirements. GAO-11-527R. Washington, D.C.: May 20, 2011. Homeland Defense: U.S. Northern Command Has a Strong Exercise Program, but Involvement of Interagency Partners and States Can Be Improved. GAO-09-849. Washington, D.C.: September 9, 2009. National Preparedness: FEMA Has Made Progress, but Needs to Complete and Integrate Planning, Exercise, and Assessment Efforts. GAO-09-369. Washington, D.C.: April 30, 2009. Homeland Defense: Steps Have Been Taken to Improve U.S. Northern Command’s Coord"
3605,"ination with States and the National Guard Bureau, but Gaps Remain. GAO-08-252. Washington, D.C.: April 16, 2008. Homeland Defense: U.S. Northern Command Has Made Progress but Needs to Address Force Allocation, Readiness Tracking Gaps, and Other Issues. GAO-08-251. Washington, D.C.: April 16, 2008. Homeland Security: Observations on DHS and FEMA Efforts to Prepare for and Respond to Major and Catastrophic Disasters and Address Related Recommendations and Legislation. GAO-07-835T. Washington, D.C.: May 15, 2"
3606,"007. Military Training: Management Actions Needed to Enhance DOD’s Investment in the Joint National Training Capability. GAO-06-802: Washington, D.C.: August 11, 2006. Military Training: Actions Needed to Enhance DOD’s Program to Transform Joint Training. GAO-05-548: Washington, D.C.: June 21, 2005."
3607,"Ex-Im Bank is an independent U.S. government agency whose mission is to finance the export of U.S. goods and services overseas and to support U.S. jobs, particularly when private sector lenders are unable or unwilling to accept the risk. Ex-Im Bank provides medium- and long-term loans and guarantees, export credit insurance, and working capital guarantees. Under the loan and guarantee program, Ex-Im Bank guarantees the repayment of loans or makes loans to foreign purchasers of U.S. goods and services. The e"
3608,"xport credit insurance program provides protection to U.S. exporters against the risks of nonpayment by foreign buyers for political or commercial reasons. The working capital guarantee program provides U.S. exporters with short-term loans and the necessary working capital to pay for raw materials, labor, and overhead to produce goods or provide services for export. Energy transactions represented a major component of transactions financed by Ex-Im Bank during the 1990s. The values financed for energy secto"
3609,"r transactions compared to total Ex-Im Bank financing for loans and guarantees averaged around 27 percent during this period and represented as much as 47 percent of all Ex-Im Bank financing in 1995. Ex-Im Bank categorizes energy sector transactions according to the end-use industrial activity. That is, U.S. exports of services and equipment used in energy sector projects are considered energy transactions. Energy sector transactions are divided into subsectors that include fossil fuels, nuclear energy, and"
3610," renewable energy. Examples of exports financed under fossil fuel projects include engineering services, drilling equipment, and turbines. Examples of renewable energy products or services financed include heat exchangers for geothermal power plants, solar electric modules for solar power generation, and engineering services to design a hydroelectric dam. Ex-Im Bank defines renewable energy to include geothermal, hydroelectric, biomass, wind, and solar activities. The definition of renewable energy for diff"
3611,"erent policy purposes is a subject of debate, especially regarding hydroelectric power because of concerns about potential environmental impacts of large dams. Of the $28 billion Ex-Im Bank provided in loans and guarantees for energy- related projects from 1990 to 2001, about 93 percent was used to finance fossil fuel projects. (See app. II for a discussion of trends in export credit insurance and working capital guarantees.) The number of fossil fuel projects financed each year dropped sharply during the e"
3612,"arly 1990s, but the values financed annually showed significant fluctuations with no clear trend. For renewable energy, there has been a small volume of overall activity during this period, with most of the financing provided primarily in 1994 when two large geothermal power plants were financed. Trends in final commitment applications submitted for energy sector projects largely mirror the trends in the number and values financed for energy sector projects because 90 percent of these applications were fina"
3613,"nced. The number of fossil fuel projects financed annually by Ex-Im Bank decreased significantly over the 1990s, while the values financed fluctuated substantially. (See fig. 1.) Ex-Im Bank financed 474 fossil fuel projects over the period, with the number falling from 91 in 1990 to 15 in 1999, before rising slightly in 2000 and 2001. The total value financed for fossil fuel projects over the period was about $25.7 billion, with annual values ranging from $546 million in 1999 to more than $3.6 billion in bo"
3614,"th 1993 and 1995. The average value financed per project increased significantly during the early 1990s, and ranged from $7 million in 1990 to more than $79 million in 1995. The types of fossil fuel projects Ex-Im Bank financed varied over the period. As shown in figure 2, during the early 1990s, extraction, transport, and processing projects such as oil and gas exploration and the development of oil and gas pipelines dominated Ex-Im Bank’s fossil fuel project financing in terms of values financed. In the m"
3615,"id-1990s, however, power production projects, such as power plants using natural gas, oil, and coal, received the most financing. Neither project type was particularly dominant from 1997 to 2000. Projects in Mexico received the largest share of fossil fuel financing during 1990 to 2001, at 16 percent, followed by projects in Venezuela and Algeria, at about 10 percent each. In terms of the numbers of projects, Algeria and Mexico received 43 percent of the total number financed over the 12-year period. Most o"
3616,"f these were for small value loans and guarantees financed from 1990 to 1992. Appendix III shows Ex-Im Bank’s distribution of fossil fuel energy projects by total number and values financed to recipient countries. For renewable energy, a small number of projects were financed in most years, with the overall value of financing concentrated primarily in one year. As shown in figure 1, from 1990 to 1996, the number of renewable energy projects varied from two to six. Ex-Im Bank did not finance any renewable en"
3617,"ergy projects from 1997 to 1999, but did finance two renewable energy projects in 2000 and three in 2001. Overall, Ex-Im Bank financed 30 renewable energy projects from 1990 to 2001, accounting for about 6 percent of the total number of energy sector projects financed. Most projects financed between 1990 and 1996 were to construct hydroelectric and geothermal power plants. Of the projects receiving loans and guarantees in 2000 and 2001, three were for hydroelectric engineering services and two were for sola"
3618,"r projects. Appendix IV identifies the renewable energy loans and guarantees financed from 1990 to 2001, including the project type, supplier, value financed, and country. The values financed for renewable energy projects varied dramatically during 1990 through 2001, with the majority of the financing provided in 1994. Overall, Ex-Im Bank financed renewable energy projects totaling $730 million from 1990 through 2001 or about 3 percent of all energy projects financed. Almost 60 percent of these funds were p"
3619,"rovided in 1994, when two large geothermal projects were financed in the Philippines for almost $395 million. As shown in figure 3, geothermal and hydroelectric projects represented 75 percent and 17 percent of the total value of financing provided for renewable energy projects, while solar, wind, and biomass projects combined accounted for about 8 percent of total financing. Trends in the number and value of final commitment applications submitted for energy sector projects closely track the trends for ene"
3620,"rgy projects financed, because 90 percent of final commitment applications submitted were financed by Ex-Im Bank. While Ex-Im Bank offers two earlier types of applications—the letter of interest and preliminary commitment—the final commitment application is the only one required to obtain financing for a project and is the only one used consistently from 1990 to 2001. As shown in figure 4, the number of fossil fuel final commitment applications for loans and guarantees decreased significantly from 1990 to 2"
3621,"001, while the values of financing requested in these applications fluctuated greatly. For renewable energy, the application trends also mirrored those of the overall renewable energy projects financed, with the overall numbers remaining at low levels and the financed values concentrated primarily in 1994. Ex-Im Bank denies very few final applications and only a small percentage of applications are withdrawn or canceled. From 1990 through 2001, Ex-Im Bank records indicate that only 2 of the 577 energy secto"
3622,"r applications were denied; both were fossil fuel projects. During this period, about 10 percent of the energy sector final applications for loans and guarantees were either withdrawn by the applicant or canceled by Ex-Im Bank because the applicant did not meet the requisite terms and conditions. Ex-Im Bank has not consistently reported to Congress on its efforts to meet the 1989 legislative financing target for renewable energy or its renewable energy promotion efforts. In reviewing Ex-Im Bank’s annual rep"
3623,"orts, we looked for basic information on renewable energy projects that would include the number of projects and values financed, the types of projects, and the value of renewable energy project financing relative to overall energy sector financing. Ex-Im Bank’s reporting to Congress was most complete for fiscal year 1990 when Ex-Im Bank provided a report in 1991 to the Committees on Appropriations with specific information regarding both Ex-Im Bank’s meeting the 5 percent renewable energy target and its ma"
3624,"rketing and promotional efforts for renewable energy. This report also provided specific information regarding values financed, types of projects financed, and an estimate for potential demand for future financing. Other than this one-time report to Congress, Ex-Im Bank has typically provided information about its renewable energy efforts in its annual report. During the period 1990 to 2001, Ex-Im Bank’s annual reports identified the percentage of renewable energy projects to the total energy projects finan"
3625,"ced in 3 years—1990, 1991, and 1994. Including all financing types— loans and guarantees, insurance, and working capital guarantees—Ex-Im Bank met the 5 percent target twice—1990 and 1994—and came close in 1996 when renewable energy projects accounted for 4.8 percent of the total values financed. (See fig. 5.) Ex-Im Bank’s annual reports since 1990 contained varying amounts of additional information regarding its efforts to promote renewable energy. Overall, Ex-Im Bank provided the most consistent reporting"
3626," from fiscal years 1990 to 1994, which included the number of projects and values financed, types of projects, and countries where the projects were implemented. The 1995 and 1998 reports did not address renewable energy. Various factors have affected Ex-Im Bank’s renewable energy financing, including worldwide economic conditions and energy consumption patterns, financing challenges faced by diverse renewable energy suppliers, foreign government support of renewable energy sectors, and environmental concer"
3627,"ns. Ex-Im Bank has not placed a priority on promoting renewable energy exports, but has addressed the sector through its general marketing efforts and its Environmental Exports Program. Ex-Im Bank established the Renewable Energy Exports Advisory Committee to help expand its support of U.S. renewable energy exporters in May 2002. Broad economic conditions and market trends are important to Ex-Im Bank’s overall financing and energy sector patterns. These include, for example, exchange rates and economic grow"
3628,"th trends. While identifying the impacts of these factors is complex, macroeconomic factors have been identified as particularly important in the geothermal sector. According to industry representatives and analysts, the Asian financial crisis and subsequent economic and political turmoil in Southeast Asia was a key reason for a decline in construction of geothermal facilities in the region in the late 1990s. The relatively small share of most renewable resources in world energy consumption, due partly to c"
3629,"ost disadvantages, is viewed as a key factor underlying the demand for Ex-Im Bank financing. According to Department of Energy estimates, in 1999 about 7 percent of world energy consumption was from hydroelectricity and 1 percent from other renewable sources. For energy used for electricity generation, hydroelectricity supplied 19 percent and other renewables 2 percent. A primary reason for this relatively small share of renewables is cost, according to government and industry assessments. While the costs o"
3630,"f some renewable energy technologies have decreased, they have generally not been competitive with fossil fuels for most uses, according to these assessments. A related factor is that the feasibility of renewable energy projects often depends on environmental factors such as the location of rivers, geothermal heat sources, and wind supply. The renewable energy market is diverse, with sectors and firms varying in terms of key characteristics that could affect the demand for Ex-Im Bank financing. These charac"
3631,"teristics include, for example, firm size and exporting experience, project risk, and payback periods. The geothermal sector includes large-scale power production and smaller-scale direct heating and agricultural uses. Project risk can be high with substantial exploration and development costs. The solar energy sector includes multinational producers of photovoltaics for export to electric utilities as well as producers of off-grid equipment that can include small-scale uses. U.S. wind energy suppliers incl"
3632,"ude one firm producing for large-scale on- grid utility uses and a number of firms providing for smaller scale power generation. Representatives for different renewable energy sectors have cited various exporting challenges or financing needs, not necessarily under Ex-Im Bank’s control, including: Actual or perceived financial risk of renewable energy projects; For small businesses, lack of investment capital or contacts in export Lack of credit-worthy buyers for certain types of renewable energy projects, "
3633,"such as smaller scale projects in developing countries; Need in some sectors for longer repayment terms due to higher up-front Difficulty in understanding financing options and coordinating financing among exporters, buyers, financial institutions, sources of funding assistance, and local governments. Government support has been an important factor in the growth of renewable energy. Foreign government support, for example, is seen as critical to rapid growth in the international wind and photovoltaic market"
3634,"s. Several European countries and Japan have used various strategies and financial incentives for increasing renewable energy in their domestic markets. World photovoltaic shipments almost tripled between 1994 and 2000, due in part to subsidized programs in Europe and Japan.Similarly, the world wind energy market grew sharply between 1994 and 2001, due in part to government support and growth in Europe. The United States has had some production incentives and tax credits for renewable energy at the state an"
3635,"d federal level but their impact has varied depending on amounts and certainty of initiatives. According to the Department of Energy, nonhydroelectric renewable electricity generation in the United States declined between 1993 and 1998. The U.S. domestic wind energy market did grow strongly in 2001, which analysts attribute in part to firms taking advantage of a federal production tax credit scheduled to expire at the end of 2003. Governments have provided official development assistance for renewable energ"
3636,"y projects in developing countries, including concessional loans and grants. According to analysts and industry representatives, such assistance can in some cases yield advantages to donor country exporters. Links to exports are explicit in cases of tied aid, where trade-related concessional financing of public sector capital projects is conditional on the procurement of goods and services from the donor country. Many industrialized countries, including the United States, view tied aid as potentially trade-"
3637,"distorting and agreed in 1992 to limits on its use. Renewable energy projects are often exempt from international restrictions due to not being commercially viable. Ex-Im Bank has matched tied aid offers by other countries in some instances. From 1991 to 2001, Ex-Im Bank funded four tied aid projects for renewable energy.According to some renewable energy industry representatives, tied aid has not generally been viewed as a viable export financing option for U.S. renewable energy exporters because of the do"
3638,"cumentation requirements and the length of the process. Increased public concerns about the environmental and social impacts of large hydroelectric dams may have affected financing of hydroelectric projects, according to Ex-Im Bank and industry officials. Ex-Im Bank adopted environmental procedures and guidelines in February 1995,which provide for qualitative and quantitative assessments of air and water quality, management of hazardous and toxic materials and waste, cultural and ecological effects, and oth"
3639,"er factors. Environmental concerns regarding hydroelectric power plants were highlighted in 1996 when the Yangtze Three Gorges hydroelectric power plant was proposed by China. Although Ex-Im Bank was approached regarding financing, the project proceeded with financing from other sources and has continued to be controversial. Ex-Im Bank did not finance any hydroelectric projects from 1997 to 1999, but did finance engineering and architectural services for two hydroelectric projects in Turkey in 2000 and one "
3640,"in 2001. According to Ex-Im Bank officials and some environmental groups, issues regarding its financing activities in the hydroelectric sector illustrate a tension between increasing renewable energy financing and responding to environmental concerns. Ex-Im Bank has not focused on or allocated specific resources to promote the renewable energy sector. Instead, Ex-Im Bank has addressed this sector through its general marketing efforts and the Environmental Exports Program. With the exception of aircraft sal"
3641,"es, Ex-Im Bank does not target its resources or marketing efforts toward specific industry sectors, according to senior Ex-Im Bank officials. Instead Ex-Im Bank’s business development officers are assigned geographic regions and are expected to promote all sectors, such as energy, telecommunications, and manufacturing equipment, within their respective regions. According to Ex-Im Bank officials, an environmental liaison officer was appointed in 1994 to focus exclusively on promoting and developing environme"
3642,"ntally beneficial projects, which by definition include renewable energy projects. However, the individual in that position has been assigned other duties over time, and the official’s portfolio now includes responsibility for the South America region and the medical equipment sector. Several trade association and industry officials said this dilution of responsibility has affected Ex-Im Bank’s ability to effectively promote renewable energy exports. They stressed that having an experienced person dedicated"
3643," specifically to renewable energy is critical to providing effective linkages among Ex-Im Bank, exporters, foreign buyers, financiers, and other U.S. government agencies. According to Ex-Im Bank officials, its efforts to promote small businesses have benefited some renewable energy exporters. In 2000, Congress required that not less than 10 percent of all Ex-Im Bank annual financing be provided to support small businesses. Ex-Im Bank officials said that the product typically best suited to meet the needs of"
3644," renewable energy small businesses is short- or medium-term insurance. Of the nine renewable energy-related insurance policies underwritten by Ex-Im Bank since 1999, seven were provided to three small businesses. Although Ex-Im Bank has financed some renewable energy projects under its Environmental Exports Program, the program’s impact on Ex-Im Bank’s financing of renewable energy projects appears to be limited. Ex-Im Bank established the environmental exports program in 1994 to provide enhanced levels of "
3645,"support for a broad range of exports deemed environmentally beneficial. Of the $3.1 billion financed for environmentally beneficial projects from 1994 to 2001, about $457 million was provided to finance renewable energy projects—of which $333 million was financed in 1994. Meanwhile, fossil fuel projects deemed environmentally beneficial received just over $2 billion. Ex-Im Bank officials said they have not seen a notable increase in renewable energy applications or projects financed since the program was in"
3646,"troduced. Although Ex-Im Bank provided $113 million for environmentally beneficial renewable energy projects in 1996, it did not finance other renewable energy projects again until 2000 and 2001 when it financed transactions totaling approximately $5 million and $6 million, respectively. Several Ex-Im Bank officials attributed this recent activity in the renewable energy sector to Ex-Im Bank’s focus on providing loans and short-term insurance to small businesses. Ex-Im Bank and renewable energy industry off"
3647,"icials have acknowledged that Ex-Im Bank can do a better job of promoting their products and services to renewable energy sectors. Officials identified Ex-Im Bank’s establishment of a Renewable Energy Exports Advisory Committee in May 2002 as an effort to help the Bank expand its support of U.S. renewable energy exporters. Over the next 2 years, the advisory committee will focus on specific issues such as how Ex-Im Bank can modify its existing programs, what new financing products or changes to existing pro"
3648,"ducts should be considered, and how to improve its outreach to U.S. renewable energy exporters and foreign buyers. Congress has demonstrated a long-standing and continued interest in Ex-Im Bank’s efforts to promote the export of renewable energy products and services. While Ex-Im Bank has undertaken some efforts to increase its funding of renewable energy exports, they have been limited. This report highlights several factors and challenges to renewable energy exports. Some factors, such as cost disadvantag"
3649,"es in many markets, are largely outside Ex-Im Bank’s control while others, such as product terms and the allocation and targeting of business development resources, represent areas in which Ex-Im Bank has some control. In addition, Ex-Im Bank’s renewable energy financing to date shows how a few large projects can account for the majority of financing in an area, and illustrates that significant small-scale renewable energy financing activity could take place with relatively low values financed. Ex-Im Bank’s"
3650," renewable energy efforts can be measured and reported in various ways. In addition to information on the programs and initiatives undertaken to promote renewable energy, specific information about project financing would be helpful to Congress. Although Ex-Im Bank has provided specific funding information to Congress for some reporting periods, it has not provided this information consistently. Such information can help Congress better track and understand Ex-Im Bank’s efforts to promote renewable energy a"
3651,"nd identify emerging trends and challenges in financing renewable energy projects. In reporting on its renewable energy efforts under Ex-Im Bank’s 2002 reauthorization act, we recommend that the Chairman of the Export- Import Bank provide adequate information for Congress to assess these efforts and the types of challenges Ex-Im Bank faces. In addition to information on types of outreach and specific processes or programs to promote renewable energy exports, Ex-Im Bank should provide information on the type"
3652,"s and amounts of financing actually provided, including the number and values financed for renewable energy transactions each year, and the specific renewable energy sectors to which the financing is provided. Ex-Im Bank provided written comments on a draft of this report, which are reprinted in appendix V. In its response, Ex-Im Bank reiterated as important a number of factors identified in the report as significant to the Bank’s energy sector financing trends, including broad economic and market trends. E"
3653,"x-Im Bank also expressed the view that the report understates the Bank’s support of renewable energy sector exports. We believe that the report appropriately identifies both external and internal factors that have affected the Bank’s energy sector financing, and points out the difficulty of determining the specific impacts of various factors. Ex-Im Bank stated that in comparing its financing of renewable energy and fossil fuel exports, we should have included only the fossil fuel exports for power generatio"
3654,"n and excluded extraction, transportation, and processing projects, such as pipeline construction. Our analysis is based on energy sector project data provided to us by Ex-Im Bank, which included both categories of fossil-fuel related energy financing. We believe that comparing renewable energy sector financing to only a portion of fossil- fuel related financing would have been inappropriate for demonstrating overall financing trends. Ex-Im Bank did not comment on our recommendation that Ex-Im Bank’s future"
3655," reporting to Congress on its renewable energy efforts include specific information on its financing of renewable energy projects. We are sending copies of this report to the appropriate congressional committees, and the Honorable Eduardo Aguirre, Vice Chairman, Export- Import Bank of the United States. Copies will also be made available to others upon request. In addition, this report is also available on GAO’s Web site at no charge at http://www.gao.gov. Please contact me at (202) 512-4347 if you or your "
3656,"staff has any questions concerning this report. Major contributors to this report are listed in appendix VI. In response to Chairman Bereuter’s request, we identified and assessed (1) trends in Ex-Im Bank’s financing of and applications for fossil fuel and renewable energy-related projects, (2) the extent of Ex-Im Bank’s reporting to Congress on its renewable energy efforts, and (3) key factors affecting Ex-Im Bank’s renewable energy sector financing. To meet these objectives, we analyzed a range of documen"
3657,"ts and interviewed policy and program officials from the Export-Import Bank as well as energy trade associations, private sector companies, think tanks, and nongovernmental organizations. To address the first objective, we obtained the cooperation of Ex-Im Bank’s Engineering and Environment Division staff in creating reports from two different databases—one for loans and guarantees and the other for insurance—to identify the number and value of energy-related transactions that Ex-Im Bank financed by each pr"
3658,"oduct type (loans and guarantees, insurance, and working capital guarantees) for fiscal years 1990 through 2001. The reports were further divided by sub sectors, which included fossil fuel extraction, transport and processing, fossil fuel power generation, renewable energy, and nuclear energy. Ex-Im Bank also provided similar reports for applications submitted but not supported by Ex-Im Bank for loans and guarantees by various sub sectors. Ex-Im Bank did not provide applications data for insurance or workin"
3659,"g capital guarantees. Applications data were reported in the fiscal years in which they were received, while project data were reported in the fiscal years in which they were financed. We analyzed these reports to identify trends in the number and values financed for energy sector projects as well as the number and value of energy sector applications submitted. We did not focus on nuclear energy projects because they are outside the scope of our request and comprise only a small percentage of Ex-Im Bank’s e"
3660,"nergy sector portfolio. The report, however, notes that nuclear energy projects account for the balance of energy sector projects financed when combined with fossil fuel and renewable energy projects. Ex-Im Bank officials noted concerns over the reliability and completeness of some of the data, particularly insurance transactions. Reliability issues occur because insurance transactions often include multi-buyer policies that cover many products and services. These policies may be in different sectors and wo"
3661,"uld therefore be difficult to characterize under one sector code. Further, insurance underwriters code the transaction according to the principal product or service, not according to the project’s end-use, as the loans and guarantees division would do. Ex-Im Bank officials estimate that the insurance data provided are about 75 percent accurate but noted that increased accuracy would require the review of each policy – a large investment of time. Ex-Im Bank officials also note that insurance records prior to"
3662, 1992 were not readily available We chose to focus our principal findings on the loans and guarantees programs because of these concerns and because loans and guarantees account for 89 percent of the value of energy sector projects financed by Ex-Im Bank. We discuss trends in the number and values financed for insurance and working capital guarantees in appendix II. We also focused on loans and guarantees because Ex-Im Bank provided data for both the applications submitted and projects financed for the peri
3663,"od 1990 to 2001. We compared this data to data used in other Ex-Im Bank reports to assess its reliability and found them to be consistent. To address the second objective, we reviewed the 1989 legislation that established the Ex-Im Bank renewable energy-financing target and reporting requirement. We also reviewed Ex-Im Bank’s 2002 reauthorization act, which includes a reporting requirement for Ex-Im Bank’s renewable energy promotion efforts. To ascertain the extent to which Ex-Im Bank reported data to Congr"
3664,"ess regarding its renewable energy efforts, we analyzed Ex-Im Bank’s annual reports for fiscal years 1990 to 2001 and a 1991 report to the Committees on Appropriations. To determine the percentage of the value financed for renewable energy projects to the total energy sector, we analyzed the energy sector project reports provided by Ex-Im Bank for fiscal years 1990 to 2001. To address the third objective regarding factors that affected the increases and decreases in Ex-Im Bank’s energy sector financing, we "
3665,"analyzed reports on energy sector trends. We reviewed relevant Ex-Im Bank and GAO reports regarding tied aid provided by the United States and other foreign governments. To obtain industry perspective on the factors affecting trends, we discussed these issues with representatives from the various renewable energy trade associations including the American Wind Energy Association, Solar Energy Industries Association, U.S. Hydropower Council for International Development, Geothermal Energy Association, and U.S"
3666,". Export Council on Energy Efficiency. We also interviewed officials from the International Rivers Network, Institute for Policy Studies, and several private sector renewable energy firms. To identify factors internal to Ex-Im Bank that affected energy sector trends, we analyzed Ex-Im Bank program data relating to its efforts to promote renewable energy, the Environmental Exports Program, and the Renewable Energy Exports Advisory Committee. We also interviewed policy and program officials from Ex-Im Bank to"
3667," discuss the trends and factors. We conducted our review from December 2001 through September 2002 in accordance with generally accepted government auditing standards. While loans and guarantees have traditionally accounted for 89 percent of Ex-Im Bank’s energy sector portfolio, export credit insurance and working capital guarantees represented about 10 percent and less than 1 percent of the values financed, respectively. The values of export credit insurance for fossil fuel projects fluctuated, while the n"
3668,"umber of fossil fuel transactions declined. Conversely, the renewable energy sector showed a slight increase in both the value financed and the number of insurance transactions during this period. Meanwhile, trends for the value of working capital guarantees for fossil fuels increased incrementally, while the number of transactions varied. Only two renewable energy projects received working capital guarantees during this period. Ex-Im Bank provided insurance for 281 energy sector projects totaling $2.9 bill"
3669,"ion from 1992 through 2001 under the export credit insurance program. As shown in figure 6, the values financed for fossil fuel energy projects varied from a high of $749 million in 1992 to lows of $45 million and $52 million in 1997 and 2001, respectively. Meanwhile, the trend in the number of insurance transactions financed for fossil fuel projects declined steadily by more than 50 percent—from 39 to 18 fossil fuel transactions— from 1992 through 2001. While trends in the number and values financed for re"
3670,"newable energy projects increased during this period for export credit insurance, the overall financing provided and numbers financed for export credit insurance was $3.5 million for 12 transactions. Ex-Im Bank did not finance any renewable energy insurance transactions in 4 of the 10 years analyzed, but the value financed increased from $170,850 in 1994 to $711,000 in 2001. A peak was noted in 1998 as Ex-Im Bank financed over $1 million in insurance transactions. Similarly, the number of renewable energy p"
3671,"rojects has increased from zero in 1992 to five in 2001, reflecting Ex-Im Bank’s focus on using the insurance program to reach small businesses, including renewable energy businesses. Ex-Im Bank financed working capital guarantees for 64 energy sector projects totaling over $120 million from 1992 through 2001. As shown in figure 7, the financing provided for working capital guarantees for fossil fuel projects decreased to zero in 1994 but increased incrementally until 2000. The values financed doubled in 20"
3672,"01—from $14 million in 2000 to about $28 million. Meanwhile, the number of working capital guarantees provided for fossil fuel projects during the period increased—with some variations from year to year. The number of fossil fuel projects financed ranged from 0 in 1994 to 10 in 1997 and 1999. Over 80 percent of the fossil fuel working capital guarantees were provided after 1995. Only two renewable energy projects were financed through the working capital guarantee program when Ex-Im Bank provided $8.9 milli"
3673,"on to finance two wind energy projects in 1996. International Drilling Integrated Power Corporation M/G Electric, Inc. Ormat, Inc. Ormat, Inc. Caterpillar, Inc. Siemens Solar Industries Geothermal Power Company, Inc. Mid American Holdings Company Mid American Holdings Company Integrated C-E Services, Inc. Sargent and Lundy, LLC Voith Hydro, Inc. National-Oilwell, Inc. Voith Hydro, Inc. Enron Wind Systems, Inc. Enron Wind Systems, Inc. Enron Wind Systems, Inc. BP Solarex Ormat, Inc. Kaiser Engineers & Constr"
3674,"uctors, Inc. Washington Group International, Inc. In addition to those named above, Nathan A. Morris, Lynn Cothern, and Ernie Jackson made key contributions to this report. Export Promotion: Mixed Progress in Achieving a Governmentwide Strategy (GAO-02-850, Sept. 4, 2002). Export Promotion: Export-Import Bank and Treasury Differ in Their Approaches to Using Tied Aid (GAO-02-741, June 28, 2002). Export Promotion: Government Agencies Should Combine Small Business Export Training Programs (GAO-01-1023, Sept. 2"
3675,"1, 2001). Renewable Energy: DOE’s Funding and Markets for Wind Energy and Solar Cell Technologies (GAO/RCED-99-130, May 14, 1999). U.S. Export-Import Bank’s Asian Financial Exposure (GAO/NSIAD-98- 150R, Apr. 17, 1998). Export Finance: Federal Efforts to Support Working Capital Needs of Small Business (GAO/NSIAD-97-20, Feb. 13, 1997). Export-Import Bank: Reauthorization Issues (GAO/T-NSIAD-97-147, Apr. 29, 1997). Export-Import Bank: Options for Achieving Possible Budget Reductions (GAO/NSIAD-97-7, Dec. 20, 1"
3676,"996). Export Finance: Comparative Analysis of U.S. and European Union Export Credit Agencies (GAO/GGD-96-1, Oct. 24, 1995). Export Finance: The Role of the U.S. Export-Import Bank (GAO/GGD-93- 39, Dec. 23, 1992). Export Promotion: Federal Efforts to Increase Exports of Renewable Energy Technologies (GAO/GGD-93-29, Dec. 30, 1992). The U.S. Export-Import Bank: The Bank Provides Direct and Indirect Assistance to Small Businesses (GAO/GGD-92-105, Aug. 21, 1992)."
3677,"NCLBA reauthorized the Elementary and Secondary Education Act of 1965 (ESEA) and built upon accountability requirements created under a previous reauthorization, the Improving America’s Schools Act of 1994 (IASA). Under ESEA, as amended, Congress sought to improve student learning by incorporating academic standards and assessments in the requirements placed on states. Academic standards, which describe what students should know and be able to do at different grade levels in different subjects, help guide s"
3678,"chool systems in their choice of curriculum and help teachers plan for classroom instruction. Assessments, which states use to measure student progress in achieving the standards, are required to be administered by states. NCLBA further strengthened some of the accountability requirements contained in ESEA, as amended. Specifically, NCLBA’s accountability provisions require states to develop education plans that establish academic standards and performance goals for schools to meet AYP and lead to 100 perce"
3679,"nt of their students being proficient in reading, math, and science by 2014. This proficiency must be assessed annually in reading and math in grades 3 through 8 and periodically in science, whereas assessments were required less frequently under the IASA. Under NCLBA, schools’ assessment data generally must be disaggregated to assess progress toward state proficiency targets for students in certain designated groups, including low-income students, minority students, students with disabilities, and those wi"
3680,"th limited English proficiency. Each of these groups must make AYP in order for the school to make AYP. Schools that fail to make AYP for 2 or more consecutive years are required to implement various improvement measures identified in NCLBA, and these measures are more extensive than those required under IASA. Education, which has responsibility for general oversight of NCLBA, reviews and approves state plans for meeting AYP requirements. As we have previously reported, Education had approved all states’ pl"
3681,"ans—fully or conditionally—by June 2003. NCLBA also recognizes the role of teachers in providing a quality education by requiring states to ensure that all teachers in core academic subjects are “highly qualified.” Under this requirement, teachers generally must have a bachelor’s degree, be fully certified, and demonstrate their knowledge of the subjects they teach. Previously, there were no specific requirements regarding teacher quality under ESEA, as amended. According to our analysis of NLS-NCLB data fr"
3682,"om Education, most principals reported their schools focused on multiple instructional practices in their voluntary school improvement efforts. These strategies were used more often at schools with higher proportions of low-income students (“high-poverty schools”) and schools with higher proportions of minority students (“high-minority schools”) than at schools with lower proportions of low-income students (“low-poverty schools”) and schools with lower proportions of minority students (“low-minority schools"
3683,"”). Likewise, the survey of math teachers in California, Georgia, and Pennsylvania indicates teachers were using many different instructional practices in response to their state tests, and teachers at high-poverty and high-minority schools were more likely than teachers at low-poverty and low-minority schools to have been increasing their use of some of these practices. Some researchers we spoke with suggested that differences in the use of these instructional practices exist because schools with low- pove"
3684,"rty or low-minority student populations might generally be meeting accountability standards and, therefore, would need to try these strategies less frequently. According to nationally representative data from Education’s NLS-NCLB, in school year 2006-2007 most principals focused on multiple strategies in their school improvement efforts. The survey asked principals the extent to which their schools were focusing on ten different strategies in their voluntary school improvement initiatives. The three most co"
3685,"mmon strategies were: (1) using student achievement data to inform instruction and school improvement; (2) providing additional instruction to low- achieving students; and (3) aligning curriculum and instruction with standards and/or assessments. (See fig. 1.) Nearly all school principals placed a major or moderate focus on three or more surveyed strategies in their school improvement efforts, and over 80 percent of principals placed a major or moderate focus on six or more strategies. However, as Education"
3686,"’s report on the survey data cautioned, the number of improvement strategies emphasized was not necessarily an indication of the intensity or quality of the improvement efforts. While nearly all principals responded that they used multiple improvement strategies, there were statistically significant differences in principals’ responses across a range of school characteristics, including percentage of the school’s students receiving free or reduced price lunch (poverty), percentage of minority students, the "
3687,"school’s location, and AYP status. For example, when comparing schools across poverty levels, we found that principals at high-poverty schools were two to three times more likely than principals at low-poverty schools to focus on five particular strategies in their school improvement efforts: Restructuring the school day to teach core content areas in greater depth; Increasing instructional time for all students (e.g., by lengthening the school day or year, shortening recess); Providing extended-time instru"
3688,"ctional programs (e.g., before-school, after- school, or weekend instructional programs); Implementing strategies for increasing parents’ involvement in their children’s education; and Increasing the intensity, focus, and effectiveness of professional development. Likewise, when comparing schools across minority levels, we found that principals at high- and moderate-minority schools were approximately two to three times more likely than principals at low-minority schools to make six particular school improv"
3689,"ement strategies a major or moderate focus of their school improvement efforts. For instance, principals at schools with a high percentage of minority students were more than three times as likely as principals at schools with a low percentage of minority students to provide extended-time instruction such as after-school programs. A school’s location was associated with differences in principals’ responses about the strategies they used as well: principals at rural schools were only about one-third to one-h"
3690,"alf as likely as central city schools to make five of these school improvement strategies a moderate or major focus of their school improvement efforts. When we compared principal responses based on AYP status, there was some evidence of a statistically significant association between AYP status and the extent to which principals focused these strategies in their school improvement efforts, but it was limited when the other variables such as poverty and minority were taken into account. AYP status had some "
3691,"correlation with the demographic characteristics of poverty and minority, and those characteristics explained the patterns of principals’ responses more fully than the AYP characteristic. However, our analysis generally showed that schools that had not made AYP were more likely to make six of these school improvement strategies a moderate or major focus of their school improvement plan than schools that had made AYP. Additionally, Education reported that schools identified for improvement under NCLBA—that i"
3692,"s, schools that have not made AYP for two or more consecutive years—were engaged in a greater number of improvement efforts than non-identified schools. Therefore, principals of the non- identified schools may have been less likely than principals of identified schools to view specific strategies as a major or moderate focus. We spoke with several researchers about the results of our analysis of the principals’ responses, especially at high-poverty and high-minority schools. While the researchers could not "
3693,"say with certainty the reasons for the patterns, they noted that high-poverty and high-minority schools tend to be most at risk of not meeting their states’ standards, so that principals at those schools might be more willing to try different approaches. Conversely, the researchers noted that principals at schools meeting standards would not have the same incentives to adopt as many school improvement strategies. The RAND survey of elementary and middle school math teachers in California, Georgia and Pennsy"
3694,"lvania showed that in each of the three states at least half of the teachers reported increasing their use of certain instructional practices in at least five areas as a result of the statewide math test (see fig. 2). For example, most teachers in Pennsylvania responded that due to the state math test they: (1) focused more on standards, (2) emphasized assessment styles and formats, (3) focused more on subjects tested, (4) searched for more effective teaching methods, and (5) spent more time teaching conten"
3695,"t. As we did with the survey responses of principals, we analyzed the teacher survey data to determine whether math teachers’ responses differed by school characteristics for poverty, minority, location, and AYP status. As with the principals’ responses, we found that elementary and middle school math teachers in high-poverty and high-minority schools were more likely than teachers in low-poverty and low-minority schools to report increasing their use of certain instructional practices, and this pattern was"
3696," consistent across the three states (see fig. 3). For example, 69 percent of math teachers at high-poverty schools in California indicated they spent more time teaching test-taking strategies as opposed to 38 percent of math teachers in low-poverty schools. In Georgia, 50 percent of math teachers in high-poverty schools reported offering more outside assistance to non- proficient students in contrast to 26 percent of math teachers in low- poverty schools. Fifty-one percent of math teachers at high-poverty s"
3697,"chools in Pennsylvania reported focusing more attention on students close to proficiency compared to 23 percent of math teachers doing so in low poverty schools. Similar to what our poverty analysis showed, survey responses provided some evidence that math teachers in high-minority schools were more likely than those in low-minority schools to change their instructional practices. Math teachers at high-minority schools in each of the three states, as compared to those at low-minority schools, were more like"
3698,"ly to: rely on open-ended tests in their own classroom assessments; increase the amount of time spent teaching mathematics by replacing non- instructional activities with mathematics instruction; focus on topics emphasized in the state math test; and teach general test-taking strategies. We also analyzed the RAND data with regard to school location and a school’s AYP status, but results from these characteristics were not significant for as many instructional practices. As we did regarding the survey respon"
3699,"ses of principals, we spoke to several researchers, including the authors of the three-state teacher study, regarding possible reasons for the patterns we saw in the teacher survey data. The researchers we spoke with provided similar possible reasons for the patterns in the teacher survey as they did for patterns in the principal survey. For instance, the researchers noted that high-poverty and high- minority schools are more likely to be at risk of failing to meet the state standards, which might prompt te"
3700,"achers to try different approaches. On the other hand, the researchers stated that teachers at those schools meeting the standards would not have the same incentives to change their instructional practices. Research shows that using a standards-based curriculum that is aligned with corresponding instructional guidelines can positively influence teaching practices. Specifically, some studies reported changes by teachers who facilitated their students developing higher-order thinking skills, such as interpret"
3701,"ing meaning, understanding implied reasoning, and developing conceptual knowledge, through practices such as multiple answer problem solving, less lecture and more small group work. Additionally, a few researchers we interviewed stated that a positive effect of NCLBA’s accountability provisions has been a renewed focus on standards and curriculum. However, some studies indicated that teachers’ practices did not always reflect the principles of standards-based instruction and that current accountability poli"
3702,"cies help contribute to the difficulty in aligning practice with standards. Some research shows that, while teachers may be changing their instructional practices in response to standards-based reform, these changes may not be fully aligned with the principles of the reform. That research also notes that the reliability in implementing standards in the classroom varied in accordance with teachers’ different beliefs in and support for standards-based reform as well as the limitations in their instructional c"
3703,"apabilities. For example, one observational study of math teachers showed that, while teachers implemented practices envisioned by standards-based reform, such as getting students to work in small groups or using manipulatives (e.g., cubes or tiles), their approaches did not go far enough in that students were not engaged in conversations about mathematical or scientific concepts and ideas. To overcome these challenges, studies point to the need for teachers to have opportunities to learn, practice, and ref"
3704,"lect on instructional practices that incorporate the standards, and then to observe their effects on student learning. However, some researchers have raised concerns that current accountability systems’ focus on test scores and mandated timelines for achieving proficiency levels for students do not give teachers enough time to learn, practice, and reflect on instructional practices and may discourage some teachers from trying ambitious teaching practices envisioned by standards-based reform. Another key ele"
3705,"ment of a standards-based accountability system is assessments, which help measure the extent to which schools are improving student learning through assessing student performance against the standards. Some researchers note that assessments are powerful tools for managing and improving the learning process by providing information for monitoring student progress, making instructional decisions, evaluating student achievement, and evaluating programs. In addition, assessments can also influence instructiona"
3706,"l content and help teachers use or adjust specific classroom practices. As one synthesis concluded, assessments can influence whether teachers broaden or narrow the curriculum, focus on concepts and problem solving—or emphasize test preparation over subject matter content. In contrast, some of the research and a few experts we interviewed raised concerns about testing formats that do not encourage challenging teaching practices and instructional practices that narrow the curriculum as a result of current as"
3707,"sessment practices. For example, depending on the test used, research has shown that teachers may be influenced to use teaching approaches that reflect the skills and knowledge to be tested. Multiple choice tests tend to focus on recognizing facts and information while open-ended formats are more likely to require students to apply critical thinking skills. Conclusions from a literature synthesis conducted by the Department of Education stated that “ teachers respond to assessment formats used, so testing p"
3708,"rograms must be designed and administered with this influence in mind. Tests that emphasize inquiry, provide extended writing opportunities, and use open-ended response formats or a portfolio approach tend to influence instruction in ways quite different from tests that use closed-ended response formats and which emphasize procedures.” We recently reported that states have most often chosen multiple choice items over other item types of assessments because they are cost effective and can be scored within ti"
3709,"ght time frames. While multiple choice tests provide cost and time saving benefits to states, the use of multiple choice items make it difficult, if not impossible, to measure highly complex content. Other research has raised concerns that, to avoid potential consequences from low-scoring assessment results under NCLBA, teachers are narrowing the curriculum being taught—sometimes referred to as “teaching to the test”—either by spending more classroom time on tested subjects at the expense of other non-teste"
3710,"d subjects, restricting the breadth of content covered to focus only on the content covered by the test, or focusing more time on test-taking strategies than on subject content. Our literature review found some studies that pointed to instructional practices that appear to be effective in raising student achievement. But, in discussing the broader implications of these studies with the experts that we interviewed, many commented that, taken overall, the research is not conclusive about which specific instru"
3711,"ctional practices improve student learning and achievement. Some researchers stated that this was due to methodological issues in conducting the research. For example, one researcher explained that, while smaller research studies on very specific strategies in reading and math have sometimes shown powerful relationships between the strategy used and positive changes in student achievement, results from meta- analyses of smaller studies have been inconclusive in pointing to similar patterns in the aggregate."
3712," A few other researchers stated that the lack of empirical data about how instruction unfolds in the classroom hampers the understanding about what works in raising student performance. A few researchers also noted that conducting research in a way that would yield more conclusive results is difficult. One of the main difficulties, as explained by one researcher, is the number of variables a study may need to examine or control for in order to understand the effectiveness of a particular strategy, especiall"
3713,"y given the number of interactions these variables could have with each other. One researcher mentioned cost as a challenge when attempting to gather empirical data at the classroom level, stating “teaching takes place in the classroom, but the expense of conducting classroom-specific evaluations is a serious barrier to collecting this type of data.” Finally, even when research supports the efficacy of a strategy, it may not work with different students or under varying conditions. In raising this point, on"
3714,"e researcher stated that “educating a child is not like making a car” whereby a production process is developed and can simply be repeated again and again. Each child learns differently, creating a challenge for teachers in determining the instructional practices that will work best for each student. Some of the practices identified by both the studies and a few experts as those with potential for improving student achievement were: Differentiated instruction. In this type of instruction, teaching practices"
3715," and plans are adjusted to accommodate each student’s skill level for the task at hand. Differentiated instruction requires teachers to be flexible in their teaching approach by adjusting the curriculum and presentation of information for students, thereby providing multiple options for students to take in and process information. As one researcher described it, effective teachers understand the strategies and practices that work for each student and in this way can move all students forward in their learni"
3716,"ng and achievement. More guiding, less telling. Researchers have identified two general approaches to teaching: didactic and interactive. Didactic instruction relies more on lecturing and demonstrations, asking short answer questions, and assessing whether answers are correct. Interactive instruction focuses more on listening and guiding students, asking questions with more than one correct answer, and giving students choices during learning. As one researcher explained, both teaching approaches are importa"
3717,"nt, but some research has shown that giving students more guidance and less direction helps students become critical and independent thinkers, learn how to work independently, and assess several potential solutions and apply the best one. These kinds of learning processes are important for higher-order thinking. However, implementing “less instruction” techniques requires a high level of skill and creativity on the part of the teacher. Promoting effective discourse. An important corollary to the teacher pra"
3718,"ctice of guiding students versus directing them is effective classroom discussion. Research highlights the importance of developing students’ understanding not only of the basic concepts of a subject, but higher-order thinking and skills as well. To help students achieve understanding, it is necessary to have effective classroom discussion in which students test and revise their ideas, and elaborate on and clarify their thinking. In guiding students to an effective classroom discussion, teachers must ask en"
3719,"gaging and challenging questions, be able to get all students to participate, and know when to provide information or allow students to discover it for themselves. Additionally, one synthesis of several experimental studies examining practices in elementary math classrooms identified two instructional approaches that showed positive effects on student learning. The first was cooperative learning in which students work in pairs or small teams and are rewarded based on how well the group learns. The other app"
3720,"roach included programs that helped teachers introduce math concepts and improve skills in classroom management, time management, and motivation. This analysis also found that using computer-assisted instruction had moderate to substantial effects on student learning, although this type of instruction was always supplementary to other approaches or programs being used. We found through our literature review and interviews with researchers that the issue of effective instructional practices is intertwined wi"
3721,"th professional development. To enable all students to achieve the high standards of learning envisioned by standards-based accountability systems, teachers need extensive skills and knowledge in order to use effective teaching practices in the classroom. Given this, professional development is critical to supporting teachers’ learning of new skills and their application. Specifically, the research concludes that professional development will more likely have positive impacts on both teacher learning and st"
3722,"udent achievement if it: Focuses on a content area with direct links to the curriculum; Challenges teachers intellectually through reflection and critical problem Aligns with goals and standards for student learning; Lasts long enough so that teachers can practice and revise their Occurs collaboratively within a teacher learning community—ongoing teams of teachers that meet regularly for the purposes of learning, joint lesson planning, and problem solving; Involves all the teachers within a school or depart"
3723,"ment; Provides active learning opportunities with direct applications to the Is based on teachers’ input regarding their learning needs. Some researchers have raised concerns about the quality and intensity of professional development currently received by many teachers nationwide. One researcher summarized these issues by stating that professional development training for teachers is often too short, provides no classroom follow up, and models more “telling than guiding” practices. Given the decentralized "
3724,"nature of the U.S. education system, the support and opportunity for professional development services for teachers varies among states and school districts, and there are notable examples of states that have focused resources on various aspects of professional development. Nevertheless, shortcomings in teachers’ professional development experiences overall are especially evident when compared to professional development requirements for teachers in countries whose students perform well on international tes"
3725,"ts, such as the Trends in International Mathematics and Science Study and the Program for International Student Assessment. For example, one study showed that fewer than 10 percent of U.S. math teachers in school year 2003-04 experienced more than 24 hours of professional development in mathematics content or pedagogy during the year; conversely, teachers in Sweden, Singapore, and the Netherlands are required to complete 100 hours of professional development per year. We provided a copy of our draft report "
3726,"to the Secretary of Education for review and comment. Education’s written comments, which are contained in appendix V, expressed support for the important questions that the report addresses and noted that the American Recovery and Reinvestment Act of 2009 included $250 million to improve assessment and accountability systems. The department specifically stated that the money is for statewide data systems to provide information on individual student outcomes that could help enable schools to strengthen inst"
3727,"ructional practices and improve student achievement. However, the department raised several issues about the report’s approach. Specifically, the department commented that we (1) did not provide the specific research citations throughout the report for each of our findings or clearly explain how we selected our studies; (2) mixed the opinions of education experts with our findings gleaned from the review of the literature; (3) did not present data on the extent to which test formats had changed or on the re"
3728,"lationship between test format and teaching practices when discussing our assessment findings; and (4) did not provide complete information from an Education survey regarding increases and decreases in instructional time. As stated in the beginning of our report, the list of studies we reviewed and used for our findings are contained in appendix IV. We provide a description in appendix I of our criteria, the types of databases searched, the types of studies examined (e.g., experimental and nonexperimental) "
3729,"and the process by which we evaluated them. We relied heavily on two literature syntheses conducted by the Department of Education— Standards in Classroom Practice: Research Synthesis and The Influence of Standards on K-12 Teaching and Student Learning: A Research Synthesis, which are included in the list. These two syntheses covered, in a more comprehensive way than many of the other studies that we reviewed, the breadth of the topics that we were interested in and included numerous research studies in the"
3730,"ir reviews. Many of the findings in this report about the research are taken from the conclusions reached in these syntheses. However, to make this fact clearer and more prominent, we added this explanation to our abbreviated scope and methodology section on page 5 of the report. Regarding the use of expert opinion, we determined that obtaining the views of experts about the research we were reviewing would be critical to our understanding its broader implications. This was particularly important given the "
3731,"breadth and scope of our objectives. The experts we interviewed, whose names and affiliations are listed in appendix III, are prominent researchers who conduct, review, and reflect on the current research in the field, and whose work is included in some of the studies we reviewed, including the two literature syntheses written by the Department of Education and used by us in this study. We did not consider their opinions “conjecture” but grounded in and informed by their many years of respected work on the "
3732,"topic. We have been clear in the report as to when we are citing expert opinion, the research studies, or both. Regarding the report section discussing the research on assessments, it was our intent to highlight that, according to the research, assessments have both positive and negative influences on classroom teaching practices, not to conclude that NCLBA was the cause of either. Our findings in this section of the report are, in large part, based on conclusions from the department’s syntheses mentioned e"
3733,"arlier. For example, The Influence of Standards on K-12 Teaching and Student Learning: A Research Synthesis states “… tests matter—the content covered, the format used, and the application of their results—all influence teacher behavior.” Furthermore, we previously reported that states most often have chosen multiple choice assessments over other types because they can be scored inexpensively and their scores can be released prior to the next school year as required by NCLBA. That report also notes that sta"
3734,"te officials and alignment experts said that multiple choice assessments have limited the content of what can be tested, stating that highly complex content is “difficult if not impossible to include with multiple choice items.” However, we have revised this paragraph to clarify our point and provide additional information. Concerning the topic of narrowing the curriculum, we agree with the Department of Education that this report should include a fuller description of the data results from the cited Educat"
3735,"ion survey in order to help the reader put the data in an appropriate context. Hence, we have added information to that section of the report. However, one limitation of the survey data we cite is that it covers changes in instructional time for a short time period—from school year 2004-05 to 2006-07. In the its technical comments, the Department refers to its recent report, Title I Implementation: Update on Recent Evaluation Findings for a fuller discussion of this issue. The Title I report, while noting t"
3736,"hat most elementary teachers reported no change from 2004–05 to 2006–07 in the amount of instructional time that they spent on various subjects, also provides data over a longer, albeit earlier period time period, from 1987–88 to 2003–04, from the National Center on Education Statistics Schools and Staffing Survey. In analyzing this data, the report states that elementary teachers had increased instructional time on reading and mathematics and decreased the amount of time spent on science and social studies"
3737," during this period. We have added this information as well. Taken together, we believe these data further reinforce our point that assessments under current accountability systems can have, in addition to positive influences on teaching, some negative ones as well, such as the curriculum changes noted in the report, even if the extent of these changes is not fully known. Education also provided technical comments that we incorporated as appropriate. We are sending copies of this report to the Secretary of "
3738,"Education, relevant congressional committees, and other interested parties. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or ashbyc@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. To address the objectives of this "
3739,"study, we used a variety of methods. To determine the types of instructional practices schools and teachers are using to help students achieve state academic standards and whether those practices differ by school characteristics, we used two recent surveys of principals and teachers. The first survey, a nationally- representative survey from the Department of Education’s (Education) National Longitudinal Study of No Child Left Behind (NLS-NCLB) conducted by the RAND Corporation (RAND), asked principals the "
3740,"extent to which their schools were focusing on certain strategies in their voluntary school improvement efforts. Education’s State and Local Implementation of the No Child Left Behind Act Volume III— Accountability Under NCLB: Interim Report included information about the strategies emphasized by principals as a whole, and we obtained from Education the NLS-NCLB database to determine the extent to which principals’ responses differed by school characteristic variables. We conducted this analysis on school y"
3741,"ear 2006-2007 data by controlling for four school characteristic variables: (1) the percentage of a school’s students receiving free or reduced price lunch (poverty); (2) the percentage of students who are a racial minority (minority); (3) whether the school is in an urban, urban fringe (suburban), or rural area (school location); and (4) the school’s adequate yearly performance (AYP) status. We analyzed data from a second RAND survey, which was a three-state survey sponsored by the National Science Foundat"
3742,"ion that asked math teachers in California, Georgia, and Pennsylvania how their classroom teaching strategies differed due to a state math test. RAND selected these states to represent a range of approaches to standards-based accountability and to provide some geographic and demographic diversity; the survey data is representative only for those three states individually. RAND’s report on the three-state survey data included information about how teachers within each of the three states had changed their te"
3743,"aching practices due to a state accountability test. RAND provided us with descriptive data tables based on its school year 2005-2006 survey data; we analyzed the data to measure associations between the strategies used and the school characteristic variables. We requested tables that showed this information for teachers in all schools, and separately for teachers in different categories of schools (elementary and middle schools) and by the school characteristics of poverty, minority, school location and AY"
3744,"P status. We obtained from RAND standard error information associated with the estimates from the different types of schools and thus were able to test the statistical significance of differences in likelihood between what teachers from different types of schools reported. As part of our analyses for both surveys, we reviewed documentation and performed electronic testing of the data obtained through the surveys. We also conducted several interviews with several researchers responsible for the data collecti"
3745,"on and analyses and obtained information about the measures they took to ensure data reliability. On the basis of our efforts to determine the reliability of the data, we determined the data from each of these surveys were sufficiently reliable for the purposes of our study. We reviewed existing literature to determine what researchers have found regarding the effect of standards-based accountability systems on instructional practices, and practices that work in raising student achievement. To identify exis"
3746,"ting studies, we conducted searches of various databases, such as the Education Resources Information Center, Proquest, Dialog EDUCAT, and Education Abstracts. We also asked all of the education researchers that we interviewed to recommend additional studies. From these sources, we identified 251 studies that were relevant to our study objectives about the effect of standards-based accountability systems on instructional practices and instructional practices there are effective in raising student achievemen"
3747,"t. We selected them according to the following criteria: covered the years 2001 through 2008 and were either experimental or quasi-experimental studies, literature syntheses, or studied multiple sites. We selected the studies for our review based on their methodological strength, given the limitations of the methods used, and not necessarily on whether the results could be generalized. We performed our searches from August 2008 to January 2009. To assess the methodological quality of the selected studies, w"
3748,"e developed a data collection instrument to obtain information systematically about each study being evaluated and about the features of the evaluation methodology. We based our data collection and assessments on generally accepted social science standards. We examined factors related to the use of comparison and control groups; the appropriateness of sampling and data collection methods; and for syntheses, the process and criteria used to identify studies. A senior social scientist with training and experi"
3749,ence in evaluation research and methodology read and coded the methodological discussion for each evaluation. A second senior social scientist reviewed each completed data collection instrument and the relevant documentation to verify the accuracy of every coded item. This review identified 20 selected studies that met GAO’s criteria for methodological quality. We supplemented our synthesis by interviewing prominent education researchers identified in frequently cited articles and through discussions with k
3750,"nowledgeable individuals. We also conducted interviews with officials at the U.S. Department of Education, including the Center on Innovation and Improvement, and the Institute on Education Sciences’ National Center for Education Evaluation and Regional Assistance, as well as other educational organizations. We also reviewed relevant federal laws and regulations. In order to analyze the National Longitudinal Study of No Child Left Behind (NLS-NCLB) principal survey conducted by the RAND Corporation, we anal"
3751,"yzed strategies on which principals most often focused, taking into account the percentage of a school’s students receiving free or reduced price lunch (poverty), the percentage of students who are a racial minority (minority), whether the school is in an urban, suburban, or rural area (school location), and the school’s adequate yearly performance (AYP) status (see table 1). Our analyses used “odds ratios,” generally defined as the ratio of the odds of an event occurring in one group compared to the odds o"
3752,"f it occurring in another group, to express differences in the likelihoods of schools with different characteristics using these strategies. We used odds ratios rather than percentages because they are more appropriate for statistical modeling and multivariate analysis. Odds ratios indicate how much higher (when they are greater than 1.0) or lower (when they are less than 1.0) the odds were that principals would respond that a given strategy was a major or moderate focus. We included a reference category fo"
3753,"r the school characteristics (low minority, low poverty, and central city) in the top row of table 1, and put comparison groups beneath those reference categories, as indicated by the column heading in the second row (high-minority, high- poverty, or rural schools). As an example, the third cell in the “high- minority schools” column indicates that principals in high-minority schools were 2.65 times more likely to make “implementing new instructional approaches or curricula in reading/language arts/English”"
3754," a focus of their school improvement efforts. In another example, the odds that principals would “restructure the school day to teach core content areas in greater depth (e.g., establishing a literacy block)” were 2.8 times higher for high-poverty schools than low poverty schools, as seen in the sixth cell under “high-poverty schools.” Those cells with an asterisk indicate statistically significant results; that is, we have a high degree of confidence that the differences we see are not just due to chance b"
3755,"ut show an actual difference in the survey responses. See appendix I for further explanation of our methodology. “Strong States, Weak Schools: The Benefits and Dilemmas of Centralized Accountability” Quasi-experimental design with matched groups; multiple regressions used with data. Literature review using a best-evidence synthesis (related to a meta-analysis) Cornelia M. Ashby (202) 512-7215 or ashbyc@gao.gov. Janet Mascia (Assistant Director), Bryon Gordon (Assistant Director), and Andrew Nelson (Analyst-"
3756,"in-Charge) managed all aspects of the assignment. Linda Stokes and Caitlin Tobin made significant contributions to this report in all aspects of the work. Kate van Gelder contributed to writing this report, and Ashley McCall contributed to research for the report. Luann Moy, Justin Fisher, Cathy Hurley, Douglas Sloane, and John Smale Jr. provided key technical support, and Doreen Feldman and Sheila R. McCoy provided legal support. Mimi Nguyen developed the graphics for the report."
3757,"In November 2006, we reported that since 2001, the amount of national research that has been conducted on the prevalence of domestic violence and sexual assault had been limited, and less research had been conducted on dating violence and stalking. At that time, no single, comprehensive effort existed that provided nationwide statistics on the prevalence of these four categories of crime among men, women, youth, and children. Rather, various national efforts addressed certain subsets of these crime categori"
3758,"es among some segments of the population and were not intended to provide comprehensive estimates. For example, HHS’s Centers for Disease Control and Prevention’s (CDC) National Violent Death Reporting System, which collects incident-based data from multiple sources, such as coroner/medical examiner reports, gathered information on violent deaths resulting from domestic violence and sexual assaults, among other crimes. However, it did not gather information on deaths resulting from dating violence or stalki"
3759,"ng incidents. In our November 2006 report, we noted that designing a single, comprehensive data collection effort to address these four categories of crime among all segments of the population independent of existing efforts would be costly, given the resources required to collect such data. Furthermore, it would be inefficient to duplicate some existing efforts that already collect data for certain aspects of these categories of crime. Specifically, in our November 2006 report, we identified 11 national ef"
3760,"forts that had reported data on certain aspects of domestic violence, sexual assault, dating violence, and stalking. However, limited national data were available to estimate prevalence from these 11 efforts because they (1) largely focused on incidence rather than prevalence, (2) used varying definitions for the types of crimes and categories of victims covered, and (3) had varying scopes in terms of incidents and categories they addressed. Focus on incidence. Four of the 11 national data collection effort"
3761,"s focused solely on incidence—the number of separate times a crime is committed against individuals during a specific time period—rather than prevalence—the unique number of individuals who were victimized during a specific time period. As a result, information gaps related to the prevalence of domestic violence, sexual assault, dating violence, and stalking, particularly in the areas of dating violence among victims age 12 and older and stalking among victims under age 18 existed at the time of our Novembe"
3762,"r 2006 report. Obtaining both incidence and prevalence data is important for determining which services to provide to the four differing categories of crime victims. HHS also noted that both types of data are important for determining the impact of violence and strategies to prevent it from occurring. Although perfect data may never exist because of the sensitivity of these crimes and the likelihood that not all occurrences will be disclosed, agencies have taken initiatives since our report was issued to he"
3763,"lp address some of these gaps or have efforts underway. These initiatives are consistent with our recommendation that the Attorney General and Secretary of Health and Human Services determine the extent to which initiatives being planned or underway can be designed or modified to address existing information gaps. For example, DOJ’s Office of Juvenile Justice and Delinquency Prevention (OJJDP), in collaboration with CDC, sponsored a nationwide survey of the incidence and prevalence of children’s (ages 17 an"
3764,"d younger) exposure to violence across several major crime categories, including witnessing domestic violence and peer victimization (which includes teen dating violence). OJJDP released incidence and prevalence measures related to children’s exposure to violence, including teen dating violence, in 2009. Thus, Congress, agency decision makers, practitioners, and researchers have more comprehensive information to assist them in making decisions on grants and other issues to help address teen dating violence."
3765," To address information gaps related to teen dating violence and stalking victims under the age of 18, in 2010, CDC began efforts on a teen dating violence prevention initiative known as “Dating Matters.” One activity of this initiative is to identify community-level indicators that can be used to measure both teen dating violence and stalking in high-risk urban areas. CDC officials reported that they plan to begin implementing the first phase of “Dating Matters” in as many as four high-risk urban areas in "
3766,"September 2011 and expect that the results from this phase will be completed by 2016. Thus, it is too early to tell the extent to which this effort will fully address the information gap related to prevalence of stalking victims under the age of 18. Varying definitions. The national data collection efforts we reviewed could not provide a basis for combining the results to compute valid and reliable nationwide prevalence estimates because the efforts used varying definitions related to the four categories of"
3767," crime. For example, CDC’s Youth Risk Behavior Surveillance System’s definition of dating violence included the intentional physical harm inflicted upon a survey respondent by a boyfriend or girlfriend. In contrast, the Victimization of Children and Youth Survey’s definition did not address whether the physical harm was intentional. To address the issue of varying definitions, we recommended that the Attorney General and the Secretary of Health and Human Services, to the extent possible, require the use of "
3768,"common definitions when conducting or providing grants for federal research. This would provide for leveraging individual collection efforts so that the results of such efforts could be readily combined to achieve nationwide prevalence estimates. HHS agreed with this recommendation. In commenting on our November 2006 draft report, DOJ expressed concern regarding the potential costs associated with implementing this and other recommendations we made and suggested that a cost-benefit analysis be conducted. We"
3769," agreed that performing a cost-benefit analysis is a critical step, as acknowledged by our recommendation that DOJ and HHS incorporate alternatives for addressing information gaps deemed cost-effective in future budget requests. HHS agreed with this recommendation and both HHS and DOJ have taken actions to address it by requesting or providing additional funding for initiatives to address information gaps, such as those on teen dating violence. In response to our recommendation on common definitions, in Aug"
3770,"ust 2007, HHS reported that it continued to encourage, but not require, the use of uniform definitions of certain forms of domestic violence and sexual assault it established in 1999 and 2002, respectively. At the same time, DOJ reported that it consistently used uniform definitions of intimate partner violence in project solicitations, statements of work, and published reports. Since then, officials from CDC reported that in October 2010, the center convened a panel of 10 experts to revise and update its d"
3771,"efinitions of certain forms of domestic violence and sexual assault given advancements in this field of study. CDC is currently reviewing the results from the panel and plans to hold a second panel in 2012, consisting of practitioners, to review the first panel’s results and to obtain consensus on the revised definitions. Moreover, HHS reported that it is also encouraging the use of uniform definitions by implementing the National Intimate Partner and Sexual Violence Survey. This initiative is using consist"
3772,"ent definitions and methods to collect information on women and men’s experiences with a range of intimate partner violence, sexual violence, and stalking victimization. Thus, by using consistent methods over time, HHS reported that it will have comparable data at the state and national level to inform intervention and prevention efforts and aid in the evaluation of these efforts. In addition, according to a program specialist from OJJDP, in 2007, OJJDP created common definitions for use in the National Sur"
3773,"vey of Children’s Exposure to Violence to help collect data and measure incidence and prevalence rates for child victimization, including teen dating violence. While it is too early to tell the extent to which HHS’s efforts will result in the wider use of common definitions to assist in the combination of data collection efforts, OJJDP efforts in developing common definitions have supported efforts to generate national incidence and prevalence rates for child victimization. A program specialist from OJJDP n"
3774,"oted that OJJDP plans to focus on continuously improving the definitions. Varying scope. The national data collection efforts we reviewed as part of our November 2006 report also could not provide a basis for combining the results to compute valid and reliable nationwide prevalence estimates because the efforts had varying scopes in terms of the incidents and categories of victims that were included. For example, in November 2006, we reported that CDC’s Youth Risk Behavior Surveillance System excludes youth"
3775," who are not in grades 9 through 12 and those who do not attend school; whereas the Victimization of Children and Youth Survey was addressed to youth ages 12 and older, or those who were at least in the sixth grade. National data collection efforts underway since our report was issued may help to overcome this challenge. For instance, in September 2010, HHS reported that CDC was working in collaboration with the National Institute of Justice to develop the National Intimate Partner and Sexual Violence Surve"
3776,"y. Specifically, HHS reported that, through this system, it is collecting information on women’s and men’s experiences with a range of intimate partner violence, sexual violence, and stalking victimization. HHS reported that it is gathering experiences that occurred across a victim’s lifespan (including experiences that occurred before the age of 18) and plans to generate incidence and prevalence estimates for intimate partner violence, sexual violence, dating violence, and stalking victimization at both th"
3777,"e national and state levels. The results are expected to be available in October 2011. These agency initiatives may not fill all information gaps on the extent to which women, men, youth, and children are victims of the four predominant crimes VAWA addresses. However, the efforts provide Congress with additional information it can consider on the prevalence of these crimes as it makes future investment decisions when reauthorizing and funding VAWA moving forward. We reported in July 2007 that recipients of "
3778,"11 grant programs we reviewed collected and reported data to the respective agencies on the types of services they provide, such as counseling; the total number of victims served; and in some cases, demographic information, such as the age of victims; however, data were not available on the extent to which men, women, youth, and children receive each type of service for all services. This situation occurred primarily because the statutes governing the 11 grant programs do not require the collection of demog"
3779,"raphic data by type of service, although they do require reports on program effectiveness, including number of persons served and number of persons seeking services who could not be served. Nevertheless, VAWA authorizes that a range of services can be provided to victims, and we determined that services were generally provided to men, women, youth, and children. The agencies administering these 11 grant programs—HHS and DOJ—collect some demographic data for certain services, such as emergency shelter under "
3780,"the Family Violence Prevention and Services Act and supervised visitation and exchange under VAWA. The quantity of information collected and reported varied greatly for the 11 programs and was extensive for some, such as those administered by DOJ’s Office on Violence Against Women (OVW) under VAWA. The federal agencies use this information to help inform Congress about the known results and effectiveness of the grant programs. However, even if demographic data were available by type of service for all servi"
3781,"ces, such data might not be uniform and reliable because, among other factors, (1) the authorizing statutes for these programs have different purposes and (2) recipients of grants administered by HHS and DOJ use varying data collection practices. Authorizing statutes have different purposes. The authorizing statutes for the 11 grant programs we reviewed have different purposes; therefore the reporting requirements for the 11 grant programs must vary to be consistent with these statutes. However, if a grant "
3782,"program addresses a specific service, the demographic data collected are more likely to address the extent to which men, women, youth, and children receive that specific service. For example, in commenting on our July 2007 report, officials from OVW stated that they could provide such demographic data for 3 of its 8 grant programs we reviewed—the Transitional Housing Assistance Grants Program, the Safe Havens: Supervised Visitation and Safe Exchange Grant Program, and the Legal Assistance for Victims Grant "
3783,"Program. Recipients of grants administered by HHS and DOJ use varying data collection practices. For example, some recipients request that victims self-report data on the victim’s race, whereas other recipients rely on visual observation of the victim to obtain these data. Since we issued our July 2007 report, officials from HHS’s Administration for Children and Families (ACF) and OVW told us that they modified their grant recipient forms to improve the quality of the recipient data collected and to reflect"
3784," statutory changes to the programs and reporting requirements. Moreover, ACF officials stated that they adjusted the demographic categories on their forms to mirror OVW’s efforts so data would be collected consistently across the government for these grant programs. In addition, OVW officials stated that they have continued to provide technical assistance and training to grant recipients on completing their forms through a cooperative agreement with a university. As a result of these efforts, and others, of"
3785,"ficials from both agencies reported that the quality of the recipient data has improved resulting in fewer errors and more complete data. As we reported in our July 2007 report, HHS and DOJ officials stated that they would face significant challenges in collecting and reporting data on the demographic characteristics of victims receiving services by type of service funded by the 11 grant programs included in our review. These challenges included concerns about victims’ confidentiality and safety, resource c"
3786,"onstraints, overburdening recipients, and technological issues. For example, according to officials from ACF and OVW, requiring grant recipients to collect this level of detail may inadvertently disclose a victim’s identity, thus jeopardizing the victim’s safety. ACF officials also said that some of their grant recipients do not have the resources to devote to these data collection efforts, since their primary focus is on service delivery. In addition, ACF officials said that being too prescriptive in requi"
3787,"ring demographic data could overburden some grant recipients that may report data to multiple funding entities, such as federal, state, and local entities and private foundations. Furthermore, HHS and DOJ reported that some grant recipients do not have sophisticated data collection systems in place to allow them to collect additional information. In our July 2007 report, we did not recommend that federal departments require their grant recipients to collect and report additional data on the demographic char"
3788,"acteristics of victims receiving services by type of service because of the potential costs and difficulties associated with addressing the challenges HHS and DOJ officials identified, relative to the benefits that would be derived. In conclusion, there are important issues to consider in moving forward on the reauthorization of VAWA. Having better and more complete data on the prevalence of domestic violence, sexual assault, dating violence, and stalking as well as related services provided to victims of t"
3789,"hese crimes can without doubt better inform and shape the federal programs intended to meet the needs of these victims. One key challenge in doing this is weighing the relative benefits of obtaining these data with their relative costs because of the sensitive nature of the crimes, those directly affected, and the need for services and support. Chairman Leahy, Ranking Member Grassley, and Members of the Committee, this completes my prepared statement. I would be happy to respond to any questions you or othe"
3790,"r Members of the Committee may have at this time. For questions about this statement, please contact Eileen R. Larence at (202) 512-8777 or larencee@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Debra B. Sebastian, Assistant Director; Aditi Archer, Frances Cook, and Lara Miklozek. Key contributors for the previous work that this testimony is based on are lis"
3791,"ted in each individual report. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately."
3792,"The Title I property improvement program was established by the National Housing Act (12 U.S.C. 1703) to encourage lending institutions to finance property improvement projects that would preserve the nation’s existing housing stock. Under the program, FHA insures 90 percent of a lender’s claimable loss on an individual defaulted loan. The total amount of claims that can be paid to a lender is limited to 10 percent of the value of the total program loans held by each lender. Today, the value of Title I’s ou"
3793,"tstanding loans is relatively small compared with other FHA housing insurance programs. As of September 30, 1997, the value of loans outstanding on the property improvement program totaled about $4.4 billion on 364,423 loans. By contrast, the value of outstanding FHA single-family loans in its Mutual Mortgage Insurance Fund totaled about $360 billion. Similarly, Title I’s share of the owner-occupied, single-family remodeling market is small—estimated by the National Association of Home Builders to be about "
3794,"1 percent in fiscal year 1997. Approximately 3,700 lenders are approved by FHA to make Title I loans. Lenders are responsible for managing many aspects of the program, including making and servicing loans, monitoring the contractors, and dealing with borrowers’ complaints. In conducting these activities, lenders are responsible for complying with FHA’s underwriting standards and regulations and ensuring that home improvement work is inspected and completed. FHA is responsible for approving lenders, monitori"
3795,"ng their operations, and reviewing the claims submitted for defaulted loans. Title I program officials consider lenders to have sole responsibility for program operations and HUD’s role is primarily to oversee lenders and ensure that claims paid on defaulted loans are proper. Homeowners obtain property improvement loans by applying directly to Title I lenders or by having a Title I lender-approved dealer—that is a contractor—prepare a credit application or otherwise assist the homeowner in obtaining the loa"
3796,"n from the lender. During fiscal years 1986 through 1996, about 520,000 direct and 383,000 dealer loans were made under the program. By statute, the maximum size of property improvement loans is $25,000 for single-family loans and the maximum loan term is about 20 years. Title I regulations require borrowers to have an income adequate to meet the periodic payments required by a property improvement loan. Most borrowers have low- to moderate incomes, little equity in their homes, and/or poor credit histories"
3797,". HUD’s expenses under the Title I program, such as claim payments made by FHA on defaulted loans, are financed from three sources of revenue: (1) insurance charges to lenders of 0.5 percent of the original loan amount for each year the loan is outstanding, (2) funds recovered from borrowers who defaulted on loans, and (3) appropriations. In an August 1997 report on the Title I program, Price Waterhouse concluded that the program was underfunded during fiscal years 1990 through 1996. Price Waterhouse estima"
3798,"ted that a net funding deficit of about $150 million occurred during the period, with a net funding deficit in 1996 of $11 million. Data from the Price Waterhouse report on estimated projected termination rates for program loans made in fiscal year 1996 can be used to calculate an estimated cumulative claim rate of about 10 percent over the life of Title I loans insured by FHA in that fiscal year. When FHA-approved Title I lenders make program loans, they collect information on borrowers, such as age, incom"
3799,"e, and gender; the property, such as its address; and loan terms, such as interest rate. While lenders are required to report much of this information to their respective regulatory agencies by the Home Mortgage Disclosure Act, HUD collects little of this information when Title I loans are made. Using information that it requires lenders to provide, HUD records the lender’s and borrower’s names, state and county, as well as the size, term, and purpose of the loan. Other information collected by HUD on other"
3800," single-family loan insurance programs, such as the borrower’s address, Social Security number, income, and debt are not collected by HUD when Title I loans are made. HUD does collect all of the information available on borrowers, property, and loans when Title I loans default and lenders submit claims. Title I officials told us they collected little information when loans were made because they consider the program to be lender-operated. As a result, HUD cannot identify the characteristics of borrowers and"
3801," neighborhoods served by the program, nor can it identify certain potential abuses of the program. For example, HUD does not collect borrowers’ Social Security numbers and property addresses when loans are made. Therefore, HUD would have difficulty determining if some borrowers are obtaining multiple Title I loans or if some borrowers are exceeding the maximum amount of Title I loans per property when loans are made. HUD regulations limit the total amount of indebtedness on Title I loans to $25,000 for each"
3802," single-family property. In this regard, our examination of HUD’s Title I claims data found a number of instances in which the same Social Security number was used for multiple claims. As discussed previously, claims on about 10 percent of the program’s loans can be expected over the life of program loans. Our examination of 16,556 claims paid by HUD between January 1994 and August 1997 revealed 247 instances in which the same Social Security number appeared on multiple claims. These cases totaled about $5."
3803,"2 million in paid claims. In several instances, claims were paid on as many as five loans having the same Social Security number during the 3-1/2-year period. Our Office of Special Investigations, together with HUD’s Office of the Inspector General, is inquiring further into the circumstances surrounding these loans. However, because these loans may have been for multiple properties, or multiple loans on the same property that totaled less than $25,000, they may not have violated program regulations. Allowi"
3804,"ng individual borrowers to accumulate large amounts of Title I HUD insured debt, however, exposes HUD to large losses in the case of financial stress on the part of such heavily indebted borrowers. In addition, while information available to HUD allows identification of potential abuses of the $25,000 indebtedness limit after loans have defaulted, control over the indebtedness limitation is not possible for 90 percent of the program’s loans made that do not default because borrowers’ Social Security numbers"
3805," and property addresses are not collected when the loans are made. While HUD collects more extensive information on program loans when they default, we found problems with the accuracy of some of the information recorded in its claims database. Our random sample of 53 loans on which a claim had been denied and subsequently paid by HUD, found that 7 loans, or 13 percent, had been miscoded as dealer loans when they were direct loans, or direct loans when they were dealer loans. This is important because HUD r"
3806,"ecently cited high default rates on dealer loans, among other reasons, for proposing regulations to eliminate the dealer loan portion of the program. Considering the miscoding on identifying loans as dealer or direct, we question HUD’s ability to identify default experience by loan type. In addition, HUD’s information on claims denied and subsequently approved was problematic. Although HUD can deny claims for property improvement loans for a number of reasons, HUD did not have a system in place to provide i"
3807,"nformation on why claims are denied or approved for payment following a denial. HUD could not provide us with information on how many claims it denied because of poor underwriting or other program abuses or which lenders had a higher-than-average number of claims denied for specific program violations. In addition, we were unable to determine from HUD’s data system why a denied claim was subsequently paid following an appeal by the lender or waiver by HUD. Such information is important in determining how we"
3808,"ll lenders are complying with program regulations, whether internal controls need to be strengthened, and which lenders should be targeted for review by HUD’s Office of Quality Assurance. We also found that files for claims that were initially denied by HUD and subsequently paid frequently did not contain the names of program officials who decided the denied claims should be paid and the reasons for their decisions. Of the 53 randomly selected loan claim files we examined, 50 contained no evidence of furthe"
3809,"r review by a HUD official following the initial denial or provided any basis for eventually paying the claim. Unless information on who makes decisions to deny claims and the reasons for the denial and subsequent payments are documented, HUD has no basis for reviewing the reasonableness of those decisions. HUD recently made changes to its claims database system to identify the reasons claims are denied. Program officials agreed that such information is important in determining how well program regulations "
3810,"are being complied with and in targeting lenders for quality assurance reviews. Claims examiners are now required to identify their reasons for denial, including the section of the regulation that was violated. However, the change does not address the problem of missing documentation in the claims file explaining the reasons for paying claims that were previously denied. HUD’s monitoring reviews of Title I lenders to identify compliance problems have declined substantially in recent years. Between fiscal ye"
3811,"ars 1995 and 1997, HUD performed 33 Title I on-site quality assurance reviews of lenders. Most of these reviews (26) were performed in fiscal year 1995. During fiscal years 1996 and 1997, HUD performed five and two on-site lender reviews, respectively. According to HUD officials, prior to fiscal year 1997, HUD had a staff of 23 individuals to monitor the 3,700 lenders approved by FHA to make Title I loans and about 8,000 other FHA approved lenders making loans on other FHA insurance programs. Because of thi"
3812,"s limited monitoring resource, HUD decided to focus its lender monitoring on major high volume FHA programs, according to these HUD officials. Monitoring priorities have also led to few follow-up reviews by HUD. As a result, it is difficult to determine the impact of the quality assurance reviews that were performed on improving lenders’ compliance. When making Title I loans, lenders are required to ensure that borrowers represent acceptable credit risks, with a reasonable ability to make payments on the lo"
3813,"ans, and to see that the property improvement work is completed. However, our examination of 53 loan claim files revealed that one or more required documents needed to ensure program compliance were missing from more than half (30) of the files. In 12 cases, the required original loan application, signed by the borrower, was not in the loan file. The original loan application is important because it is used by the claims examiner to review the adequacy of the lender’s underwriting and to ensure that the bor"
3814,"rower’s signature and Social Security number matches those on other documents, including the credit report. Furthermore, for 23 of the 53 claim files, we found that required completion certificates, certifying that the property improvement work had been completed, were missing or were signed but not dated by the borrowers. According to program guidelines, claims submitted for payment after defaults have occurred on dealer loans should not be paid unless a signed completion certificate is in the file. We fou"
3815,"nd that completion certificates were missing from the files for 13 dealer loans and were not dated for another 4 dealer loans. Lastly, for 33 loans on which program regulations required that an inspection be conducted by the lender, 18 loan files did not contain the report. We also reviewed the 53 claim files to determine how well lenders were complying with underwriting standards. All documentation supporting the underwriting determination should be retained in the loan file, according to HUD regulations. "
3816,"HUD can deny a lender’s claim if the lender has not followed HUD underwriting standards in making the loan. However, HUD does not examine the quality of a lender’s loan underwriting during the claims process if 12 loan payments were made by the borrower before defaulting on the loan. Since 27 percent of the Title I loans that default do so within the first year, this practice, in effect, exempts the majority of defaulted loans from an examination of the quality of the lenders’ underwriting. Of the 53 loans "
3817,"in our sample, 13 defaulted within 12 months of loan origination and were subject to an underwriting review by HUD. We focused our underwriting examination on these 13 loan claim files. We found that for 4 of the 13 loans, on which HUD eventually paid claims, lenders made questionable underwriting decisions. Title I program regulations require that the credit application and review by the lender must establish that the borrower, is an acceptable credit risk, had 2 years of stable employment, and that his/he"
3818,"r income will be adequate to meet the periodic payments required by the loan, as well as the borrower’s other housing expenses and recurring charges. However, for four of these loans, information in the files indicated that the borrowers may not have had sufficient income to qualify for the loan or had poor credit. For example, on one loan, the lender used a pay stub covering the first 2 weeks of March to calculate the borrower’s annual income. The pay stub showed that the borrower’s year-to-date earnings w"
3819,"ere $6,700 by the middle of March, and this amount was used to calculate that his annual income was $34,000, or about $2,800 per month. However, the pay stub also showed that for the 2-week period in March, the borrower worked a full week with overtime and only earned $725, or about $1,600 per month. The file contained no other documentation, such as income tax returns, W-2 forms, or verification from the employer to support the higher monthly income. Program officials told us that it was acceptable to use "
3820,"one pay stub to calculate monthly income; however, the “yearly earnings to date” figure should not be used because it can at times inflate the actual income earned during a normal pay period. The borrower, with about $1,600 per month in corrected income, still met HUD’s income requirements for the amount of the loan. However, HUD denied the original claim because its underwriting standards had not been followed in that the borrower had poor credit at the time the loan was made. In a letter responding to HUD"
3821,"’s denial of its claim, the lender acknowledged that the borrower had limited credit at the time the loan was made, but pointed out the (mis-calculated) higher income of $2,800 per month to justify making the loan. This reasoning was apparently accepted by HUD as there was no evidence in the claim file that HUD questioned the error in calculating the borrower’s monthly income. The borrower defaulted on the loan after making two payments, and HUD paid a claim of $14,000. Similar problems with lenders’ noncom"
3822,"pliance with Title I program regulations have been identified by HUD. As noted previously, between fiscal years 1995 and 1997, HUD performed 33 Title I on-site quality assurance reviews of lenders. Among other things, HUD cited lenders for engaging in poor credit underwriting practices and having loan files with missing inspection reports or inspection reports that were not signed or dated. HUD sent the lenders letters detailing its findings and requested a written response addressing the findings. HUD, how"
3823,"ever, did not perform follow-up, on-site reviews on 32 lenders to ensure that they had taken corrective actions. For the 33 on-site reviews, nine lenders were referred to HUD’s Mortgagee Review Board for further action. The Board assessed four of these lenders a total of $23,500 in civil penalties. Under its HUD 2020 Management Reform Plan and related efforts, HUD has been making changes to the Title I program operations. HUD has relocated its claims examination unit to the Albany (New York) Financial Opera"
3824,"tions Center and contracted with Price Waterhouse to develop claims examination guidelines. According to program officials in Albany, the new claims process will be more streamlined and automated and include lenders filing claims electronically. In addition, HUD is consolidating all single-family housing operations from 81 locations across the nation into four Single-Family Homeownership Centers. Each center has established a quality assurance division to (1) monitor lenders, (2) recommend sanctions against"
3825," lenders and other program participants such as contractors and loan officers, (3) issue limited denials of program participation against program participants, and (4) refer lenders for audits/investigations. However, since HUD’s quality assurance staff will monitor lenders involved in all FHA single-family programs, the impact of this change on improving HUD’s oversight of Title 1 lenders is unclear. Overall, by the end of fiscal year 1998, the quality assurance staff will increase to 76, up from 43 in Feb"
3826,"ruary 1998. HUD expects that the addition of more quality assurance staff will increase the number of reviews of lenders and allow more comprehensive reviews of lender operations. In closing, Mr. Chairman, our preliminary analysis shows weaknesses in HUD’s management of its Title I property improvement loan insurance program and oversight of program lenders. These weaknesses center on the absence of information needed to manage the program and HUD’s oversight of lenders’ compliance with program regulations."
3827," HUD officials attributed these weaknesses to the program’s being lender-operated, limited staff resources, and HUD’s assignment of monitoring priorities. Because of these weaknesses, we are concerned that HUD may have little assurance that the property improvement program is operating efficiently and free of abuse. The challenge faced by HUD in managing and overseeing this program centers on how to obtain the information needed to manage the program and to strengthen the oversight of lenders for this progr"
3828,"am, which is relatively small compared with other FHA housing insurance programs. Our report will include any recommendations or options we have to offer to strengthen HUD’s management and oversight of the program. Mr. Chairman, this concludes my statement. We would be pleased to respond to any questions that you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a che"
3829,"ck or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day"
3830,", GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists."
3831,"DLA is DOD’s logistics manager for all departmental consumable items and some repair parts. Its primary business function is materiel management: providing supply support to sustain military operations and readiness. In addition, DLA performs five other supply-related business functions: distributing materiel from DLA and service-owned inventories, purchasing fuels for DOD and the U.S. government, storing strategic materiel, marketing surplus DOD materiel for reuse and disposal, and providing numerous infor"
3832,"mation services, such as item cataloging, for DOD and the U.S. government, as well as selected foreign governments. These six business functions are managed by field commands that report to and support the agency’s central command authority. In 2000, DLA refocused its logistics mission from that of a supplier of materiel to a manager of supply chain relationships. To support this transition, the agency developed a strategic plan (known as DLA 21) to reengineer and modernize its operations. Among the goals o"
3833,"f DLA 21 are to optimize inventories, improve efficiency, increase effectiveness through organizational redesign, reduce inventories, and modernize business systems. DLA relies on over 650 systems to support warfighters by allowing access to global inventories. Whether it is ensuring that there is enough fuel to service an aircraft fleet, providing sufficient medical supplies to protect and treat military personnel, or supplying ample food rations to our soldiers on the frontlines, information technology pl"
3834,"ays a key role in ensuring that Defense Department agencies are prepared for their missions. Because of its heavy reliance on IT to accomplish its mission, DLA invests extensively in this area. For fiscal year 2002, DLA’s IT budget is about $654 million. Our recent reviews of DLA’s IT management have identified weaknesses in such important areas as enterprise architecture management, incremental investment management, and software acquisition management. In June 2001, we reported that DLA did not have an en"
3835,"terprise architecture to guide the agency’s investment in its Business Systems Modernization (BSM) project—the agency’s largest IT project. The use of an enterprise architecture, which describes an organization’s mode of operation in useful models, diagrams, and narrative, is required by the OMB guidance that implements the Clinger-Cohen Act of 1996 and is a commercial best practice. Such a “blueprint” can help clarify and optimize the dependencies and relationships among an agency’s business operations and"
3836," the IT infrastructure and applications supporting them. An effective architecture describes both the environment as it is and the target environment that an organization is aiming for (as well as a plan for the transition from one to the other). We concluded that without this architecture, DLA will be challenged in its efforts to successfully acquire and implement BSM. Further, we reported that DLA was not managing its investment in BSM in an incremental manner, as required by the Clinger-Cohen Act of 1996"
3837," and OMB guidance and in accordance with best commercial practices. An incremental approach to investment helps to minimize the risk associated with such large-scale projects as BSM. Accordingly, we recommended that DLA make the development, implementation, and maintenance of an enterprise architecture an agency priority and take steps to incrementally justify and validate its investment in BSM. According to DLA officials, the agency is addressing these issues. In January 2002, we reported a wide disparity "
3838,"in the rigor and discipline of software acquisition processes between two DLA systems. Such inconsistency in processes for acquiring software (the most costly and complex component of systems) can lead to the acquisition of systems that do not meet the information needs of management and staff, do not provide support for necessary programs and operations, and cost more and take longer than expected to complete. We also reported that DLA did not have a software process-improvement program in place to effecti"
3839,"vely strengthen its corporate software acquisition processes, having eliminated the program in 1998. Without a management-supported software process-improvement program, it is unlikely that DLA can effectively improve its institutional software acquisition capabilities, which in turn means that the agency’s software projects will be at risk of not delivering promised capabilities on time and within budget. Accordingly, we recommended that DLA institute a software process-improvement program and correct the "
3840,"software acquisition process weaknesses that we identified. According to DLA officials, the agency is addressing each of these issues. In May 2000, we issued the Information Technology Investment Management (ITIM) maturity framework, which identifies critical processes for successful IT investment and organizes these processes into an assessment framework comprising five stages of maturity. This framework supports the fundamental requirements of the Clinger-Cohen Act of 1996, which requires IT investment an"
3841,"d capital planning processes and performance measurement. Additionally, ITIM can provide a useful roadmap for agencies when they are implementing specific, fundamental IT capital planning and investment management practices. The federal Chief Information Officers Council has favorably reviewed the framework, and it is also being used by a number of executive agencies and organizations for designing related policies and procedures and self-led or contractor-based assessments. ITIM establishes a hierarchical "
3842,"set of five different maturity stages. Each stage builds upon the lower stages and represents increased capabilities toward achieving both stable and effective (and thus mature) IT investment management processes. Except for the first stage—which largely reflects ad hoc, undefined, and undisciplined decision and oversight processes—each maturity stage is composed of critical processes essential to satisfy the requirements of that stage. These critical processes are defined by core elements that include orga"
3843,"nizational commitment (for example, policies and procedures), prerequisites (for example, resource allocation), and activities (for example, implementing procedures). Each core element is composed of a number of key practices. Key practices are the specific tasks and conditions that must be in place for an organization to effectively implement the necessary critical processes. Figure 1 shows the five ITIM stages and a brief description of each stage. Using ITIM, we assessed the extent to which DLA satisfied"
3844," the five critical processes in stage 2 of the framework. Based on DLA’s acknowledgment that it had not executed any of the key practices in stage 3, we did not independently assess the agency’s capabilities in this stage or stages 4 and 5. To determine whether DLA had implemented the stage 2 critical processes, we compared relevant DLA policies, procedures, guidance, and documentation associated with investment management activities to the key practices and critical processes in ITIM. We rated the key prac"
3845,"tices as “executed” based on whether the agency demonstrated (by providing evidence of performance) that it had met the criteria of the key practice. A key practice was rated as “not executed” when we found insufficient evidence of a practice during the review, or when we determined that there were significant weaknesses in DLA’s execution of the key practice. As part of our analysis, we selected four IT projects as case studies to verify application of the critical processes and practices. We selected proj"
3846,"ects that (1) supported different DLA business areas (such as materiel management), (2) were in different lifecycle phases (for example, requirements definition, design, operations and maintenance), (3) represented different levels of risk (such as low or medium) as designated by the agency, and (4) included at least one investment that required funding approval by a DOD authority outside of DLA (for example, the Office of the Secretary of Defense (OSD)). The four projects are the following: Business System"
3847,"s Modernization: This system, which supports DLA’s materiel management business area, is in the concept demonstration phase of development. DLA reported that it spent about $136 million on this system in fiscal year 2001, and it has budgeted about $133 million for fiscal year 2002. BSM is intended to modernize DLA’s materiel management business function, replacing two of its standard systems (the Standard Automated Materiel Management System and the Defense Integrated Subsistence Management System). The pro"
3848,"ject is also intended to enable the agency to reengineer its logistics practices to reflect best commercial business practices. For example, in support of DLA’s goal of reducing its role as a provider and manager of materiel and increasing its role as a manager of supply chain relationships, BSM is to help link customers with appropriate suppliers and to incorporate commercial business practices regarding physical distribution and financial management. The agency has classified this project as high risk, an"
3849,"d OSD has funding approval authority for this project. Hazardous Materials Information System (HMIS): This system, which supports DLA’s logistics operations function, was implemented in 1978. In fiscal year 2001, DLA reported that it spent about $1 million on this system and budgeted about $2.4 million for fiscal year 2002. In 1999 DLA began a redesign effort to transform HMIS into a Web-based system with a direct interface to the manufacturers and suppliers of hazardous material. The project is in the deve"
3850,"lopment stage. It contains data on the chemical composition of materials classified as “hazardous” for the purposes of usage, storage, and transportation. The system is used by Emergency Response Teams whenever a spill or accident occurs involving hazardous materials. The agency classified this project as low risk, and funding approval occurs within DLA. The Defense Reutilization and Marketing Automated Information System (DAISY): This system, which supports DLA’s materiel reuse and disposal mission, is in "
3851,"the operations and maintenance lifecycle phase. The agency reported that it spent approximately $4.4 million on DAISY in fiscal year 2001, and it has budgeted about $7 million for fiscal year 2002. This system is a repository for transactions involving the reutilization, transfer, donation, sale, or ultimate disposal of excess personal property from DOD, federal, and state agencies. The excess property includes spare and repair parts, scrap and recyclable material, precious metals recovery, hazardous materi"
3852,"al, and hazardous waste disposal. Operated by the Defense Reutilization and Marketing Service, the system is used at 190 locations worldwide. The agency classified this project as low risk, and funding approval occurs within DLA. Standard Automated Materiel Management System (SAMMS): This system, which supports DLA’s materiel management business area, is 30 years old and approaching the end of its useful life. The agency reports that investment in SAMMS (budgeted at approximately $19 million for fiscal year"
3853," 2002) is directed toward keeping the system operating until its replacement, BSM, becomes fully operational (scheduled for fiscal year 2005). This system provides the Inventory Control Points with information regarding stock levels, as well as with the capabilities required for (1) acquisition and management of wholesale consumable items, (2) direct support for processing requisitions, (3) forecasting of requirements, (4) generation of purchase requests, (5) maintenance of technical data, (6) financial man"
3854,"agement, (7) identification of items, and (8) asset visibility. The agency has classified the maintenance of SAMMS as a low risk effort, and funding approval occurs within DLA. For these projects, we reviewed project management documentation, such as mission needs statements, project plans, and status reports. We also analyzed charters and meeting minutes for DLA oversight boards, DLA’s draft Automated Information System Emerging Program Life Management (LCM) Review and Milestone Approval Directive and Port"
3855,"folio Management and Oversight Directives, and DOD’s 5000 series guidance on systems acquisition. In addition, we reviewed documentation related to the agency’s self-assessment of its IT investment operations. To supplement our document reviews, we interviewed senior DLA officials, including the vice director (who sits on the Corporate Board, DLA’s highest level investment decisionmaking body), the chief information officer (CIO), the chief financial officer, and oversight board members. We also interviewed"
3856," the program managers of our four case study projects, as well as officials responsible for managing the IT investment process and other staff within Information Operations. To determine what actions DLA has taken to improve its IT investment management processes, we interviewed the CIO and officials of the Policy, Plans, and Assessments and the program executive officer (PEO) operations groups within the Information Operations Directorate. These groups are primarily responsible for implementing investment "
3857,"management process improvements. We also reviewed a draft list of IT investment management improvement tasks. We conducted our work at DLA headquarters in Fort Belvoir, Virginia, from June 2001 through January 2002, in accordance with generally accepted government auditing standards. In order to have the capabilities to effectively manage IT investments, an agency should (1) have basic, project-level control and selection practices in place and (2) manage its projects as a portfolio of investments, treating"
3858," them as an integrated package of competing investment options and pursuing those that best meet the strategic goals, objectives, and mission of the agency. DLA has a majority of the project-level practices in place. However, it is missing several crucial practices, and it is not performing portfolio-based investment management. According to the CIO, the evolving state of its investment management capabilities is the result of agency leadership’s recently viewing IT investment management as an area of manag"
3859,"ement focus and priority. Without having crucial processes and related practices in place, DLA lacks essential management controls over its sizable IT investments. At ITIM stage 2 maturity, an organization has attained repeatable, successful IT project-level investment control processes and basic selection processes. Through these processes, the organization can identify expectation gaps early and take appropriate steps to address them. According to ITIM, critical processes at stage 2 include (1) defining i"
3860,"nvestment board operations, (2) collecting information about existing investments, (3) developing project-level investment control processes, (4) identifying the business needs for each IT project, and (5) developing a basic process for selecting new IT proposals. Table 1 discusses the purpose for each of the stage 2 critical processes. To its credit, DLA has put in place about 75 percent of the key practices associated with stage 2 critical processes. For example, DLA has oversight boards to perform invest"
3861,"ment management functions, and it has basic project-level control processes to help ensure that IT projects are meeting cost and schedule expectations. However, DLA has not executed several crucial stage 2 investment practices. For example, the business needs for IT projects are not always clearly identified and defined, basic investment selection processes are still being developed, and policies and procedures for project oversight are not documented. Table 2 summarizes the status of DLA’s stage 2 critical"
3862," processes, showing how many associated key practices the agency has executed. DLA’s actions in each of the critical processes are discussed in the sections that follow. To help ensure executive management accountability for IT capital planning and investment decisions, an organization should establish a governing board or boards responsible for selecting, controlling, and evaluating IT investments. According to ITIM, effective IT investment board operations require, among other things, that (1) board membe"
3863,"rship have both IT and business knowledge, (2) board members understand the investment board’s policies and procedures and exhibit core competencies in using the agency’s IT investment policies and procedures, (3) the organization’s executives and line managers support and carry out board decisions, (4) the organization create organization-specific process guidance that includes policies and procedures to direct the board’s operations, and (5) the investment board operate according to written policies and p"
3864,"rocedures. (The full list of key practices is provided in table 3.) DLA has established several oversight boards that perform IT investment management functions. These boards include the following: The DLA Investment Council, which is intended to review, evaluate, and approve new IT and non-IT investments between $100,000 and $1,000,000. The Program Executive Officer Review Board, which is intended to review and approve the implementation of IT investments that are budgeted for over $25 million in all or ov"
3865,"er $5 million in any one year. The Corporate Board, which is intended to review, evaluate, and approve all IT and non-IT investments over $1 million. DLA is executing four of the six key practices needed for these boards to operate effectively. For example, the membership of these boards integrates both IT and business knowledge. In addition, board members informed us of their understanding of their board’s informal practices. Further, according to IT investment officials, project managers, and agency docum"
3866,"entation, the boards have a process for ensuring that their decisions are supported and carried out by organization executives and line managers. This process involves documenting board decisions in meeting minutes, assigning staff to carry out the decisions, and tracking the actions taken on a regular basis until the issues are addressed. Nonetheless, DLA is missing the key ingredient associated with two of the board oversight practices that are needed to operate effectively— organization-specific guidance"
3867,". This guidance, which serves as official operations documentation, should (1) clearly define the roles of key people within its IT investment process, (2) delineate the significant events and decision points within the processes, (3) identify the external and environmental factors that will influence the processes (that is, legal constraints, the behavior of key subordinate agencies and military customers, and the practices of commercial logistics that DLA is trying to emulate as part of DLA 21); and (4) e"
3868,"xplain how IT investment-related processes will be coordinated with other organizational plans and processes. DLA does not have guidance that sufficiently addresses these issues. Policies and procedures governing operations are in draft for one board and have not been developed for the two other boards. Without this guidance governing the operations of the investment boards, the agency is at risk of performing key investment decisionmaking activities inconsistently. Such guidance would also provide a degree"
3869," of transparency that is helpful in both communicating and demonstrating how these decisions are made. Table 3 summarizes the ratings for each key practice and the specific findings supporting the ratings. An IT project inventory provides information to investment decision- makers to help evaluate the impacts and opportunities created by proposed or continuing investments. This inventory (which can take many forms) should, at a minimum, identify the organization’s IT projects (including new and existing sys"
3870,"tems) and a defined set of relevant investment management information about them (for example, purpose, owner, lifecycle stage, budget cost, physical location, and interfaces with other systems). Information from the IT project inventory can, for example, help identify systems across the organization that provide similar functions and help avoid the commitment of additional funds for redundant systems and processes. It can also help determine more precise development and enhancement costs by informing decis"
3871,"ionmakers and other managers of interdependencies among systems and how potential changes in one system can affect the performance of other systems. According to ITIM, effectively managing an IT project inventory requires, among other things, (1) identifying IT projects, collecting relevant information about them, and capturing this information in a repository, (2) assigning responsibility for managing the IT project inventory process to ensure that the inventory meets the needs of the investment management"
3872," process, (3) developing written policies and procedures for maintaining the IT project inventory, (4) making information from the inventory available to staff and managers throughout the organization so they can use it, for example, to build business cases and to support project selection and control activities, and (5) maintaining the IT project inventory and its information records to contribute to future investment selections and assessments. (The full list of key practices is provided in table 4.) DLA "
3873,"has executed many of the key practices in this critical process. For example, according to DLA’s CIO, IT projects are identified and specific information about them is entered into a central repository called the DLA Profile System (DPS). DPS includes, among other things, project descriptions, key contact information, lifecycle stage, and system interfaces. In addition, the CIO is responsible for managing the IT project identification process to ensure that DPS meets the needs of the investment management p"
3874,"rocess. However, DLA has not defined written policies and procedures for how and when users should add to or update information in the DPS. In addition, DLA is not maintaining DPS records, which would be useful during future project selections and investment evaluations, and for documenting the evolution of a project’s development. Without appropriate policies and procedures in place to describe the objectives and information requirements of the inventory, DPS is not being maximized as an effective tool to "
3875,"assist in the fundamental analysis essential to effective decisionmaking. Table 4 summarizes the ratings for each key practice and the specific findings supporting the ratings. Investment review boards should effectively oversee IT projects throughout all lifecycle phases (concept, design, development, testing, implementation, and operations/maintenance). At stage 2 maturity, investment review boards should review each project’s progress toward predefined cost and schedule expectations, using established cr"
3876,"iteria and performance measures, and should take corrective actions to address cost and milestone variances. According to ITIM, effective project oversight requires, among other things, (1) having written polices and procedures for project management, (2) developing and maintaining an approved management plan for each IT project, (3) having written policies and procedures for oversight of IT projects, (4) making up-to-date cost and schedule data for each project available to the oversight boards, (5) review"
3877,"ing each project’s performance by regularly comparing actual cost and schedule data to expectations, (6) ensuring that corrective actions for each under- performing project are documented, agreed to, implemented, and tracked until the desired outcome is achieved, and (7) using information from the IT project inventory. (The complete list of key practices is provided in table 5.) DLA has executed most of the key practices in this area. In particular, DLA relies on the guidance in the Department of Defense 50"
3878,"00 series directives for project management and draft guidance in an Automated Information System (AIS) Emerging Program Life-Cycle Management (LCM) Review and Milestone Approval Directive for specific IT project management. In addition, for each of the four projects we reviewed, a project management plan had been approved, and cost and schedule controls were addressed during project review meetings. Further, based on our review of project documentation and in discussion with project managers, up-to-date co"
3879,"st and schedule project data were provided to the PEO Review Board. This board oversees project performance regularly by comparing actual cost and schedule data to expectations and has a process for ensuring that, for underperforming projects, corrective actions are documented, agreed to, and tracked. Notwithstanding these strengths, DLA has some weaknesses in project oversight. Specifically, although the Corporate Board and the Investment Council have written charters, there are no written policies or proc"
3880,"edures that define their role in collectively overseeing IT projects. Without these policies and procedures, project oversight may be inconsistently applied, leading to the risk that performance problems, such as cost overruns and schedule slippages, may not be identified and resolved in a timely manner. In addition, according to representatives from the oversight boards, they do not use information from the IT project inventory to oversee projects because they are more comfortable using more traditional me"
3881,"thods of obtaining and using information (that is, informally talking with subject matter experts and relying on experience). The inventory is of value only to the extent that decisionmakers use it. As discussed earlier, while the inventory need not be the only source of information, it should nevertheless serve as a reliable and consistent tool for understanding project and overall portfolio decisions. Table 5 summarizes the ratings for each key practice and the specific findings supporting the ratings. De"
3882,"fining business needs for each IT project helps ensure that projects support the organization’s mission goals and meets users’ needs. This critical process creates the link between the organization’s business objectives and its IT management strategy. According to ITIM, effectively identifying business needs requires, among other things, (1) defining the organization’s business needs or stated mission goals, (2) identifying users for each project who will participate in the project’s development and impleme"
3883,"ntation, (3) training IT staff adequately in identifying business needs, and (4) defining business needs for each project. (The complete list of key practices is provided in table 6.) DLA has executed all but one of the key practices associated with effectively defining business needs for IT projects. For example, DLA’s mission goals are described in DLA’s strategic plan. In addition, according to IT investment management officials, the IT staff is adequately trained in identifying business needs because th"
3884,"ey generally have prior functional unit experience. In addition, according to DLA directives, IT projects are assigned an Integrated Process Team (IPT) to guide and direct the project through the development lifecycle. The IPTs are composed of IT and functional staff. Moreover, DOD and DLA directives require that business requirements and system users be identified and that users participate in the lifecycle management of the project. According to an IT investment official, each IT project has a users’ grou"
3885,"p that meets throughout the lifecycle to discuss problems and potential changes related to the system. We verified that this was the case for the four projects we reviewed. While the business needs for three of the four projects we reviewed were clearly identified and defined, DLA has reported that this has not been consistently done for all IT projects. According to IT investment management officials, this inconsistency arose because policies and procedures for developing business needs were not always fol"
3886,"lowed or required. DLA officials have stated that they are developing new guidance to address this problem. However, until this guidance is implemented and enforced, DLA cannot effectively demonstrate that priority mission and business improvement needs are forming the basis for all its IT investment decisions. Table 6 summarizes the ratings for each key practice and the specific findings supporting the ratings. Selecting new IT proposals requires an established and structured process to ensure informed dec"
3887,"isionmaking and infuse management accountability. According to ITIM, this critical process requires, among other things, (1) making funding decisions for new IT proposals according to an established process, (2) providing adequate resources for proposal selection activities, (3) using an established proposal selection process, (4) analyzing and ranking new IT proposals according to established selection criteria, including cost and schedule criteria, and (5) designating an official to manage the proposal se"
3888,"lection process. (The complete list of key practices is provided in table 7.) DLA has executed some of the key practices for investment proposal selection. For example, DLA executives make funding decisions for IT investments using DOD’s Program Objective Memorandum (POM) process, which is part of DOD’s annual budgeting process. Through this process, proposals for new projects or enhancements to ongoing projects are evaluated by DLA’s IT and financial groups and submitted to OSD through DLA’s Corporate Boar"
3889,"d with recommendations for funding approval. In addition, according to the CIO, adequate resources have been provided to carry out activities related to the POM process. Nonetheless, DLA has yet to execute some of the critical practices related to this process area. Specifically, DLA acknowledges that the agency is not analyzing and prioritizing new IT proposals according to established selection criteria. Instead, the Corporate Board uses the expertise from the IT organization and its own judgment to analy"
3890,"ze and prioritize projects. To its credit, DLA recognizes that it cannot continue to rely solely on the POM process to make sound IT investment selection decisions. Therefore, the agency has been working to establish an IT selection process over the past two budget cycles that is more investment-focused and includes increased involvement from IT Operations staff, necessary information, and established selection criteria. Until DLA implements an effective IT investment selection process that is well establis"
3891,"hed and understood throughout the agency, executives cannot be adequately assured that they are consistently and objectively selecting proposals that best meet the needs and priorities of the agency. Table 7 summarizes the ratings for each key practice and the specific findings supporting the ratings. An IT investment portfolio is an integrated, enterprisewide collection of investments that are assessed and managed collectively based on common criteria. Managing investments within the context of such a port"
3892,"folio is a conscious, continuous, and proactive approach to expending limited resources on an organization’s competing initiatives in light of the relative benefits expected from these investments. Taking an enterprisewide perspective enables an organization to consider its investments comprehensively so that the collective investments optimally address its mission, strategic goals, and objectives. This portfolio approach also allows an organization to determine priorities and make decisions about which pro"
3893,"jects to fund based on analyses of the relative organizational value and risks of all projects, including projects that are proposed, under development, and in operation. According to ITIM, stage 3 maturity includes (1) defining portfolio selection criteria, (2) engaging in project-level investment analysis, (3) developing a complete portfolio based on the investment analysis, (4) maintaining oversight over the investment performance of the portfolio, and (5) aligning the authority of IT investment boards. "
3894,"Table 8 describes the purposes for the critical processes in stage 3. According to DLA officials, they are currently focusing on implementing stage 2 processes and have not implemented any of the critical processes in stage 3. Until the agency fully implements both stage 2 and 3 processes, it cannot consider investments in a comprehensive manner and determine whether it has the appropriate mix of IT investments to best meet its mission needs and priorities. DLA recognizes the need to improve its IT investme"
3895,"nt processes, but it has not yet developed a plan for systematically correcting weaknesses. To properly focus and target IT investment process improvements, an organization should fully identify and assess current process strengths and weaknesses (that is, create an investment management capability baseline) as the first step in developing and implementing an improvement plan. As we have previously reported, this plan should, at a minimum, (1) specify measurable goals, objectives, milestones, and needed res"
3896,"ources, and (2) clearly assign responsibility and accountability for accomplishing well-defined tasks. The plan should also be documented and approved by agency leadership. In implementing the plan, it is important that DLA measure and report progress against planned commitments, and that appropriate corrective action be taken to address deviations. DLA does not have such a plan. In March 2001, it attempted to baseline agency IT operations by reviewing its project-level investment management practices using"
3897," ITIM. This effort identified practice strengths and weaknesses, but DLA considered the assessment to be preliminary (to be followed by a more comprehensive assessment at an unspecified later date) and limited in scope. DLA used the assessment results to establish broad milestones for strengthening its investment management process. The agency did not, however, develop a complete process improvement plan. For example, it did not (1) specify required resources to accomplish the various tasks, (2) clearly ass"
3898,"ign responsibility and accountability for accomplishing the tasks, (3) obtain support from senior level officials, and (4) establish performance measures to evaluate the effectiveness of the completed tasks. At the same time, the agency has separately begun other initiatives to improve its investment management processes, but these initiatives are not aligned with the established milestones or with each other. The DLA CIO characterizes the agency’s approach to its various process improvement efforts as a ne"
3899,"cessary progression that includes some inevitable “trial and error” as it moves toward a complete process improvement plan. Without such a plan that allows the agency to systematically prioritize, sequence, and evaluate improvement efforts, DLA jeopardizes its ability to establish a mature investment process that includes selection and control capabilities that result in greater certainty about future IT investment outcomes. Until recently, IT investment management has not been an area of DLA management att"
3900,"ention and focus. As a result, DLA currently finds itself without some of the capabilities that it needs to ensure that its mix of IT investments best meets the agency’s mission and business priorities. To its credit, DLA now recognizes the need to strengthen its IT investment management and has taken positive steps to begin doing so. However, several critical IT investment management capabilities need to be enhanced before DLA can have reasonable assurance that it is maximizing the value of its IT investme"
3901,"nt dollar and minimizing the associated risks. Moreover, DLA does not yet have a process improvement plan that is endorsed and supported by agency leadership. The absence of such a plan limits DLA’s prospects for introducing the management capabilities necessary for making prudent decisions that maximize the benefits and minimize the risks of its IT investment. To strengthen DLA’s investment management capability and address the weaknesses discussed in this report, we recommend that the secretary of defense"
3902," direct the DLA director to designate the development and implementation of effective IT investment management processes as an agencywide priority. Further, we recommend that the secretary of defense have the DLA director do the following: Develop a plan, within 6 months, for implementing IT investment management process improvements that is based on GAO’s ITIM stage 2 and 3 critical processes. Ensure that the plan specifies measurable goals and time frames, defines a management structure for directing and "
3903,"controlling the improvements, and establishes review milestones. Ensure that the plan focuses first on correcting the weakness in the ITIM stage 2 critical processes, because these processes collectively provide the foundation for building a mature IT investment management process. Specifically: Develop and issue guidance covering the scope and operations of DLA’s investment review boards. Such guidance should include, at a minimum, specific definitions of the roles and responsibilities within the IT invest"
3904,"ment process; an outline of the significant events and decision points within the processes; an identification of the external and environmental factors that will influence the processes (for example, legal constraints, the behavior of key suppliers or customers, or industry norms), and the manner in which IT investment-related processes will be coordinated with other organization plans and processes. Develop and issue policies and procedures for maintaining DLA’s IT projects inventory for investment manage"
3905,ment purposes. Finalize and issue policies and procedures (including the use of information from the IT systems and project inventory) for the PEO Review Board’s oversight of IT projects. Develop and issue similar policies and procedures for the other investment boards. Finalize and issue guidance supporting the identification of business needs and implementing management controls to ensure that proposals submitted to DLA for review clearly identify and define business requirements. Develop and issue guidan
3906,"ce for the proposal selection process in such a way that the criteria for selection are clearly set forth, including formally assigning responsibility for managing the proposal selection process and establishing management controls to ensure that the proposal selection process is working effectively. Ensure that the plan next focuses on stage 3 critical processes, which are necessary for portfolio management, because along with the stage 2 foundational processes, these processes are necessary for effective "
3907,"management of IT investments. Implement the approved plan and report on progress made against the plan’s goals and time frames to the secretary of defense every 6 months. DOD provided what it termed “official oral comments” from the director for acquisition resources and analysis on a draft of this report. In its comments, DOD concurred with our recommendations and described efforts under way and planned to implement them. However, it recommended that two report captions be changed to more accurately reflec"
3908,"t, in DOD’s view, the contents of the report and to eliminate false impressions. Specifically, DOD recommended that we change one caption from “DLA’s Capabilities to Effectively Manage IT Investments Are Limited” to “DLA’s Capabilities to Effectively Manage IT Investments Should Be Improved.” DOD stated that this change is needed to recognize the fact that DLA has completed about 75 percent of the practices associated with stage 2 critical processes. We do not agree. As stated in our report, to effectively "
3909,"manage IT investments an agency should (1) have basic, project-level control and selection practices in place (stage 2 processes) and (2) manage its projects as a portfolio of investments (stage 3 processes). Although DLA has executed most of the key practices associated with stage 2 processes, the agency acknowledges that it has not implemented any of the stage 3 processes. Therefore, our caption as written describes DLA’s IT investment management capabilities appropriately. In addition, DOD recommended th"
3910,"at we change the caption “DLA Lacks a Plan to Guide Improvement Efforts” to “DLA Lacks a Published Plan to Guide Improvement Efforts.” DOD stated that this change is needed because DLA has developed some elements of an implementation plan. We do not agree. Our point is that DLA did not have a complete process improvement plan, not that it has yet to publish the plan that it has. As we describe in the report, a complete plan should, at a minimum, (1) be based on a full assessment of process strengths and wea"
3911,"knesses, (2) specify measurable goals, objectives, milestones, and needed resources, (3) clearly assign responsibility and accountability for accomplishing well- defined tasks, and (4) be documented and approved by agency leadership. In contrast, DLA’s planning document was based on a preliminary assessment of only stage 2 critical processes and lacked several of the critical attributes listed above. Moreover, DOD stated in its comments that DLA has not completed a formally documented and prioritized implem"
3912,"entation plan to resolve stage 2 and 3 practice weaknesses and has yet to complete the self-assessment and gap analysis necessary to define planned action items. Accordingly, it is clear that DLA has not satisfied the tenets of a complete plan, and thus our caption is accurate as written. DOD provided additional comments that we have incorporated as appropriate in the report. We are sending copies of this report to the chairmen and ranking minority members of the Subcommittee on Defense, Senate Committee on"
3913," Appropriations; the Subcommittee on Readiness and Management Support, Senate Committee on Armed Services; the Subcommittee on Defense, House Committee on Appropriations; and the Subcommittee on Military Readiness, House Committee on Armed Services. We are also sending copies to the director, Office of Management and Budget; the secretary of defense; the under secretary of defense for acquisition, technology, and logistics; the deputy under secretary of defense for logistics and materiel readiness; and the "
3914,"director, Defense Logistics Agency. Copies will be made available to others upon request. If you have any questions regarding this report, please contact us at (202) 512-3439 and (202) 512-7351, respectively, or by e-mail at hiter@gao.gov and mcclured@gao.gov. An additional GAO contact and staff acknowledgments are listed in appendix II. In addition to the individual named above, key contributors to this report were Barbara Collier, Lester Diamond, Gregory Donnellon, Sabine Paul, and Eric Trout."
3915,"Since 2005, DOD and OPM have made significant progress in reducing delays in making personnel security clearance decisions and met statutory timeliness requirements for DOD’s initial clearances completed in fiscal year 2008. IRTPA currently requires that decisions on at least 80 percent of initial clearances be made within an average of 120 days. In December of 2008, we conducted an analysis to assess whether DOD and OPM were meeting the current timelines requirements in IRTPA and examined the fastest 80 pe"
3916,"rcent of initial clearance decisions for military, DOD civilian, and DOD industry personnel. We found that these clearance decisions were completed within 87 days, on average, and well within IRTPA’s requirements. IRTPA further requires that by December 2009, a plan be implemented in which, to the extent practical, 90 percent of initial clearance decisions are made within 60 days, on average. We also analyzed the executive branch’s 2009 annual report to Congress, which presented an average of the fastest 90"
3917, percent of initial clearance decisions in anticipation of IRTPA’s December 2009 requirements. The report stated that the average time for completing the fastest 90 percent of initial clearances for military and DOD civilians in fiscal year 2008 was 124 days. The report also stated that the average time for completing the fastest 90 percent of initial clearances for private industry personnel working on DOD contracts in fiscal year 2008 was 129 days. DOD and OMB officials have noted that the existing cleara
3918,"nce process is not likely to allow DOD and other agencies to meet the timeliness requirements that will take effect in December 2009 under IRTPA. IRTPA requires that the executive branch report annually on the progress made during the preceding year toward meeting statutory requirements for security clearances, including timeliness, and also provides broad discretion to the executive branch to report any additional information considered appropriate. Under the timeliness requirements in IRTPA, the executive"
3919," branch can exclude the slowest clearances and then calculate the average of the remaining clearances. Using this approach and anticipating IRTPA’s requirement that by December 2009, a plan be implemented under which, to the extent practical, 90 percent of initial clearance decisions are made within an average of 60 days, the executive branch’s 2009 report cited as its sole metric for timeliness the average of the fastest 90 percent of initial clearances. We conducted an independent analysis of all initial "
3920,"clearance decisions that DOD made in fiscal year 2008 that more fully reflects the time spent making clearance decisions. Without excluding any portion of the data or taking an average, we analyzed 100 percent of 450,000 initial DOD clearances decisions made in fiscal year 2008 for military, DOD civilian, and DOD industry personnel. Figure 2 shows the full range of time it took DOD and OPM to make clearance decisions in fiscal year 2008. As you can see, our independent analysis of all of the initial clearan"
3921,"ces revealed that 39 percent of the clearance decisions took more than 120 days to complete. In addition, 11 percent of the initial clearance eligibility decisions took more than 300 days to complete. By limiting its reporting on timeliness to the average of the fastest 90 percent of the initial clearance decisions made in fiscal year 2008 and excluding mention of the slowest clearances, the executive branch did not provide congressional decision makers with visibility over the full range of time it takes t"
3922,"o make all initial clearance decisions and the reasons why delays continue to exist. In our recent report, we recommended that the Deputy Director for Management at OMB (who is responsible for submitting the annual report) include comprehensive data on the timeliness of the personnel security clearance process in future versions of the IRTPA-required annual report to Congress. In oral comments in response to our recommendation, OMB concurred, recognized the need for timeliness, and underscored the importanc"
3923,"e of reporting on the full range of time to complete all initial clearances. We note, Mr. Chairman, that you previously submitted an amendment to expand IRTPA’s provision on reporting on clearance timeliness. While IRTPA contains no requirement for the executive branch to report any information on quality, the act grants the executive branch broad latitude to include any appropriate information in its reports. The executive branch’s 2006 through 2009 IRTPA-required reports to Congress on the clearance proce"
3924,"ss provided congressional decision makers with little information on quality—a measure that could include topics such as the completeness of the clearance documentation of clearance decisions. The 2006 and 2008 reports did not contain any mention of quality, and the 2007 report mentioned a single quality measure—the frequency with which adjudicating agencies returned OPM’s investigative reports because of quality deficiencies. The 2009 report does not contain any data on quality but proposes two measures of"
3925," investigative report quality and identifies plans to measure adjudicative quality. Specifically, the discussion of these measures is included in the Joint Reform Team’s December 2008 report, Security and Suitability Process Reform, which was included in the executive branch’s 2009 report. We have previously reported that information on timeliness alone does not communicate a complete picture of the clearance process, and we have emphasized the importance of ensuring quality in all phases of the clearance p"
3926,"rocess. For example, we recently estimated that with respect to initial top secret clearances adjudicated in July 2008, documentation was incomplete for most OPM investigative reports and some DOD adjudicative files. We independently estimated that 87 percent of about 3,500 investigative reports that adjudicators used to make clearance decisions were missing required documentation, and the documentation most often missing was employment verification. Incomplete documentation may lead to increases in both th"
3927,"e time needed to complete the clearance process and in overall process costs and may reduce the assurance that appropriate safeguards are in place to prevent DOD from granting clearances to untrustworthy individuals. Because the executive branch has not sufficiently addressed quality in its reports, it has missed opportunities to provide congressional decision makers with greater visibility over the clearance process. In our most recent report, we recommended that the Deputy Director for Management at OMB i"
3928,"nclude measures of quality in future versions of the IRTPA-required annual reports. In oral comments, OMB concurred with our recommendation and emphasized the importance of providing Congress more transparency about quality in the clearance process. Initial joint reform efforts partially reflect key practices for organizational transformation that we have identified, such as having committed leadership and a dedicated implementation team, but reports issued by the Joint Reform Team do not provide a strategi"
3929,"c framework that contains important elements of successful transformation, including long-term goals with related outcome-focused performance measures to show progress, nor do they identify potential obstacles to progress and possible remedies. Consistent with some of the key practices for organizational transformation, a June 2008 Executive Order established the Suitability and Security Clearance Performance Accountability Council, commonly known as the Performance Accountability Council, as the head of th"
3930,"e governmentwide governance structure responsible for achieving clearance reform goals and driving and overseeing the implementation of reform efforts. The Deputy Director for Management at OMB—who was confirmed in June 2009—serves as the Chair of the Council, and the Order also designated the Director of OPM and the Director of National Intelligence as Executive Agents for Suitability and Security, respectively. Membership on the council currently includes senior executive leaders from 11 federal agencies."
3931," In addition to high-level leadership of the Performance Accountability Council, the reform effort has benefited from a dedicated, multi-agency implementation team—the Joint Reform Team—to manage the transformation process from the beginning. The Joint Reform Team, while not formally part of the governance structure established by Executive Order 13467, works under the Council to provide progress reports to the President, recommend research priorities, and oversee the development and implementation of an in"
3932,"formation technology strategy, among other things. In addition to the key practices, the three reports issued by the Joint Reform Team have begun to address essential factors for reforming the security clearance process that we identified in prior work and that are also found in IRTPA. These factors include (1) developing a sound requirements determination process, (2) engaging in governmentwide reciprocity, (3) building quality into every step of the process, (4) consolidating information technology, and ("
3933,"5) identifying and reporting long-term funding requirements. While the personnel security clearance joint reform reports, which we reviewed collectively, begin to address essential factors for reforming the security clearance process, which represents positive steps, the Joint Reform Team’s information technology strategy does not yet define roles and responsibilities for implementing a new automated capability that is intended to be a cross-agency collaborative initiative. GAO’s prior work on key collabora"
3934,"tion practices has stressed the importance of defining these roles and responsibilities when initiating cross-agency initiatives. In addition, the Joint Reform Team’s reports do not contain any information on initiatives that will require funding, determine how much they will cost, or identify potential funding sources. Without long-term funding requirements, decision makers in both the executive and legislative branches will lack important information for comparing and prioritizing proposals for reforming "
3935,"the clearance processes. The reform effort’s success will be dependent upon the extent to which the Joint Reform Team is able to fully address these key factors moving forward. Although the high-level leadership and governance structure of the current reform effort distinguish it from previous efforts, it is difficult to gauge progress of reform, or determine if corrective action is needed, because the council, through the Joint Reform Team, has not established a method for evaluating the progress of the re"
3936,"form efforts. Without a strategic framework that fully addresses the long-standing security clearance problems and incorporates key practices for transformation—including the ability to demonstrate progress leading to desired results—the Joint Reform Team is not in a position to demonstrate to decision makers the extent of progress that it is making toward achieving its desired outcomes, and the effort is at risk of losing momentum and not being fully implemented. In our May 2009 report, we recommended that"
3937," OMB’s Deputy Director of Management, in the capacity as Chair of the Performance Accountability Council, ensure that the appropriate entities—such as the Performance Accountability Council, its subcommittees, or the Joint Reform Team— establish a strategic framework for the joint reform effort to include (1) a mission statement and strategic goals; (2) outcome-focused performance measures to continually evaluate the progress of the reform effort toward meeting its goals and addressing long-standing problem"
3938,"s with the security clearance process; (3) a formal, comprehensive communication strategy that includes consistency of message and encourages two-way communication between the Performance Accountability Council and key stakeholders; (4) a clear delineation of roles and responsibilities for the implementation of the information technology strategy among all agencies responsible for developing and implementing components of the information technology strategy; and (5) long-term funding requirements for securi"
3939,"ty clearance reform, including estimates of potential cost savings from the reformed process and provide them to decision makers in Congress and the executive branch. In oral comments on our report, OMB stated that it partially concurred with our recommendation to establish a strategic framework for the joint reform effort. Further, in written agency comments provided to us jointly by DOD and ODNI, they also partially concurred with our recommendation. Additionally, DOD and ODNI commented on the specific el"
3940,"ements of the strategic framework that we included as part of our recommendation. For example, in the comments, DOD and ODNI agreed that the reform effort must contain outcome-focused performance measures, but added that these metrics must evolve as the process improvements and new capabilities are developed and implemented because the effort is iterative and in phased development. We continue to believe that outcome-focused performance measures are a critical tool that can be used to guide the reform effor"
3941,"t and allow overseers to determine when the reform effort has accomplished it goals and purpose. In addition, DOD and ODNI asserted that considerable work has already been done on information technology for the reform effort, but added that even clearer roles and responsibilities will be identified moving forward. Regarding our finding that, at present, no single database exists in accordance with IRTPA’s requirement that OPM establish an integrated database that tracks investigations and adjudication infor"
3942,"mation, DOD and ODNI stated that the reform effort continues its iterative implementation of improvements to systems that improve access to information that agencies need. DOD and ODNI also acknowledged that more work needs to be done to identify long-term funding requirements. Mr. Chairman, I want to conclude by reiterating that DOD and OPM are meeting current IRTPA timeliness requirements, which means that 80 percent of initial clearance decisions are made within 120 days, on average. This represents sign"
3943,"ificant and noteworthy progress from our finding in 2007, when we reported that industry personnel waited more than 1 year, on average, to receive a top secret clearance. I would also like to emphasize that, although the high-level leadership and governance structure of the current reform effort distinguish it from previous attempts at clearance reform, it is imperative that OMB’s newly appointed Deputy Director for Management continue in the crucial role as chair of the Performance Accountability Council i"
3944,"n deciding (1) how to implement the recommendations contained in our most recent reports, (2) what types of actions are necessary for developing a corrective action plan, and (3) how the corrective measures will be implemented. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. For further information regarding this testimony, please contact me at (202) 512-3604 or farrellb@gao.gov. Contact points for our Offices of Congressional Relations"
3945," and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony are David E. Moser, Assistant Director; James D. Ashley; Lori Atkinson; Joseph M. Capuano; Sara Cradic; Mae Jones; Shvetal Khanna; James P. Klein; Ron La Due Lake; and Gregory Marchand. DOD Personnel Clearances: Comprehensive Timeliness Reporting, Complete Clearance Documentation, and Quality Measures Are Needed to Further Improve the Clearance Process. GAO-09-400. Washington, D.C.: "
3946,"May 19, 2009. Personnel Security Clearances: An Outcome-Focused Strategy Is Needed to Guide Implementation of the Reformed Clearance Process. GAO-09-488 Washington, D.C.: May 19, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 22, 2009. DOD Personnel Clearances: Preliminary Observations about Timeliness and Quality. GAO-09-261R. Washington, D.C.: December 19, 2008. Personnel Security Clearance: Preliminary Observations on Joint Reform Efforts to Improve the Governmentwide Clearance "
3947,"Eligibility Process. GAO-08-1050T. Washington, D.C.: July 30, 2008. Personnel Clearances: Key Factors for Reforming the Security Clearance Process. GAO-08-776T. Washington, D.C.: May 22, 2008. Employee Security: Implementation of Identification Cards and DOD’s Personnel Security Clearance Program Need Improvement. GAO-08-551T. Washington, D.C.: April 9, 2008. Personnel Clearances: Key Factors to Consider in Efforts to Reform Security Clearance Processes. GAO-08-352T. Washington, D.C.: February 27, 2008. DOD"
3948," Personnel Clearances: Improved Annual Reporting Would Enable More Informed Congressional Oversight. GAO-08-350. Washington, D.C.: February 13, 2008. DOD Personnel Clearances: Delays and Inadequate Documentation Found for Industry Personnel. GAO-07-842T. Washington, D.C.: May 17, 2007. DOD Personnel Clearances: Additional OMB Actions Are Needed to Improve the Security Clearance Process. GAO-06-1070. Washington, D.C.: September 28, 2006. DOD Personnel Clearances: Questions and Answers for the Record Followin"
3949,"g the Second in a Series of Hearings on Fixing the Security Clearance Process. GAO-06-693R. Washington, D.C.: June 14, 2006. DOD Personnel Clearances: New Concerns Slow Processing of Clearances for Industry Personnel. GAO-06-748T. Washington, D.C.: May 17, 2006. DOD Personnel Clearances: Funding Challenges and Other Impediments Slow Clearances for Industry Personnel. GAO-06-747T. Washington, D.C.: May 17, 2006. DOD Personnel Clearances: Government Plan Addresses Some Long- standing Problems with DOD’s Progr"
3950,"am, but Concerns Remain. GAO-06-233T. Washington, D.C.: November 9, 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately."
3951,"The SDB program in various forms has been in existence for the past 14 years. While criteria to qualify as an SDB remained essentially the same during this period, a Supreme Court decision in 1995—Adarand v. Pena— resulted in the federal government examining how it implemented “affirmative action” programs, including certain procurement preference programs. Subsequently, the federal government established a program to certify SDBs as eligible for preferences when being considered for federal prime and subco"
3952,"ntracting opportunities. The SDB program was established by the National Defense Authorization Act of 1987, and applies to the Department of Defense (DOD), the National Aeronautics and Space Administration (NASA), and the U. S. Coast Guard. The implementing regulations define SDBs as small business concerns that are owned and controlled by socially and economically disadvantaged individuals who have been subjected to racial or ethnic prejudice or cultural bias and who have limited capital and credit opportu"
3953,"nities. African, Asian, Hispanic, and Native Americans are presumed by regulation to be socially disadvantaged. An individual who is not a member of a designated group presumed to be socially disadvantaged had to establish individual social disadvantage on the basis of clear and convincing evidence which, according to the SBA's OIG audit report, is a difficult standard to meet. Under this standard, an applicant must produce evidence to show that it is highly probable that the applicant is a socially disadva"
3954,"ntaged business concern. The regulations further specify that to qualify as an SDB, a small business concern had to (1) be at least 51 percent owned and controlled by a socially and economically disadvantaged individual or individuals; (2) meet the SBA-established size standard based on the business' primary industry as established by the Standard Industrial Classification (SIC) code; and (3) have principals who have a personal net worth, excluding the value of the business and personal home, less than $750"
3955,",000. The Federal Acquisition Streamlining Act of 1994 (FASA) expanded the program to all federal agencies. In addition to the governmentwide programs, various other federal laws contain provisions designed to assist SDBs that are applicable to specific executive departments or independent agencies. For example, the Surface Transportation and Uniform Relocation Assistance Act of 1987 required the Department of Transportation to expend not less than 10 percent of federal highway and transit funds with disadv"
3956,"antaged business enterprises. Amendments in 1987 and 1992 to the Airport and Airway Improvement Act of 1982 imposed similar requirements with regard to airport programs. Other statutes contain provisions to encourage contracting with SDBs by various departments and agencies, including the Department of Energy, the Department of State, the Environmental Protection Agency, and the Federal Deposit Insurance Corporation. Prior to the recent changes in the SDB program, small business concerns could self-certify "
3957,"that they were small and disadvantaged. According to an SBA official, unless otherwise challenged by an interested party, the contracting agency accepted the self-representation to be accurate. Between 1987 and the Adarand decision, self-certified SDBs were eligible to receive two main benefits: (1) a 10 percent evaluation preference in competitive DOD acquisitions where that award was based on price and price-related factors and (2) the ability to compete for contracts set-aside for SDBs for certain DOD ac"
3958,"quisitions where agency officials believed that there was a reasonable expectation that offers would be received from at least two responsible SDBs. Though FASA extended the authority to implement these benefits to all federal agencies, because of the 1995 Adarand decision and the effort to reform federal affirmative action programs in light of the decision, regulations to implement the authority were delayed. In the 1995 Adarand decision, the Supreme Court held that all federal affirmative action programs "
3959,"that use racial classifications are subject to strict judicial scrutiny. To meet this standard, a program must be shown to meet a compelling governmental interest and must be narrowly tailored to meet that interest. The Court questioned whether the program at issue in the Adarand case, which involved highway contracts at the Department of Transportation, met that test. The Court decision resulted in the federal government's examining all affirmative action programs, including procurement preference programs"
3960,". One issue that was addressed following the Supreme Court decision was the government's policy that allowed firms to self-certify as SDBs. The Supreme Court decision in Adarand resulted in the administration having to make changes to the SDB program. Tasked by the administration, the Department of Justice (DOJ) conducted a review of affirmative action in federal procurement programs. DOD, one of the largest contracting agencies, was the focus of the initial post-Adarand compliance actions by the federal go"
3961,"vernment. DOJ reviewed the procurement mechanisms used by DOD, including set-asides, direct competitive awards, and price evaluations. On May 23, 1996, DOJ issued a proposed structure to reform affirmative action in federal procurement to ensure compliance with the tests of constitutionality established in the Adarand decision. The DOJ proposal included a 2-year ban on DOD's use of set-aside programs for SDBs and the elimination of the SDB set-asides for civilian agencies, allowing only bidding and evaluati"
3962,on credits. The proposal also included standards by which a firm could apply to be certified as an SDB. This proposal also reduced the burden of proof from “clear and convincing evidence” to a “preponderance of the evidence” standard. This lesser evidentiary standard requires that applicants show that they are more likely than not to meet the criteria for social disadvantage. Because of its experience in certifying 8(a) businesses and resolving protests in connection with both the 8(a) and the previous SDB 
3963,"set-aside programs, SBA was chosen to pilot and administer a centralized program for SDB certification. In August 1998, SBA set up the Office of Small Disadvantage Business Certification and Eligibility to implement the DOJ proposal. According to an SBA official, SBA projected that by October 1999, an estimated 30,000 firms would apply to SBA for certification based, in large part, on the number of firms that self-certified as SDBs under the previous program. Under the SDBC program, small businesses seeking"
3964," to obtain SDB procurement opportunities must first demonstrate that they meet the eligibility criteria to qualify as an SDB. Effective October 1, 1998, small business concerns must receive certification from SBA that they qualify as an SDB for purposes of receiving a price evaluation adjustment when competing for a prime contract. As of January 1, 1999, monetary incentives became available for prime contractors that met and exceeded their subcontracting goals. Also, effective October 1, 1999, SDBs that wai"
3965,"ved the price evaluation adjustment and large business prime contractors that used certified SDBs as subcontractors in certain industries were eligible for evaluation credits. While the SDB set-aside program was suspended, price and evaluation credits continued with the following three procurement mechanisms: (1) qualified SDBs are eligible for price evaluation adjustments of up to 10 percent when bidding on federal prime contracts in certain industries, (2) prime contractors may receive evaluation credits "
3966,"for their plans to subcontract with SDBs in major authorized SIC groups, and (3) prime contractors that exceed specified targets for SDB subcontracting in the major authorized SIC groups can receive monetary incentives. Although on September 30, 2000, the initial pilot covering civilian agencies' authority to use price and evaluation credits expired, the administration is seeking a 3-year extension of the program as part of SBA's pending Reauthorization Bill. The DOD authority was extended for another 3 yea"
3967,"rs. During this time, SBA, DOD, and the Department of Commerce are to evaluate the performance of the program and determine whether the program has benefited SDBs and whether the reinstitution of set-asides should be considered. As of August 24, 2000, according to SBA officials, 9,034 small business firms were certified as SDBs. Of these firms, 6,405 were grandfathered into the SDBC program due to their 8(a) status. The remaining 2,629, or 29 percent, were small business firms that applied to the program an"
3968,"d were certified by SBA. According to SBA, 5,456 small business firms applied to the program, which was a significantly lower number than the 30,000 applications SBA anticipated. Of the 5,456 applications submitted for certification, SBA returned 1,990 applications as incomplete and denied 241 applications for SDB certification. Applicants withdrew 307 applications for unknown reasons. The remaining 289 applications were in various stages of screening and processing. Of the 9,034 certified SDBs, according t"
3969,"o an SBA official, 6,405 firms, or 71 percent, were automatically grandfathered into the SDB program due to their 8(a) certification. Of those firms that were grandfathered, 5,689 firms were 8(a) business development firms, and 716 were firms that recently graduated from the 8(a) program but qualified as an SDB because they still met the ownership and personal wealth criteria, according to an SBA official. The official also reported that, as of August 24, 2000, SBA had certified 2,629 firms as SDBs—1,302 fi"
3970,"rms were certified in the first year of the program from August 24, 1998, through August 23, 1999; and 1,327 firms were certified from August 24, 1999, through August 24, 2000. Table 1 shows the composition of the SDB certifications. According to SBA officials, 5,456 applications were submitted by small businesses for SDB certification from August 24, 1998, to August 24, 2000. Of the 5,456 applications, 3,377, or 62 percent, were determined to be complete and passed the screening phase of the certification "
3971,"process. According to SBA officials, 1,990 applications, or 36 percent, were determined to be incomplete and subsequently returned to the applicant during this period, and 89, or 2 percent, were “in- screening,” meaning that the application was being reviewed by an analyst for completeness. Table 2 shows the status of the applications submitted to SBA by small business concerns for SDB certification. SBA certified 2,629, or 78 percent, of the 3,377 applications it considered complete from August 24, 1998, t"
3972,"hrough August 24, 2000. SBA denied certification to 241 applicants, or 7 percent, according to SBA officials. The two primary reasons SBA officials gave for denying certification were either that (1) the designated group members exceeded the economic threshold, or that (2) the nondesignated group members did not meet the social disadvantaged standard. As for the remaining 507 complete applications, SBA officials also reported that applicants withdrew 307 applications for unknown reasons, and 200 were “in pr"
3973,"ocess,” meaning they were being reviewed to determine whether or not the applicant met the eligibility criteria. Table 3 shows the status of all complete applications submitted to SBA as of August 24, 2000. The number of SDBs that have been certified through the SDBC program is significantly lower than the 30,000 projected by SBA, based on the number of firms that had self-certified as SDBs. Officials from SBA, two federal agencies' Offices of Small and Disadvantaged Business Utilization, the U. S. Chamber "
3974,"of Commerce, the Women's Business Enterprise National Council, the National Minority Supplier Development Council, and the National Small Business United cited four broad factors, which they believed, combine to likely explain the lower-than-anticipated number of SDB certification applications. These factors included, for some firms: (1) confusion about the program's implementation, (2) the administrative and financial burden of applying, (3) questions regarding the benefits of obtaining the SDB certificati"
3975,"on, and (4) not qualifying as SDBs. SBA officials and officials from other organizations we interviewed agreed that businesses might not have applied for certification due to uncertainty about when or how the SDB certifications would be implemented. Criticisms and lack of buy-in from outside groups on the SDB certification process and changes to the program's implementation dates may have created confusion for some firms, while some others may have adopted a “wait-and-see attitude.” Officials from two of th"
3976,"e seven organizations that we talked to said that, when developing the certification process, SBA did not solicit the support of small business advocacy organizations that represent the interests of small business concerns. The two officials also stated that some advocacy groups opposed the structure and criteria used to establish SDB certification as well as the onerous documentation requirements. Consequently, those groups have not encouraged their members to participate in the program because these issue"
3977,"s are not resolved. One of the officials also believed that SDB owners were not educated about the process, which might have lead them to not apply for certification. Compounding the problem of conflicting or inadequate information about the certification requirements, according to SBA officials, was the shifting of implementation dates. The implementation date for the requirement that prime contractors use only certified SDBs in meeting their subcontracting goals and receive evaluation credits under the SD"
3978,"B participation program also changed several times. For example, the implementation date for the program was originally January 1, 1999, then changed to July 1999 with a final extension to October 1999. Consequently, according to SBA and some of the advocacy group representatives, SDBs may have delayed applying for certification because of uncertainty as to actual deadlines and, in some cases, may have adopted a wait-and-see attitude regarding program requirements and criteria. Officials interviewed from si"
3979,"x of the seven organizations agreed that another key factor explaining the lower-than-anticipated number of applicants was that small business owners view the application process as an administrative burden compared with self-certification. Officials from four of the seven organizations interviewed pointed out that the certification requirement was a financial burden compared with the self- certification process. Previously, firms only had to attest that they qualified as SDBs. To be certified as SDBs, firm"
3980,"s have to complete and submit one of several different SDB applications, depending on the type of business to be certified. In addition to the administrative burden, businesses can incur significant expenses under the new certification procedures to ensure that their application package is complete and accurate. For example, businesses can go to a private certifier to help them complete their application, but this service can cost up to several thousand dollars, depending on the services performed. Accordin"
3981,"g to one small business advocacy official, this expense can be prohibitive for a number of firms. Adding to the issues of confusion about the program's requirements and administrative burden, according to officials interviewed, is the view held by some small businesses and shared by several SBA officials that there is no real benefit to participating in the program. Officials gave different reasons for this view. Two officials we interviewed, as well as officials from SBA, said that some small businesses be"
3982,"lieve that they are unlikely to receive federal contracts due to both real and perceived restrictions on agencies' use of price evaluation adjustments and therefore questioned the value of obtaining SDB certification. An SBA official pointed out, for example, that DOD, which accounts for about 67 percent of federal procurement dollars spent, is statutorily barred from using price evaluation adjustments once it exceeds its SDB contracting goal. Alternatively, two officials from other organizations we intervi"
3983,"ewed said that other firms do not see the benefit to certification because they feel confident that they can receive contracts through open competition regardless of their certification status, particularly those that have established contracting relationships. Consequently, small businesses' view that the certification process is an administrative and financial burden combined with the low value placed on SDB certification are factors that may have discouraged small businesses from applying for certificati"
3984,"on, according to these officials. Finally, an SBA official we interviewed pointed out that, in some cases, firms that had previously self-certified as SDBs might not currently qualify for SDB status. Although she did not have data that could show how many firms fit in this category, the SBA official believed that, based on her experience, exceeding the personal wealth threshold of $750,000 was one reason for firms to either not qualify or no longer qualify as an SDB. We provided a draft of this report to th"
3985,"e Administrator of the Small Business Administration, for her review and comment. On December 19, 2000, we received oral comments from the Associate Administrator, Office of Planning and Liaison (formerly Associate Administrator, Office of Government Contracting and Minority Enterprise Development), and from the Assistant Administrator, Office of Outreach and Marketing (formerly Assistant Administrator, Office of Small Disadvantaged Business Certification and Eligibility). Both officials stated that they ge"
3986,"nerally concurred with the information included in the draft report, however, they provided clarifying technical information that we have included in this report as appropriate. To determine the number of businesses that SBA had certified as socially and economically disadvantaged since the implementation of the SDBC program, we met with and obtained information from SBA and reviewed data contained in the SBA Pro-Net database. In addition, we reviewed the SBA OIG's audit report on the SDB certification prog"
3987,"ram, laws and regulations pertaining to SDBs, and a Supreme Court decision. We did not verify data provided by SBA. For our second objective, to obtain views on the reasons for the lower- than-expected SDB certifications, we interviewed officials from SBA, DOJ's Office of the Assistant Attorney General for Civil Rights, as well as officials from the U. S. Chamber of Commerce, the Women's Business Enterprise National Council, the National Minority Supplier Development Council, and the National Small Business"
3988," United. Also, we sent letters to 30 representatives from federal agencies' Office of Small Disadvantaged Business Utilization requesting their view on reason for the lower-than- expected SDB certifications. Of the 30 federal agency representatives, we received views from Commerce and DOJ within the time frame specified in our letter, which we have included in this report. We did not validate the factors cited by these organizations for explaining the lower-than-expected certifications, nor was there empiri"
3989,"cal evidence available to validate or refute these views. Also, we did not evaluate the performance and implementation of the SDB program to achieve the governmentwide goal or its effectiveness in certifying SDBs. We conducted our review in Washington, D.C., from July through September 2000 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report for 30 days. At that time"
3990,", we will send copies of this report to appropriate congressional committees and interested Members of Congress. We will also send copies to the Honorable Aida Alvarez, Administrator, Small Business Administration; the Administrator, General Services Administration; and the Director, Office of Management and Budget. We will also make copies available to others on request. If you have questions regarding this report, please contact me on (202) 512- 8984. Major contributors to this assignment were Hilary Sull"
3991,"ivan, Geraldine Beard, William Woods, and Sylvia Schatz. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G "
3992,"Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: fraudnet@gao.gov 1-800-424-5454 (automated answering "
3993,system)
3994,"Holding federal elections in the United States is a massive enterprise, administered primarily at the local level. On federal Election Day, millions of voters across the country visit polling places, which are located in schools, recreation centers, churches, various government buildings, and even private homes. For the 2008 federal election, state and local election officials recruited and trained about 2 million poll workers across the country. Generally, each of the 50 states, the District of Columbia, a"
3995,"nd U.S. territories also play a role in elections, by establishing election laws and policies for their respective election jurisdictions. While federal elections are generally conducted under state laws and policies, several federal laws apply to voting and some provisions specifically address accessibility issues for voters with disabilities. These federal laws collectively address two issues that are essential to ensuring that voters with disabilities can go to polling places and cast their ballots indep"
3996,"endently and privately as do nondisabled voters. These two issues are physical access and voting systems that enable people with disabilities to cast a private and independent vote. In 1984, Congress enacted VAEHA, which required political subdivisions responsible for conducting elections to ensure that all polling places for federal elections are accessible to elderly voters and voters with disabilities, with limited exceptions. One such exception occurs when the chief election officer of the state determi"
3997,"nes that no accessible polling places are available in a political subdivision, and that officer ensures that any elderly voter or voter with a disability assigned to an inaccessible polling place will, upon advance request, either be assigned to an accessible polling place or will be provided with an alternative means to cast a ballot on the day of the election. Under the VAEHA, the definition of “accessible” is determined under guidelines established by the state’s chief election officer, but the law does"
3998," not specify standards or minimum requirements for those guidelines. Additionally, states are required to make available voting aids for elderly voters and voters with disabilities, including instructions printed in large type at each polling place and information by telecommunications devices for the deaf. Title II of the Americans with Disabilities Act of 1990 (ADA) also contains provisions that help increase the accessibility of voting for individuals with disabilities. Specifically, title II and its imp"
3999,"lementing regulations require that people with disabilities have access to basic public services, including the right to vote. Although the ADA does not strictly require all polling places to be accessible, public entities must make reasonable modifications in policies, practices, or procedures to avoid discrimination against people with disabilities. Moreover, no person with a disability may, by reason of disability, be excluded from participating in or be denied the benefits of any public program, service"
4000,", or activity. State and local governments may comply with ADA accessibility requirements in a variety of ways, such as redesigning equipment, reassigning services to accessible buildings or alternative accessible sites, or altering existing facilities or constructing new ones. However, state and local governments are not required to take actions that would threaten the historical significance of a historic property, fundamentally alter the nature of a service, or impose any undue financial and administrati"
4001,"ve burdens. Moreover, a public entity is not required to make structural changes in existing facilities where other methods are effective in achieving compliance. Title III of the ADA covers commercial facilities and places of public accommodation, such as private schools and privately operated recreational centers that may also be used as polling places. Public accommodations must make reasonable modifications in policies, practices, or procedures to facilitate access for people with disabilities. These fa"
4002,"cilities are also required to remove physical barriers in existing buildings when it is “readily achievable” to do so, that is, when the removal can be done without much difficulty or expense, given the entity’s resources. When the removal of an architectural barrier cannot be accomplished easily, the entity may take alternative measures to facilitate accessibility. All buildings newly constructed by public accommodations and commercial facilities must be readily accessible, and any alterations to an existi"
4003,"ng building are required, to the maximum extent feasible, to be readily accessible to people with disabilities, including those who use wheelchairs. The Voting Rights Act of 1965, as amended, provides for voter assistance in the voting room. Specifically, the Voting Rights Act, among other things, authorizes voting assistance for blind, disabled, or illiterate persons. Voters who require assistance to vote by reason of blindness, disability, or the inability to read or write may be given assistance by a per"
4004,"son of the voter’s choice, other than the voter’s employer or agent of that employer or officer or agent of the voter’s union. Most recently, Congress passed HAVA, which contains a number of provisions to help increase the accessibility of voting for people with disabilities. In particular, section 301(a) of HAVA outlines minimum standards for voting systems used in federal elections. This section specifically states that the voting system must be accessible for people with disabilities, including nonvisual"
4005," accessibility for the blind and visually impaired, in a manner that provides the same opportunity for access and participation as is provided for other voters. To satisfy this requirement, each polling place must have at least one direct recording electronic or other voting system equipped for people with disabilities. HAVA established the EAC as an agency with wide-ranging duties to help improve state and local administration of federal elections. Among other things, the EAC is responsible for (1) providi"
4006,"ng voluntary guidance to states implementing certain HAVA provisions; (2) serving as a national clearinghouse of election-related information and a resource for information with respect to the administration of federal elections; (3) providing for the certification of voting systems; and (4) periodically conducting and making publicly available studies regarding methods of ensuring accessibility of voting, polling places, and voting equipment to all voters, including people with disabilities. The EAC also m"
4007,"akes grants for the research and development of new voting equipment and technologies and the improvement of voting systems. Furthermore, HAVA requires the Secretary of HHS to make yearly payments to each eligible state and unit of local government to be used for (1) making polling places accessible for people with disabilities and (2) providing people with disabilities with information on accessible polling places. HAVA vests enforcement authority with the U.S. Attorney General to bring a civil action agai"
4008,"nst any state or jurisdiction as may be necessary to carry out specified uniform and nondiscriminatory election technology and administration requirements under HAVA. These requirements pertain to HAVA voting system standards, provisional voting and voting information, the computerized statewide voter registration list, and voter registration by mail. The Voting Section, within Justice’s Civil Rights Division, is responsible for enforcement of civil provisions of federal voting laws, such as HAVA. The Votin"
4009,"g Section’s internal process for initiating HAVA-related matters and cases consists of four phases: initiation, investigation, complaint justification, and litigation. See appendix III for an overview of this internal process. The Disability Rights Section, also within the Civil Rights Division, is primarily responsible for protecting the rights of persons with disabilities under the ADA, which includes ensuring that people with disabilities have access to basic services, such as voting. Providing an access"
4010,"ible voting system encompasses both the voting method and the operation of the system. In terms of the voting method, HAVA specifically identifies direct recording electronic systems to facilitate voting for people with disabilities or other voting systems equipped for people with disabilities. For the most part, these systems are electronic machines or devices equipped with features to assist voters with disabilities. A brief description of these types of systems follows. Direct Recording Electronic (DRE) "
4011,"Devices. DRE devices capture votes electronically (see fig. 1). These devices come in two basic models: push button or touch screen. DRE ballots are marked by a voter pressing a button or touching a screen that highlights the selected candidate’s name or an issue. Voters can change their selections until they select the final “vote” button or screen, which casts their vote. These devices can be equipped with such features as an audio ballot and audio voting instructions for the blind. Ballot Marking Devices"
4012,". These devices use electronic technology to mark an optical scan ballot at voter direction, interpret the ballot selections, communicate the interpretation for voter verification, and then print a voter-verified ballot. A ballot marking device integrates components such as an optical scanner, printer, touch-screen monitor, and a navigational keypad (see fig. 2). Voters use the device’s accessible interface to record their choices on a paper or digital ballot. For example, voters with visual impairments wil"
4013,"l use an audio interface as well as a Braille keypad to make a selection. Voters who prefer to vote in an alternate language can also utilize the audio interface. Voters with disabilities can make their selection using a foot-pedal or a sip-and-puff device. Vote-by-Phone. Vote-by-phone systems use electronic technology to mark paper ballots. This system is made up of a standard touch-tone telephone and a printer (see fig. 3). When voters call from a polling place to connect to the system, the ballot is read"
4014," to the voters who then make choices using the telephone keypad. The system then prints out a paper ballot at either a central location (central print) or a polling site (fax print). Central print ballots are read back to the voter over the telephone for verification, after which the voter can decide to cast the ballot or discard it and revote. Fax print ballots produce a physical ballot at the polling place for the voter to review, verify, and cast in a ballot box. Regarding accessible voting system operat"
4015,"ion, HAVA specifies that the voting system must be accessible for people with disabilities, in a manner that provides the same opportunity for access and participation as is provided for other voters. The operation of the voting system is the responsibility of local election officials at individual polling places. For the voting system to be accessible, the system should be turned on, equipped with special features such as ear phones, set up to accommodate voters using wheelchairs, and positioned in a way t"
4016,"o provide the same level of privacy as is afforded to other voters. Also, poll workers should be knowledgeable of the operation of the voting system to provide assistance, if needed. Alternative Voting Methods As we have previously mentioned, the VAEHA requires that any elderly voter or voter with a disability who is assigned to an inaccessible polling place, upon his or her advance request, must be assigned to an accessible polling place or be provided with an alternative means for casting a ballot on the "
4017,"day of the election. However, states generally regulate absentee voting and other alternative voting method provisions, which provide voters with disabilities with additional voting options. Alternative voting methods may include curbside voting; taking a ballot to a voter’s residence; allowing voters to use another, more accessible polling location either on or before Election Day; voting in person at early voting sites; or removing prerequisites by establishing “no excuse” absentee voting or allowing abse"
4018,"ntee voting on a permanent basis. Compared to 2000, the proportion of polling places without potential impediments increased and almost all polling places had an accessible voting system. In 2008, based upon our survey of polling places, we estimate that 27.3 percent of polling places had no potential impediments in the path from the parking area to the voting area—up from 16 percent in 2000; 45.3 percent had potential impediments but offered curbside voting; and the remaining 27.4 percent had potential imp"
4019,"ediments and did not offer curbside voting. All but one polling place we visited had an accessible voting system to facilitate private and independent voting for people with disabilities. However, 46 percent of polling places had an accessible voting system that could pose a challenge to certain voters with disabilities, such as voting stations that were not arranged to accommodate voters using wheelchairs. In 2008, we estimate that 27 percent of polling places had no potential impediments in the path from "
4020,"the parking area to the voting area—up from 16 percent in 2000 (see fig. 4). Potential impediments included a lack of accessible parking and obstacles en route from the parking area to the area to the voting area. voting area. Figure 5 shows some key polling place features that we examined, and appendix IV contains a complete list of potential impediments. These features primarily affect individuals with mobility impairments, in particular voters using wheelchairs. Many of the polling places that had potent"
4021,"ial impediments offered curbside voting or other accommodations to assist voters who may have had difficulty getting to or making their way through a polling place. For all polling places, we found that 45.3 percent had one or more potential impediments and offered curbside voting, 27.4 percent had potential impediments and did not offer curbside voting, and 27.3 percent had no potential impediments. Some polling places provided assistance to voters by bringing a paper ballot or provisional ballot to a vote"
4022,"r in a vehicle. In addition to curbside voting, officials we interviewed at most polling places said they would provide assistance to help people with disabilities vote in the polling place. For example, some polling places had wheelchairs available, if needed. Similar to our findings in 2000, the majority of potential impediments at polling places in 2008 occurred outside of or at the building entrance, although improvements were made in some areas. Fifty percent of polling places had one or more potential"
4023," impediments in the path from the parking area to the building entrance (see fig. 6). At the same time, the percentage of polling places with potential impediments at the building entrance dropped sharply—from 59 percent in 2000 to 25 percent in 2008. As shown in table 1, the most common potential impediments in 2008 were steep ramps or curb cuts in the parking area, unpaved or poor surfaces in the path from the parking lot or route to the building entrance, and door thresholds exceeding ½ inch in height. F"
4024,"igure 7 shows an example of a polling place with two potential impediments from the parking area to the building entrance. It is important to note that our assessment of polling places in 2000 did not include measurements of ramps or curb cuts in the parking area. With this additional accessibility indicator, we did not see a reduction of potential impediments in the parking area overall. However, polling places made significant gains in providing designated parking for people with disabilities, which decre"
4025,"ased from 32 percent with no designated parking in 2000 to only 3 percent in 2008. In comparison to our findings in 2000, the proportion of polling places with multiple potential impediments decreased in 2008. Specifically, polling places with four or more potential impediments decreased significantly—from 29 percent in 2000 to 16 percent in 2008 (see fig. 8). At the same time, the percentage of polling places with one, two, or three with one, two, or three potential impediments stayed about the same as in "
4026,"2000. potential impediments stayed about the same as in 2000. All but one polling place we examined had at least one accessible voting system—typically, an accessible machine in a voting station—to facilitate private and independent voting for people with disabilities. Accessible voting machines had special features for people with disabilities, such as an audio function to allow voters to listen to ballot choices. According to an election official we interviewed, the accessible voting systems have been sig"
4027,"nificant in helping some voters with disabilities—such as blind voters—vote independently for the first time. The most common type of accessible voting machine was the Automark, followed by the Premier ier Accuvote, iVotronic, and Sequoia, respectively (see fig. 9). Accuvote, iVotronic, and Sequoia, respectively (see fig. 9). To help facilitate the use of accessible machines, polling place officials told us that they received training and would provide assistance to help voters with disabilities operate vot"
4028,"ing machines or overcome difficulties while voting. Almost all (98 percent) of the 626 polling place officials we interviewed said that some or all of the poll workers working on Election Day received training on how to operate the accessible machine. In addition, polling place officials told us they would provide assistance to help people with disabilities with the voting process. All polling place officials we interviewed said they would explain how to operate the machine, and 79 percent said they would d"
4029,"emonstrate how to operate the machine (see table 2). Virtually all polling place officials we interviewed told us they would allow a friend or relative to assist a person with a disability with voting. Although polling places had accessible voting systems, nearly one-half (46 percent) had systems that could pose challenges for people with disabilities to cast a private or independent vote. We assessed four aspects of the accessible voting system that, if not met, could pose a challenge to private or indepen"
4030,"dent voting: (1) voting system is set up and powered on; (2) earphones are available for audio functions; (3) voting system is set up to accommodate people using wheelchairs; and (4) accessible voting system provides the same level of privacy for voters with disabilities as is offered to other voters. Figure 10 shows an accessible voting station for people with disabilities. Overall, 35 percent of polling places did not meet one of these four aspects, 10 percent did not meet two eet two aspects, and 1 perce"
4031,"nt did not meet three aspects. aspects, and 1 percent did not meet three aspects. The 95-percent confidence interval for polling places with one challenge is 27.6 to 41.8. The 95-percent confidence interval for polling places with two challenges is 5.9 to 15.7. The 95-percent confidence interval for polling places with three challenges is 0.2 to 2.1. As shown in table 3, the feature most commonly not met—at 29 percent of polling places—was an accessible voting machine located in a voting station with the mi"
4032,"nimum height, width, or depth dimensions to accommodate a voter using a wheelchair. This was followed by 23 percent of polling places that offered people with disabilities less privacy for voting than is provided for other voters. For example, some voting stations were not positioned to prevent other voters from seeing how voters using the accessible machine were marking their ballots. The majority of states have established accessibility requirements and funded improvements to help facilitate accessible vo"
4033,"ting, and all states reported that they required local jurisdictions to offer alternative voting methods. Forty-three states reported on our survey that they required accessibility standards for polling places in 2008, up from 23 states in 2000. Additionally, most states reported that they used federal HAVA funds to improve the physical accessibility of polling places. Further, all states reported that they required local jurisdictions to offer alternative voting methods, such as absentee voting. To help fa"
4034,"cilitate voting for people with disabilities, most states have established standards by which to evaluate the accessibility of polling places and have required inspections of polling places to help ensure accessibility. The number of states with requirements specifying polling place accessibility standards grew from 23 states in 2000 to 43 states in 2008 (see fig. 11). These standards can vary in terms of specificity of requirements and which aspects of accessibility they address. For example, California es"
4035,"tablished requirements for ramps and entrances, among other things. By comparison, Indiana required that the voting area must have adequate maneuvering space for voters who use wheelchairs or other mobility aids and must allow space for a person who uses a wheelchair to navigate behind and around the accessible machine. Figure 12 is an example of state guidance for setting up the voting room and for placement of the accessible voting system. The number of states that required accommodation of wheelchairs in"
4036," the voting area has more than doubled—increasing from 17 in 2000 to 38 states in 2008. In addition to specifying standards, since 2000, more states have required polling places to be inspected and local jurisdictions to submit inspection reports to the state to help ensure the accessibility of polling places. Like the accessibility standards, these practices can also vary from state to state. For example, according to its Election Procedures Manual, Arizona requires counties to inspect polling places befor"
4037,"e each election or to have provisions that counties be contacted if a polling place is altered prior to an election. In contrast, Wisconsin recently revised its accessibility survey and requires all local jurisdictions to conduct their inspections on a primary Election Day so that state and local officials can evaluate the accessibility of polling places during an election. Most states reported using HAVA funds or a combination of HAVA and state funds to support a variety of activities designed to facilitat"
4038,"e voting for people with disabilities. In our report on the 2000 election, we found limited funding was one of the main barriers that most state officials faced in improving voting accessibility, especially in providing accessible voting systems and, in some cases, making temporary or permanent modifications to polling places to make them accessible. However, with the availability of HAVA funding since that time, most state officials reported on our survey that they used HAVA funds or a combination of HAVA "
4039,"and state funds to help improve accessibility in these areas. The majority of states (45) reported spending or obligating HAVA funds and, in some cases, also using state funds to enhance physical access to polling places. For example, election officials in Nebraska reported spending HAVA funds to evaluate the accessibility of polling places throughout the state and to ensure they were compliant with ADA standards. Furthermore, 39 states reported obligating or spending HAVA funds or a combination of HAVA and"
4040," state funds to improve voting systems and technology. For example, Minnesota used HAVA funds to buy ballot- marking machines so that voters with disabilities could mark regular paper ballots privately and independently and to develop instructional videos on how to use the machines. Even though states have taken actions to make the voting process more accessible, many states reported that it was very or moderately challenging to implement certain aspects of HAVA’s voting access requirements. According to ou"
4041,"r state survey, 31 states reported that ensuring polling place accessibility was very or moderately challenging. (See table 4.) For example, one area in California reported that it was challenging to find enough accessible polling places in some rural communities because limited accessible buildings are available. Additionally, 24 states reported that it was very or moderately challenging to purchase DREs or other accessible voting systems. For example, several states said that it was difficult to buy acces"
4042,"sible systems because of EAC’s delay in certifying voting systems. In addition to efforts to ensure polling place accessibility, most states offered alternative voting methods, such as absentee voting, that could help facilitate voting options for people with disabilities. All states offered absentee voting as an option, although 26 states reported on our survey that they required voters to meet at least one of several reasons—typically referred to as an “excuse”—to be eligible to vote via absentee ballot, "
4043,"such as having a disability, being elderly, or being absent from the jurisdiction (see table 5). However, the number of states that allow absentee voting without requiring that voters provide a reason has increased slightly since the 2000 election, from 18 states to 24 states in 2008. Of the 43 states that reported requiring local jurisdictions to offer in-person absentee voting, 40 states required that locations used for in-person absentee voting abide by the same accessibility provisions and accommodation"
4044,"s as Election Day polling places. In addition to absentee voting, all 23 states that reported that they required or allowed local jurisdictions to offer early voting also required early voting locations to meet the same HAVA and state accessibility requirements as Election Day polling places. Some states required polling places to provide other accommodations for voters with disabilities, such as curbside voting and audio or visual aids, although fewer states required some of these accommodations in 2008 th"
4045,"an in 2000. According to our state survey, the number of states that required curbside voting decreased from 28 states in 2000 to 23 states in 2008 (see fig. 13). Likewise, the number of states that required staff in local jurisdictions to take a ballot to the residence of a voter with a disability who needed assistance on or before Election Day decreased from 21 states in 2000 to only 9 states in 2008. These practices may have declined because more states have taken actions to make polling places accessibl"
4046,"e since the 2000 election, and more states reported allowing people to vote absentee without having to meet specific criteria. See appendix V for a comparison of state requirements, accommodations, and voting alternatives from our 2000, 2004, and 2008 surveys. Justice provided guidance on polling place accessibility and conducted an initial assessment of states’ compliance with HAVA’s January 2006 deadline for accessible voting systems. Since then, Justice’s oversight of HAVA’s access requirements is part o"
4047,"f two other enforcement efforts, but gaps remain. Justice currently conducts polling place observations for federal elections that identify whether an accessible voting system is in place, but it does not systematically assess the physical accessibility of polling places or the level of privacy and independence provided to voters with disabilities. Justice also conducts a small number of annual community assessments of ADA compliance of public buildings, which includes buildings designated as polling places"
4048,". However, these assessments do not provide a national perspective on polling place accessibility or assess any special features of voting areas and accessible voting systems that are set up only on Election Day. From shortly after the passage of HAVA until 2006, Justice officials said they conducted educational outreach on HAVA voting system requirements. Justice provided guidance on the new HAVA voting system requirements, while the EAC, which was authorized by HAVA to develop guidance and serve as a clea"
4049,"ringhouse for election information, was being formed. During this time, Justice officials said they made a considerable effort to educate state and local election officials and national organizations representing election officials and people with disabilities on HAVA voting system requirements. For this effort, Justice officials met with state and local election officials across the country and gave presentations on HAVA requirements at National Association of Secretaries of State and National Association "
4050,"of State Election Directors meetings. In addition, Justice provided information about HAVA voting system requirements on its Web site and posted answers to frequently asked questions. Justice also provided informal responses to questions from state election officials on specific aspects of HAVA voting system requirements. In one response, Justice stated that a HAVA-compliant voting system requires both the voting system and polling place to be accessible to people with disabilities. Furthermore, the EAC, in"
4051," consultation with Justice, developed an advisory opinion stating that a HAVA-compliant voting system should be accessible to people with disabilities (as defined by the ADA), which includes not just the technical features of the voting system, but configuring the system to allow people with disabilities to vote privately and independently. As part of these early efforts, Justice provided guidance to poll workers on how to assess and create a physically accessible polling place. In 2004, Justice published t"
4052,"he Americans with Disabilities Act: ADA Checklist for Polling Places, which provided information to voting officials on key accessibility features needed by most voters with disabilities to go from the parking area to the voting area. The checklist also describes how to take measurements of sloped surfaces, door openings, ramps, and other features to help identify potential impediments and suggest possible alternatives and temporary modifications. Justice officials said they have distributed 16,000 copies o"
4053,"f the Americans with Disabilities Act: ADA Checklist for Polling Places, primarily to advocacy groups and state and local election officials, and received over 80,000 hits on its Web site since the checklist was released in February 2004. According to our survey, 34 states found the checklist to be moderately to very helpful and several state election officials with whom we spoke said they used it to develop their own state assessments of polling place accessibility. While the checklist provides limited gui"
4054,"dance on accessibility features within the voting area, it does not provide information about the configuration of the voting system—such as positioning the voting system in such a way as to allow a person using a wheelchair to vote privately and independently. In 2005, the EAC adopted Voluntary Voting System Guidelines, which include accessibility standards that specify the configuration of the voting station to accommodate people using a wheelchair. The main purpose of these guidelines is to develop techn"
4055,"ical specifications and standards for voting systems for national testing and certification. HAVA does not require adoption of the guidelines at the state level, although states may choose to adopt the guidelines and make them mandatory in their jurisdictions. While these guidelines are used to specify voting system testing standards, EAC officials told us that user-friendly guidance targeted to poll workers on HAVA voting system requirements, polling place accessibility, and voting assistance to people wit"
4056,"h disabilities is needed. In addition to early guidance, Justice also conducted an initial assessment of states’ progress toward meeting the January 2006 deadline for compliance with HAVA voting system requirements. In 2003, Justice sent letters to state election officials summarizing HAVA voting system requirements. Justice followed up with letters in 2005 and 2006, which outlined HAVA voting system requirements and asked states to respond to a series of questions to help gauge whether every polling place "
4057,"in the state had at least one accessible voting machine and whether poll workers were trained in the machine’s operation. Although states were not required to submit reports to Justice under HAVA, Justice officials said all states responded to the department’s letters. Justice officials reviewed state responses and followed up with state officials, sometimes on a weekly basis, if they were not satisfied with the progress being made. Justice also monitored local media outlets and state election and procureme"
4058,"nt Web sites and consulted with national disability groups, election organizations, and local advocacy groups to independently verify information provided by states. If Justice determined that sufficient progress toward HAVA voting system compliance was not being made, it initiated investigations and, in two cases, pursued litigation when all other options were exhausted. Justice filed complaints against New York and Maine in 2006, in part because these states had not made sufficient progress in purchasing "
4059,"and implementing HAVA accessible voting systems. Since then, according to Justice, both Maine and New York acquired and implemented HAVA accessible voting systems for the November 2008 federal election. Justice officials told us that their assessment of HAVA voting system requirements was part of an initial effort to ensure that all states had accessible voting systems by the required January 1, 2006, deadline. Once the 2006 deadline passed and all states reported having accessible voting systems, Justice c"
4060,"ontinued only limited oversight of HAVA voting system requirements and polling place accessibility, as part of two ongoing enforcement efforts. These limited efforts leave gaps in ensuring voting accessibility for people with disabilities. For example, Justice supervises polling place observations for federal elections on Election Day to primarily assess compliance with the Voting Rights Act of 1965; however, some limited observations on other federal voting statues, such as HAVA, are also included. Specifi"
4061,"cally, polling place observers look for accessible voting systems and assess whether poll workers are trained in their operation. In calendar year 2008, 1,060 federal observers and 344 Justice staff members observed 114 elections in over 75 jurisdictions covering 24 states. For such efforts, Justice officials select polling places where they believe there may be a problem, on the basis of negative news coverage, complaints received, or information provided by election officials. Information from polling pla"
4062,"ce observations can provide evidence for an ongoing investigation or lawsuit. Justice sometimes initiates investigations on the basis of complaints and other information received. In some cases, the information may also be used to initiate a matter if an investigation has not already been opened. Justice officials told us that, as part of their Election Day 2008 observations, they came across some polling places where accessible voting machines were not turned on or poll workers were unable to operate the a"
4063,"ccessible machine. However, based on our Election Day assessments, the potential impediments and challenges for voters with disabilities to access and cast a ballot on accessible voting systems may be more common than what Justice officials said they found through their observations. Importantly, Justice did not systematically assess the physical accessibility of the polling places or the level of privacy and independence provided to people with disabilities by the accessible voting system, which limits the"
4064," department’s ability to identify potential accessibility issues facing voters with disabilities. In addition, Justice officials said they annually initiate a small number of community assessments of ADA compliance in public buildings, including buildings designated as polling places, but these assessments include a small portion of polling places nationwide and are generally not conducted on Election Day. According to Justice, these assessments—called Civic Access assessments—can be resource-intensive, whi"
4065,"ch, in part, may limit the number that the department can complete in a given year. Justice initiated three Civic Access assessments in calendar year 2008. Justice selects communities for Civic Access assessments on the basis of a number of characteristics within a community, including size of the disability community, geographic location, complaints received from citizens and advocacy groups, and proximity to a university or tourist attraction—which, according to Justice officials, might attract people wit"
4066,"h disabilities from outside of the community. In planning for the assessment, Justice requests information from the communities about their polling places, such as their locations, modifications made on election days, and steps taken to make polling places accessible. The on-site reviews assess as many polling places as possible within the scope of the overall review. Justice officials said they prioritize polling places for assessments on the basis of geographic location, proximity to other buildings targe"
4067,"ted for assessment in the review, and extent of public use of the facility for any purpose. To conduct on-site reviews—which typically take 1 to 3 weeks to complete—Justice deploys teams of attorneys, architects, and investigators to take measurements of a variety of public buildings. Afterwards, Justice compiles a list of physical barriers and impediments for people with disabilities found during the on-site review. Then Justice generally negotiates and enters into a settlement agreement with the election "
4068,"jurisdiction, which includes recommendations for improvements, a time frame for implementing needed changes, and requirements for reporting and documentation. Between 2000 and 2008, Justice entered into 161 Civic Access settlement agreements, of which, 69 contained one or more recommendations aimed at polling place provisions. However, given the small number of Civic Assess assessments conducted annually, the information on polling place accessibility does not provide a national perspective on polling place"
4069," accessibility. In addition, since these assessments are not conducted during elections, they do not assess any special features of voting areas and accessible voting systems that are set up only on Election Day. State and local election officials across the country took a considerable step toward improving voting access for people with disabilities by having accessible voting systems at virtually every polling place we visited on Election Day 2008. These voting systems have been significant in enabling som"
4070,"e Americans with disabilities to vote privately and independently at their neighborhood polling place for the first time. This also shows that Justice’s efforts to assess states’ implementation of HAVA voting system requirements achieved the desired outcome of ensuring that polling places had at least one accessible voting system. Despite these significant efforts, voters with disabilities may have had difficulty casting a ballot on these systems because the majority of polling places still had one or more "
4071,"potential impediments that could prevent a voter with a disability from even getting to the accessible voting system. Furthermore, in close to half of polling places, the accessible voting system itself could pose challenges for voters with disabilities to vote privately or independently. If these conditions continue, there may be some voters with disabilities who will experience frustration and dissatisfaction with the voting process on future election days, while others could be discouraged from voting en"
4072,"tirely. Ensuring that voters with disabilities can successfully vote privately and independently requires government to think broadly about access: how voters will arrive at the polling place, enter and move through the building, and cast a ballot using an accessible voting system. For example, just taking an accessible voting system out of its case and setting it up on any voting station is not enough if a voter using a wheelchair cannot reach it. Although Justice’s Americans with Disabilities Act: ADA Che"
4073,"cklist for Polling Places has been widely distributed and is considered helpful by states, it only includes limited information on creating an accessible voting area and does not have guidance on configuring voting systems for people with disabilities. In addition, Justice’s current oversight of HAVA voting system requirements and polling place accessibility does not address all aspects of voting access. Without monitoring that focuses on the broad spectrum of voting accessibility for people with disabiliti"
4074,"es, it will be difficult for Justice to ensure it is meeting its oversight duties under HAVA and other federal voting statutes and to know whether voters with disabilities are being well-served. We acknowledge that extensive monitoring of polling place accessibility could be a costly and challenging undertaking. However, Justice already demonstrated its ability to leverage resources when it worked with states, disability advocacy organizations, and others to conduct its initial assessment of states’ impleme"
4075,"ntation of HAVA voting system requirements. As the proportion of older Americans increases, the number of people with disabilities will also likely continue to grow, and it will become even more important to ensure that voting systems are accessible to all eligible voters. To identify and reduce the number of potential impediments and other challenges at polling places that might hinder or detract from the voting experience for people with disabilities, we recommend that the Department of Justice look for o"
4076,"pportunities to expand its monitoring and oversight of the accessibility of polling places for people with disabilities in a cost-effective manner. This effort might include the following activities: working with states to use existing state oversight mechanisms and using other resources, such as organizations representing election officials and disability advocacy organizations, to help assess and monitor states’ progress in ensuring polling place accessibility, similar to the effort used to determine stat"
4077,e compliance with HAVA voting system requirements by the 2006 deadline; expanding the scope of Election Day observations to include an assessment of the physical access to the voting area and the level of privacy and independence being offered to voters with disabilities by accessible voting systems; and expanding the Americans with Disabilities Act: ADA Checklist of Polling Places to include additional information on the accessibility of the voting area and guidance on the configuration of the accessible v
4078,"oting system to provide voters with disabilities with the same level of privacy and independence as is afforded to other voters. We provided a draft of this report to Justice, EAC, and HHS for review and comment. Justice generally agreed with our recommendation to expand its monitoring and oversight of accessibility of polling places for people with disabilities in a cost-effective manner, although it had some concerns about specific activities we suggested as part of this recommendation. Specifically, Just"
4079,"ice generally agreed with our suggestion to work with states to use existing state oversight mechanisms and other resources to help assess and monitor states’ progress in ensuring polling place accessibility, similar to the effort it undertook shortly after HAVA was enacted. Justice said that it can look for opportunities to enhance educational efforts to states and gather some additional information to assess state accessibility programs, and work with election officials and disability rights organizations"
4080," to stress the importance of polling place accessibility and ask for their assistance in improving compliance with federal requirements related to accessibility, but said that it is unlikely to have the resources for a comprehensive undertaking similar to its earlier effort. Justice also generally agreed with our recommendation to expand the scope of the Americans with Disabilities Act: ADA Checklist for Polling Places to provide additional information on ensuring the accessibility of the voting area and in"
4081,"clude guidance on the configuration of the accessible voting system. Justice expressed concerns about our suggestion to expand the scope of Election Day observations to include an assessment of the physical access to the voting area and the level of privacy and independence being offered to voters with disabilities by accessible voting systems. In particular, it had concerns about shifting the focus of the federal observer program from its primary purpose of ensuring compliance with the Voting Rights Act of"
4082," 1965, and not having the resources to train and deploy observers to conduct extensive assessments of polling places on Election Day. At the same time, Justice said that it will continue to have Election Day observers and monitors note whether polling places have an accessible voting system and will consider incorporating some additional questions such as observing whether the accessible voting system appears to be situated in a way that voters can use the system privately and independently. In response, we"
4083," believe that the actions we suggest to expand Justice’s monitoring and oversight activities are consistent with the agency’s stated function. As laws are enacted and revised to support voting accessibility, Justice can be positioned to fully meet its duties by modifying its assessment approaches. That stated, we believe that incorporating additional questions such as these would satisfy our recommendation and could be done without adding significant work and interfering with the primary purpose of the Elec"
4084,"tion Day observer program. Justice also provided technical comments, which we incorporated as appropriate. The EAC expressed appreciation for our research and said that the report will be a valuable resource for the EAC and election officials as they continue to develop, implement, and evaluate effective election administration practices regarding voting accessibility. It also identified some of the resources that the EAC has made available to election officials and the public regarding voting accessibility"
4085,", and stated that it will continue to work in collaboration with election officials, experts, and advocacy groups to identify additional resources needed to address this area. HHS said that our findings were consistent with what states have reported and the report highlights concerns that HHS has found for some of its grantees. Written comments from Justice, EAC, and HHS appear in appendixes VI, VII, and VIII. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further"
4086," distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to Justice, EAC, HHS, the U.S. Access Board, and other interested parties. In addition, the report will be made available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact Barbara D. Bovbjerg at (202) 512-7215 or bovbjergb@gao.gov, or William O. Jenkins at (202) 512-8777 or jenkinswo@gao.gov. Contact points for our Of"
4087,fices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IX. Our objectives were to examine (1) the proportion of polling places that have features that might facilitate or impede access to voting for people with disabilities and how these results compare to our findings from the 2000 federal election; (2) the actions states are taking to facilitate voting for people with disabilities; and (
4088,"3) the steps the Department of Justice (Justice) has taken to enforce the Help America Vote Act of 2002 (HAVA) voting access provisions. To determine the proportion of polling places that have features that might facilitate or impede access to voting for people with disabilities and how these results compared to our 2000 findings, GAO staff visited polling places on Election Day, November 4, 2008, to make observations, take measurements, and conduct short interviews of polling place officials. To obtain inf"
4089,"ormation on our first and third objectives, we administered a Web-based survey of election officials in all 50 states, the District of Columbia, and 4 U.S. territories (American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands). For all of our objectives, we interviewed officials at Justice, the Election Assistance Commission (EAC), the Department of Health and Human Services (HHS) and from national organizations that represented election officials and disability advocacy organizations. We also reviewe"
4090,"d federal laws, guidance, and other documentation. We conducted our work from April 2008 through September 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. On El"
4091,"ection Day, November 4, 2008, we sent out teams of two GAO staff to each county in our sample. Each team was equipped with data collection instruments (DCI) on which to record their observations and the necessary measurement tools: the ADA Accessibility Stick II™ , a fish scale, and a tape measure. We monitored the activities of the teams throughout Election Day and provided assistance by telephone from our Washington, D.C., office. To ensure uniform data collection across the country, we trained all teams "
4092,"in how to properly fill out each question on the DCI, use the necessary measurement tools, and interview the chief poll worker in each polling place about the accessible voting systems as well as accommodations for voters with disabilities. See figure 14 for examples of measurements and items for observation that were used to train GAO teams for Election Day visits. We also instructed teams on the appropriate times for visiting polling places and not to approach voters or interfere with the voting process i"
4093,"n any way during their visits. Each GAO team that visited a county on Election Day received a list of up to 8 polling places to visit. The first polling place on their list was randomly determined. We then used geocoding software and the address of the polling places to determine the latitude and longitude coordinates for all of the polling places they were scheduled to visit. The latitude and longitude coordinates were used to determine the ordering after the first polling place, which minimized the net tr"
4094,"avel distance. This geocoding of the addresses allowed the GAO teams to minimize the travel distance between their polling places on Election Day. To maintain the integrity of the data collection process, GAO teams were instructed not to disclose the location of the selected polling places before their visits. In some cases, states or counties placed restrictions on our visits to polling places. For example, laws in some states prohibit nonelection officials from entering the voting room or voting area. Ele"
4095,"ction officials in several counties granted us access on the condition that we not interview polling place officials on Election Day, and, in several polling places, officials were too busy assisting voters to be interviewed. In these cases, we e-mailed and called chief polling place officials after Election Day to complete the interview. Polling place officials contacted after Election Day were asked the same questions as the officials interviewed on Election Day. Due to the constraints of time and geograp"
4096,"hy, some teams were not able to visit all 8 polling places, but overall, GAO teams were able to visit 98 percent of the randomly selected polling places, or 730 of 746 polling places in 79 counties across 31 states. GAO teams used a DCI that was similar to the one used in our 2000 study of polling places to record observations and measurements taken inside and outside of the polling place and to capture responses from our interviews with chief polling place officials. However, we updated the DCI on the basi"
4097,"s of changes that have occurred in federal laws and guidance since 2000. The primary sources we used to determine the most current requirements and standards for evaluating polling place accessibility were the voting system requirements specified in HAVA and polling place accessibility guidance in the Americans with Disabilities Act: ADA Checklist for Polling Places, issued by the Department of Justice in 2004. In addition, disability advocates and representatives of the U.S. Access Board reviewed a draft v"
4098,"ersion of our DCI, and we incorporated their comments as appropriate. We also received input from officials at Justice and the EAC and from national organizations that represented election officials. Finally, to ensure that GAO teams could fill out the instrument in the field and complete it in a reasonable amount of time, we pretested the DCI during the presidential primary election in South Dakota in June 2008 and during the congressional primary election in Wisconsin in September 2008. In analyzing the d"
4099,"ata collected on Election Day, we first examined features that might facilitate or impede access on the path to the voting area. In doing so, we looked at features at four different locations at the polling place: the parking area, the path from the parking area to the building entrance, the building entrance, and the path from the building entrance to the voting area. These features included the following: Slope of ramps or cut curbs along the path are no steeper than 1:12. Surface is paved or has no abrup"
4100,"t changes over ½ inch. Doorway threshold does not exceed ½ inch in height. Single- or double-door openings are 32 inches or more wide. Therefore, the percentage of polling places cited as having one or more potential impediments was based on whether a polling place was found to have at least one feature that might impede access to voting in any of the four locations we examined and does not include potential impediments associated with the voting area itself. While features of the voting area were not inclu"
4101,"ded in our summary measure of whether a polling place had a potential impediment, we did look for features that might facilitate or impede private and independent voting inside the voting area. We identified the types of voting methods available to voters with and without disabilities and took measurements of the voting station or table used by people with disabilities to determine whether wheelchairs could fit inside the station or under the table and whether equipment was within reach for wheelchair users"
4102,". We collected information on the accessible voting systems required under HAVA to determine the extent to which the system had features that might facilitate voting for people with disabilities and allow them to vote privately and independently. We also briefly interviewed chief poll workers at most of the polling places we visited to find out whether curbside voting was available and how the poll workers would handle voter requests for assistance from a friend, relative, or election official. All sample s"
4103,"urveys are subject to sampling error, which is the extent to which the survey results differ from what would have been obtained if the whole universe of polling places had been observed. Measures of sampling error are defined by two elements—the width of the confidence interval around the estimate (sometimes called precision of the estimate) and the confidence level at which the interval is computed. The confidence interval refers to the range of possible values for a given estimate, not just a single point"
4104,". This interval is often expressed as a point estimate, plus or minus some value (the precision level). For example, a point estimate of 75 percent plus or minus 5 percentage points means that the true population value is estimated to lie between 70 percent and 80 percent, at some specified level of confidence. The confidence level of the estimate is a measure of the certainty that the true value lies within the range of the confidence interval. We calculated the sampling error for each statistical estimate"
4105," in this report at the 95- percent confidence level and present this information throughout the report. To learn more about states’ actions to facilitate voting access and perspectives on Justice’s oversight of HAVA voting access provisions, we administered a Web-based survey of officials responsible for overseeing elections from the 50 states, the District of Columbia, and 4 U.S. territories (American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands). Survey topics included (1) state requirements and "
4106,"policies for early voting, absentee voting, and voter identification; (2) state voting accommodations for people with disabilities; (3) state funding and experiences implementing HAVA voting access requirements; (4) level of interaction with Justice officials and usefulness of Justice guidance; and (5) state and local actions to facilitate voting in long-term care facilities. The survey was conducted using a self-administered electronic questionnaire posted on the Web. We collected the survey data between D"
4107,"ecember 2008 and February 2009. We received completed surveys from all 50 states, 4 territories, and the District of Columbia, for a 100-percent response rate. Because this was not a sample survey, there are no sampling errors. However, the practical difficulties of conducting any survey may introduce nonsampling errors, such as variations in how respondents interpret questions and their willingness to offer accurate responses. To minimize nonsampling errors, we pretested draft survey instruments with state"
4108," election officials in Kansas, Virginia, and Wisconsin to determine whether (1) the survey questions were clear, (2) the terms used were precise, (3) respondents were able to provide the information we were seeking, and (4) the questions were unbiased. We made changes to the content and format of the questionnaire on the basis of pretest results. Because respondents entered their responses directly into our database of responses from the Web-based surveys, possibility of data entry errors was greatly reduce"
4109,"d. We also performed computer analyses to identify inconsistencies in responses and other indications of error. In addition, a second independent analyst verified that the computer programs used to analyze the data were written correctly. We also searched state election Web sites to illustrate their respective approaches, and obtained and reviewed relevant documentation for selected states. The scope of this work did not include contacting election officials from each state and local jurisdictions to verify"
4110," survey responses or other information provided by state officials. In addition, we did not analyze states’ requirements to determine what they require, but instead relied on the states’ responses to our survey. To specifically determine what actions Justice has taken to enforce HAVA voting access provisions, we interviewed Justice officials and reviewed relevant federal laws, guidance, and other documentation. Specifically, we spoke with Justice officials in the Voting and Disability Rights Sections of the"
4111," Civil Rights Division to document Justice’s internal process for handling HAVA matters and cases and to review the department’s actions to monitor and enforce HAVA voting access provisions (see app. IV for an overview of this process). We reviewed the Americans with Disabilities Act: ADA Checklist for Polling Places and informal guidance, such as letters responding to state election officials’ requests for additional guidance on HAVA voting access requirements. We also reviewed citizen complaints from Elec"
4112,"tion Day 2008 that were provided to us by Justice and all three complaints containing a HAVA voting access claim that Justice has filed against states or election jurisdictions since HAVA was enacted in 2002. In addition, to learn more about the federal role in providing assistance and funding to states under HAVA, we interviewed officials from the EAC, HHS, the National Association of Secretaries of State, and the National Association of State Election Directors. Washington, D.C. Within Justice, the Voting"
4113," Section’s internal process for initiating HAVA- related matters and handling cases consists of four phases: initiation, investigation, complaint justification, and litigation. While the Voting Section generally does not receive referrals from other federal agencies, many matters are initiated by allegations from a variety of sources, including citizens, advocacy and community organizations, Members of Congress, U.S. Attorney’s Offices, and news articles or through election monitoring. The Voting Section al"
4114,"so sometimes initiates matters to monitor private lawsuits and to observe elections. The matter is assigned to an attorney under the supervision of a deputy chief or special litigation counsel for review to determine if further action is warranted. If so, a memorandum is prepared for the section chief and final approval from the Assistant Attorney General or his or her designee is required before an investigation can begin. Once the decision is made to investigate a matter, the section chief will assign a t"
4115,"rial attorney, who conducts an investigation. When the investigation is complete, the trial attorney makes a recommendation to the section chief on whether Justice should file a lawsuit, close the matter, or participate in some other manner. The section chief is responsible for making the final decision about closing an investigation authorized by the Assistant Attorney General or recommending a lawsuit or other participation to the Assistant Attorney General. If a referral or allegation of a HAVA violation"
4116," is not pursued, all appropriate parties are notified, and the matter is closed. If a decision is made to pursue a matter and recommend filing a formal complaint to initiate a lawsuit, then the trial attorney prepares a justification package. An attorney manager and the section chief are responsible for reviewing and approving the justification package. A Deputy Assistant Attorney General reviews the justification package, which is then forwarded to the Assistant Attorney General for final review and approv"
4117,"al. The justification package is also sent to the U.S. Attorney’s office for the district where the lawsuit is to be filed for review and concurrence. If the justification package is not approved, the trial attorney generally prepares a closing memorandum and notifies the charging party, respondent, and/or referring agency, as appropriate, that Justice is not filing a lawsuit. The matter is then closed. If the justification package is approved, the Civil Rights Division notifies the defendant by letter of J"
4118,"ustice’s intent to file a lawsuit. After the defendant has been notified, the trial attorney and the defendant often have presuit settlement discussions. If a presuit settlement is reached, a settlement document stating the points of agreement is prepared, reviewed, and approved by the Office of the Assistant Attorney General and signed by all parties. If the presuit settlement discussions do not result in a settlement, the complaint is filed in federal district court and the parties engage in litigation. F"
4119,"iling a complaint and the beginning of legal proceedings do not preclude the trial attorney and defendant from continuing negotiations and reaching a settlement. According to Voting Section officials, defendants often settle prior to, or during, a trial. If a trial is held, the plaintiff or defendant can often appeal the decision. If the decision is appealed, the Voting Section works closely with the Appellate Section of Civil Rights Division, which assumes responsibility for the appeal stage of the case. ("
4120,LB) (UB) No designated parking for people with disabilities One or more unramped or uncut curbs <36 inches wide Other potential impediments in parking lot Path from parking area to building entrance Unpaved or poor surface in parking lot or route to building entrance Ramp in path from parking area to building entrance is steeper than 1:12 No sidewalk/path from parking area to building entrance Ramps in path from parking area to building entrance do not have a level landing at the top and bottom of each sect
4121,"ion is < 60 inches long Leaves, snow, litter in path from parking area to building entrance Sidewalk/path from parking area to building entrance <36 inches wide Ramps in path from parking area to building entrance is < 36 inches wide Steps required in path from parking area to building entrance Other potential impediments in path from parking area to building entrance Doorway threshold exceeds ½ inch in height Single doorway opening is < 32 inches wide Doors that would be difficult for a person using a whee"
4122,"lchair to open Double door opening is <32 inches wide, including situations in which one of the doors cannot be opened Other potential impediments at the building entrance Path from building entrance to voting area Doorway threshold exceeds ½ inch in height Single doorway opening is < 32 inches wide Corridors that do not provide an unimpeded width of at least 36 inches, but can go down to 32 inches for two feet. Location of features that might impede access to voting in a polling place (LB) (UB) We did not "
4123,"measure these items in 2000. We collected data on this item in 2008, following our review based on the Americans with Disabilities Act: ADA Checklist for Polling Places and per interviews with experts. We based this measurement on Justice’s ADA Standards for Accessible Design, 28 C.F.R. Part 36, Appendix A, which states that any part of an accessible route with a slope greater than 1:20 shall be considered a ramp and the maximum slope of a ramp is 1:12, except in certain cases where space limitations prohib"
4124,"it the use of 1:12 slope or less. Brett Fallavollita, Assistant Director, and Laura Heald, Analyst-in-Charge managed this assignment. Carolyn Blocker, Katherine Bowman, Ryan Siegel, and Amber Yancey-Carroll made significant contributions to this report in all aspects of the work. Jason Palmer, Susan Pachikara, Gretta Goodwin, Matthew Goldstein, and numerous staff from headquarters and field offices provided assistance with Election Day data collection. Carl Barden, Cathy Hurley, Stu Kaufman, George Quinn, a"
4125,"nd Walter Vance provided analytical assistance; Alex Galuten provided legal support; Paula Moore provided technical support; Jessica Orr provided assistance on report preparation; Mimi Nguyen developed the report’s graphics; and Anna Bonelli, Caitlin Croake, Kim Siegal, and Paul Wright verified our findings. Voters with Disabilities: More Polling Places Had No Potential Impediments Than In 2000, But Challenges Remain. GAO-09-685. Washington, D.C.: June 10, 2009. Elections: States, Territories, and the Distr"
4126,"ict Are Taking a Range of Important Steps to Manage Their Varied Voting System Environments. GAO-08-874. Washington, D.C.: September 25, 2008. Elections: 2007 Survey of State Voting System Programs. GAO-08-1147SP. Washington, D.C.: September 25, 2008. Elections: Federal Program for Certifying Voting Systems Needs to Be Further Defined, Fully Implemented, and Expanded. GAO-08-814. Washington, D.C.: September 16, 2008. Election Assistance Commission—Availability of Funds for Purchase of Replacement Voting Equ"
4127,"ipment. B-316107. Washington, D.C.: March 19, 2008. Elderly Voters: Some Improvements in Voting Accessibility from 2000 to 2004 Elections, but Gaps in Policy and Implementation Remain. GAO-08-442T. Washington, D.C.: January 31, 2008. Elections: All Levels of Government Are Needed to Address Electronic Voting System Challenges. GAO-07-741T. Washington, D.C.: April 18, 2007. Elections: The Nation’s Evolving Election System as Reflected in the November 2004 General Election. GAO-06-450. Washington, D.C.: June "
4128,"6, 2006. Elections: Federal Efforts to Improve Security and Reliability of Electronic Voting Systems Are Under Way, but Key Activities Need to Be Completed. GAO-05-956. Washington, D.C.: September 21, 2005. Elections: Electronic Voting Offers Opportunities and Presents Challenges. GAO-04-975T. Washington, D.C.: July 20, 2004. Elections: A Framework for Evaluating Reform Proposals. GAO-02-90. Washington, D.C.: October 15, 2001."
4129,"The federal government uses grants to achieve national priorities through nonfederal parties, including state and local governments, educational institutions, and nonprofit organizations. While there can be significant variation among different grant programs, most federal grants share a common life cycle for administering the grants: pre-award, award, implementation, and closeout (see fig. 1). During the award stage, the federal awarding agency enters into an agreement with grantees stipulating the terms a"
4130,"nd conditions for the use of grant funds including the period of time funds are available for the grantee’s use. Also in the award stage, the awarding agency opens accounts in one of several payment management systems through which grantees receive payments. During the post-award stage, the grantee carries out the requirements of the agreement and requests payments, while the awarding agency approves payments and oversees the grantee. Once the grantee has completed all the work associated with a grant agree"
4131,"ment or the end date for the grant has arrived, or both, the awarding agency and grantee close out the grant. Closeout procedures ensure that grantees have met all financial requirements, provided their final reports, and returned any unspent balances. Grant closeout procedures, like other stages of the grant cycle, are subject to a wide range of requirements derived from a combination of OMB guidance, agency regulations, agency policy, and program-specific statutes. OMB Circular No. A-110, Uniform Administ"
4132,"rative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations, and OMB Circular No. A-102, Grants and Cooperative Agreements with State and Local Governments, provide OMB guidance to federal agencies on grant administration. These circulars apply only to federal awarding agencies; they do not apply directly to grantees. Each federal agency that awards and administers grants and agreements that are subject to the guidance in Circulars A-110"
4133," and A-102 is responsible for issuing regulations, with which grantees must comply, that are consistent with the circulars, unless different provisions are required by federal statute or are approved by OMB. Agency regulations issued under the circulars typically impose closeout procedures upon both the awarding agency and the grantee. Generally, within 90 days after the completion of the award, grantees must submit all financial, performance, and other reports as required by the terms and conditions of the"
4134," award. Also within this 90-day period, grantees generally are to liquidate all obligations incurred under the award. Grantees then are to promptly refund any remaining cash balances to the awarding agency. Awarding agencies must make prompt payments, often defined as within 90 days, to grantees for allowable reimbursable costs under the award being closed out.conditions of the award, the awarding agency must make a settlement for any upward or downward adjustment to the federal share of costs after the clo"
4135,"seout reports are received. Some federal agencies’ grant policies, such as HHS’s, further specify that grants are to be closed out within 180 days of the end of the grant funding period. Also, if allowed by the terms and While there can be substantial variation among grant programs, figure 2 illustrates how closing out grants could allow an agency to redirect resources toward other projects and activities or return unspent funds to Treasury. Generally, if the undisbursed balances that are deobligated from c"
4136,"losed grant accounts are still available for incurring new obligations, the agency may use the funds to enter into new grant agreements.may allow the federal agencies to use existing resources to fund new grant projects. If the undisbursed amounts are returned to expired appropriation accounts, the agency may not use the deobligated funds to make new grants. However, the agency may use the deobligated funds to make adjustments to obligations that were incurred before the appropriations account expired. Expi"
4137,"red appropriations accounts remain available for 5 years to make adjustments, after which, the undisbursed balances are canceled and returned to the Treasury. In other words, the funds are no longer available for use by the agency. This helps ensure that federal agency resources are not improperly spent and helps agencies maintain accurate accounting of their budgetary resources. It may also reduce future federal outlays relative to the federal government’s original estimated amount of spending for these pr"
4138,"ograms. We found that more than $794 million in undisbursed balances remained in expired PMS accounts, including undisbursed balances that remained in accounts several years past their expiration date. Roughly three-fourths of all undisbursed balances in expired grant accounts were from grants issued by HHS, the largest grant-making agency in the federal government. Although this represents only a small share (2.7 percent) of the total funding that was made available for these grants, department officials t"
4139,"old us they are taking action to improve timely closeout. We also found that more than $126 million in undisbursed balances remained in dormant grant accounts—accounts for which there had been no activity for 2 years or more—in ASAP, another large federal payment system. As of September 30, 2011, we found that $794.4 million in undisbursed balances remained in PMS, the largest federal civilian payment system in 10,548 expired grant accounts. These are accounts that were more than 3 months past the grant end"
4140," date and had no activity for 9 months or more. Undisbursed balances in expired grant accounts were spread across numerous federal agencies and almost 400 different programs. (See app. II for a list of PMS customers.) For comparison, the total amount of undisbursed balances in expired grant accounts in PMS is more than $200 million less than the amount we previously reported for calendar year 2006, while the overall amount of grant disbursements through PMS increased by about 23 percent during this time, fr"
4141,"om $320 billion in fiscal year 2006 to $415 billion in fiscal year 2011. Overall, total undisbursed balances as of September 30, 2011, represent roughly 3.3 percent of the total amount of funds made available for these grants, down from 7.4 percent at the end of calendar year 2006. However, at the department or agency level, the total amount of undisbursed balances in expired accounts as of September 30, 2011, varied from 2.7 percent to 34.8 percent of the total funding made available for these grant accoun"
4142,"ts during this period. OMB guidance and agency regulations generally require grantees to submit all financial and performance reports and liquidate all obligations incurred under the award within 3 months (or 90 days) after the completion of the award; awarding agencies must then make prompt payments to grantees for allowable reimbursable costs for the award being closed out. Therefore, based on the information in PMS, these expired grant accounts should be considered for grant closeout. Failure to close ou"
4143,"t a grant in the payment system and deobligate any unspent balances can allow grantees to continue to draw down federal funds in the payment system even after the grant’s period of availability to the grantee has ended, making these funds more susceptible to waste, fraud, or mismanagement. As figure 3 shows, we found that undisbursed balances remained in grant accounts several years past their expiration date. We found that 991 expired grant accounts were more than 5 years past the grant end date; they cont"
4144,"ained a total of $110.9 million in undisbursed funding. Of these, 115 expired grant accounts containing roughly $9.5 million remained open more than 10 years past the grant end date. Federal regulations generally require that grantees retain financial records and other documents pertinent to a grant for a period of 3 years from the date of submission of the final report. The risk increases after several years that grantees will not have retained the financial documents and other information for these grants"
4145," that are needed by federal agencies to properly reconcile financial information and make the necessary adjustments to the grant award amount and the amount of federal funds paid to the recipient, potentially resulting in the payment of unnecessary and unallowable costs. While the amount of funds remaining in individual expired grant accounts ranged from less than $1 to more than $19 million, a small percentage (a little more than 1 percent) of grant accounts with undisbursed balances of $1 million or more "
4146,"accounted for more than a third of the total undisbursed funds in expired grant accounts. Overall, 123 accounts from eight different federal agencies had more than $1 million in undisbursed balances at the end of fiscal year 2011. These expired grant accounts had a combined total of roughly $316 million in undisbursed balances, or 40 percent of the total undisbursed funding in expired grant accounts as of September 30, 2011 (see fig. 4). Accounts with undisbursed balances remaining at the end of the agreed-"
4147,"upon grant end date can indicate a potential grant management problem. Data showing grantees that have not expended large amounts of funding such as $1 million or more by the specified grant end date raise concern that grantees have not fully met the program objectives for the intended beneficiaries within the agreed- upon time frames. Roughly three-fourths of all undisbursed balances in expired grant accounts ($594.7 million) in PMS as of September 30, 2011, were from 8,262 HHS-issued grants. HHS is the la"
4148,"rgest grant-making agency in the federal government in terms of total dollars awarded and disbursed. Overall, the total undisbursed balances in expired HHS grant accounts represented 2.7 percent of the total amount authorized for these accounts, which is the lowest percentage for any federal department with undisbursed balances in expired grant accounts included on the September 30, 2011 PMS closeout report. This indicates that the grantees have typically spent the vast majority of the funds awarded. Howeve"
4149,"r, the remaining funds add up to hundreds of millions of dollars that the agency could potentially redirect toward other projects and activities or return to Treasury. Furthermore, 85 of the 123 expired grant accounts with $1 million or more remaining at the end of fiscal year 2011 discussed earlier in this report were HHS-issued grants. Of the 10 HHS operating divisions with accounts in PMS, the Administration for Children and Families (ACF) and the Centers for Disease Control and Prevention (CDC) had the "
4150,"largest undisbursed balances at the end of fiscal year 2011 with roughly $321.7 million and $110.1 million, respectively. While HHS policy generally requires that grants be closed out within 180 days after the grant’s end date, we found more than $265 million in undisbursed balances in expired grant accounts that remained open 3 or more years past the grant end date. This includes more than $86 million in expired grant accounts that were 5 years or more past the grant end date, of which more than $7 million"
4151," remained unspent 10 years after the grant end date (see fig. 5). $70.8 million in undisbursed balances in expired grant accounts that were 5 years or more past the grant end date, including $6.1 million that remained unspent 10 years after the grant end date. HHS Grants Policy Directive 4.02 outlines the department’s grants management requirements for closeout. In response to past audit reports, officials from HHS’s Division of Grants In February said that they have increased monitoring of grant closeout.2"
4152,"011, HHS established an interagency workgroup—the Accelerated Closeout Team—led by the Office of Grants and Acquisition Policy and Accountability to coordinate a departmentwide response in strengthening financial controls and accelerating the number of grant and contract closeouts. The Accelerated Closeout Team for grants reviewed and analyzed PMS data from previous years and used the data to develop a list of eligible grant awards—focusing specifically on those from fiscal year 2008. They have a near-term "
4153,"goal of closing out all eligible grants with a grant end date of 2008. According to HHS, they have identified tens of millions of dollars in undisbursed balances in PMS available for deobligation through this initiative. The initiative will conclude later this year at which point HHS will re-evaluate any additional areas requiring specific attention. HHS officials said that they are drafting a departmentwide grants closeout policy to improve the grant closeout process going forward. HHS officials said that "
4154,"attention on timely grant closeout in PMS increased in response to previous audits. Both the HHS Office of Inspector General and the HHS independent auditor have reported a backlog of expired HHS grant accounts with undisbursed balances in PMS. The HHS Inspector General issued four reports from 2008 to 2009 on grant closeout in PMS at four selected operating divisions. Using PMS data from March 30, 2006, to March 31, 2007, the HHS Inspector General found between $174 million and $1.3 billion in undisbursed "
4155,"balances at the four operating divisions in grant accounts that had not been closed within 180 days of the grant end date as specified in agency policy. The HHS Inspector General attributed the backlog in grant closeout in part to lack of staff and resources, inconsistent guidance, and a lack of supporting documentation and recommended that the agency use the information in the audit reports to ensure that grants are closed out in a timely manner and to eliminate the backlog of grants eligible for closeout."
4156," The operating divisions generally concurred with the Inspector General’s recommendations and described actions that they planned to take to improve timely closeouts in response. Findings from HHS’s independent auditor as reported in the agency’s PARs over several years indicate that timely closeout of grants has been a long-standing issue at HHS but that the agency has been making progress. From fiscal year 2006 to fiscal year 2011, the HHS independent auditor routinely reported on concerns with management"
4157," controls over grant closeout, including a backlog of HHS grant accounts in PMS that were already beyond what the auditor considered a reasonable time frame for closeout. For example, during its review of fiscal year 2009 grant activity provided from PMS as of March 31, 2009, the independent auditor identified approximately 644 grant obligations totaling $40.3 million that were dated prior to fiscal year 2002 that had not been closed out. The independent auditor concluded at that time that HHS management ne"
4158,"eded to increase its emphasis on closeout in order to reduce the backlog and ensure consistency between PMS and HHS operating divisions’ separate grant tracking systems, and, as part of the department’s fiscal year 2011 PAR, the independent auditor noted significant improvements in this and other financial management processes. Promptly closing out grants in the payment management system after the grant end date would help agencies minimize the amount that they are charged in monthly service fees. PSC, whic"
4159,"h operates PMS, does not close out a grant account in PMS until instructed to by the awarding agency and continues to charge service fees to the awarding agencies. PMS fees are calculated to allow PSC to fully recover the cost of its PMS operations. In addition to payment services, PMS also provides a number of other services to assist users, such as standardized electronic forms for meeting federal grant reporting requirements, audit support, and collection services on overdrawn grants and disallowed costs"
4160,". PSC provides these additional services for all open accounts, regardless of the grant account balance. PSC charges federal grant-making agencies based on two billing rates: a hybrid rate referred to as the “Type I” rate, which is generally applied to grants awarded to state, local, and tribal governments, and a flat rate referred to as the “Type II” rate, which is generally applied to grants awarded to nonprofit agencies, hospitals, and universities. We identified more than 28,000 expired grant accounts i"
4161,"n PMS with no undisbursed balances remaining as of the end of fiscal year 2011 for which the grant-making agency was charged a fee. More than 21,000 of these expired grant accounts with no undisbursed funds remaining— approximately 79 percent of all such accounts—were for HHS grants with the remaining amount spread across 11 other federal agencies. The closeout report made available to PMS users identifies these accounts using a special status symbol, which indicates that the awarding agency only needs to s"
4162,"ubmit the closeout code to finalize grant closeout. Until the code is submitted, these grant accounts continue to cost the awarding agency through accumulated monthly service fees. According to data provided by PSC, PMS users were charged a total of roughly $173,000 per month to maintain the more than 28,000 expired grant accounts with zero dollar balances listed on the yearend closeout report. Roughly $137,000 of this was charged to HHS operating divisions. Overall, the total charges for all expired grants"
4163," with a zero dollar balance would represent roughly $2 million in fees if agencies were billed for these accounts for the entire year. While the fees are small relative to the size of the original grant awards, they can accumulate over time. We found roughly 9,770—about 34 percent—of the expired grant accounts with no undisbursed balances remained open 3 or more years past the grant expiration date. If the grant has otherwise been administratively and financially closed out, then agencies paying fees for ex"
4164,"pired accounts with zero dollar balance are paying for services that are not needed instead of providing services to grant recipients. The presence of expired grant accounts with no undisbursed funds remaining also raises concerns that administrative and financial closeout—the final point of accountability for these grants, which includes such important tasks as the submission of financial and performance reports—may not have been completed. As of the end of fiscal year 2011, we found that $126.2 million in"
4165," undisbursed balances remained in dormant grant accounts in ASAP, another large federal payment system. These balances remained in 1,094 dormant grant accounts—accounts for which there had been no activity for 2 years or more. According to the dormant account report, this represents roughly 15 percent of the cumulative authorized funding made available for these accounts. Grant accounts for eight federal departments and other federal entities that use the ASAP system for payment services appeared on the rep"
4166,"ort, with undisbursed balances ranging from roughly $41,000 to more than $40 million, per entity. (See app. III for a list of ASAP customers.) Individual accounts in the ASAP system can include multiple grant agreements between a federal agency and a grantee; therefore, these reports cannot be used to identify individual grants eligible for closeout or the amount of funds that remain undisbursed for an individual grant agreement. However, the existence of undisbursed balances in inactive accounts can indica"
4167,"te the need for increased attention. This is particularly true of accounts where there has been no activity for a prolonged period of time. While nearly three-quarters of the undisbursed balances in dormant accounts were inactive for 3 years or less, we found roughly $33 million in 430 accounts that had been inactive for 3 years or more. Of that $33 million, $11 million in 179 accounts had been inactive for 5 years or more (see fig. 6). FMS officials first began issuing “dormant account reports” to all ASAP"
4168," users in 2009 in response to the findings in our 2008 report that using federal payment systems to track undisbursed balances in grant accounts could help reduce unused funding. ASAP dormant account reports have evolved over time to improve their usability. Currently, accounts with undisbursed balances are included in dormant account reports if (1) the grantee has not drawn down funds for 2 years or more and (2) the awarding agency has made no changes to the authorized amount of funding available to the gr"
4169,"antee in 2 years or more. Dormant account reports are generally provided twice a year—once in the fall or winter followed by a second report in the spring or summer. The first report lists all of the dormant accounts as of a specific date, and the second report shows the status of these same accounts several months later, allowing agencies to track progress toward addressing the dormant accounts that appeared on the first report. The amounts reported for the end of fiscal year 2011 represent the first phase"
4170," of this two-phase cycle. Unlike PMS, the ASAP system does not provide grant management operations for users; therefore, it is the agencies’ responsibility to maintain grant management information such as the grant end date. However, as with PMS, the separation of grant management and payment functions makes it is possible for agencies to closeout a grant in a separate grant management system but fail to close out the grant in the ASAP system. According to FMS officials, if an ASAP account remains open, gra"
4171,"ntees may be able to continue to draw funds so long as there are funds available in the account. ASAP accounts that have no balances remaining but remain open are not included in dormant account reports regardless of their period of inactivity. FMS has encouraged agencies to close these accounts, but it does not charge users for these accounts or for other payment system services provided by the ASAP system. Instead, Congress appropriates funds to FMS to cover the cost of its operations. In addition to the "
4172,"HHS audits described earlier, we and agency IGs have continued to raise concerns about timely grant closeout in federal agencies and grant programs. As part of our previous report on undisbursed balances in expired grant accounts issued in 2008, we reviewed 7 years of past audits and found that both we and federal IGs issued numerous reports indentifying specific grant programs or awarding agencies that had undisbursed funding in grants eligible for closeout. Since that time, we have issued additional repor"
4173,"ts identifying challenges related to timely closeout of grants, and the Inspectors General at the Departments of Agriculture (USDA), Education, Energy (DOE), HHS, Homeland Security (DHS), and Labor (Labor) have all issued reports identifying similar challenges in offices or programs within their respective agencies. These reports identified a lack of adequate systems or policies in place to properly monitor grant closeout and inadequacies in awarding agencies’ grant management processes, in part because clo"
4174,"seouts are a low management priority. While they focused on expired grants in specific offices or grant programs, when taken together, these report findings indicate that the timely closeout of grants continues to be an issue for multiple programs and grant-making agencies across the federal government. We found that agencies did not have adequate systems and policies in place to properly monitor grant closeout. For example, in 2011, we reported that USDA’s draft grant closeout policies for the McGovern-Dol"
4175,"e Food for Education Program did not include time frames for when grant agreements should be closed. As a result, this put USDA at risk that grant agreements will not be closed out in a timely fashion, preventing USDA from ensuring that grantees of the McGovern-Dole Food for Education Program have met all financial requirements and that unused or misused funds are promptly reimbursed to USDA. We recommended that the Secretary of Agriculture formalize policies and procedures for closing out grant agreements "
4176,"and establishing guidance to determine when agreements should be closed. USDA agreed with our recommendations and said it will take steps to address them. Similarly, in 2011 we found that roughly $24 million in Farm Labor Housing program loan and grant obligations remained undisbursed more than 5 years after the funds were obligated and that the Rural Housing Service had no guidelines for deobligation in force.since issued guidance, as we had recommended. The Rural Housing Service has We also found that age"
4177,"ncies did not deobligate funds from grants eligible for closeout in a timely manner. For example, in 2012, we reported that Department of Justice’s (DOJ) Bulletproof Vest Partnership program had not deobligated about $27 million in balances from grants awarded from fiscal years 2002 through 2009 whose terms have ended and whose grantees are no longer eligible for reimbursement. DOJ agreed with our recommendation that the department deobligate undisbursed funds from Bulletproof Vest Partnership program grant"
4178,"s that have closed and said that in the absence of statutory restrictions stating otherwise, it intends to use the deobligated, undisbursed funds to supplement appropriations in fiscal years 2012 and 2013. In another example, we reported in 2010 that recipients of 58 percent of Department of the Interior’s Office of Insular Affairs project grants failed to submit final closeout reports on time, which can delay the deobligation of any unspent grant funds from the project account. The Department of Interior a"
4179,"greed with our recommendations to improve the Office of Insular Affairs’ ability to manage grants. Federal IGs identified similar issues at their agencies. For example, in September 2009 the Inspector General at Labor reported that funds were not deobligated when a grant expired because of delays in grant closeouts. Also, grants from the Employment and Training Administration and the Veteran’s Employment and Training Service were not closed within 12 months of their expiration because of a large backlog of "
4180,"grants in need of close out. Service reported in April 2009 that it deobligated the $2.75 million in response to a finding from the department’s inspector general, making the funds available for other research projects and preventing the potential misuse of funds. IGs also reported that system updates and a lack of timely information led to problems at DHS and the Department of Education, respectively. Department of Labor, Office of the Inspector General, Management Advisory Comments Identified in an Audit "
4181,"of the Consolidated Financial Statements for the Year Ended September 30, 2009, 22-10-006-13-001 (Washington, D.C.: 2010). Federal IGs reported that grant closeout procedures have been viewed as a low priority for federal agencies and that agencies have devoted limited staff resources to other grant management functions, including the issuance of new grant awards. Lack of attention and staffing contribute to delays in grant closeout and the timely deobligation of funds. For example, DOE’s Inspector General "
4182,"found that one of DOE’s regional offices was not closing out Small Business Innovation and Research Phase II grants in a timely manner in part because staff focused their attention instead on active awards. The Inspector General found expired grants had been completed for more than 3 years but had not been closed out. In addition, the Inspector General found questionable or unallowable costs during their review of grant closeout. Because grantees are only required to maintain annual audit and expense report"
4183,"s to support progress on projects and costs incurred and other information for 3 years, the supporting cost data may not be available for review, resulting in the payment of unnecessary and unallowable costs. These findings are consistent with the results of a survey of IGs and other investigative agencies by the National Procurement Fraud Task Force’s Grant Fraud Committee, a committee chaired by the Inspector General for DOJ, which aims to detect and prevent grant fraud. Many respondents to the survey sug"
4184,"gested that grant awarding agencies are often focused on awarding grant money and do not devote sufficient resources to the oversight of how those funds are spent. Survey respondents noted that awarding agencies often inadequately monitor grantee activities by, among other things, not properly closing out grants in a timely manner. OMB has not issued governmentwide guidance on tracking or reporting undisbursed balances for grants eligible for closeout, as we recommended in 2008. OMB did issue instructions f"
4185,"or tracking and reporting on undisbursed grant balances to a small number of affected federal agencies in 2010 and 2011 as required by law. However, this guidance included grant accounts that were still available for disbursement and was not limited only to those grant accounts eligible for closeout. We found that agencywide information on undisbursed balances in grant accounts eligible for closeout is largely lacking. In 2008, we recommended that OMB instruct all executive departments and independent agenc"
4186,"ies to annually track the amount of undisbursed balances in expired grant accounts and report on the status and resolution of the undisbursed funding in their annual performance reports. In our report, expired grant accounts were defined as the grants that remained open after the end of the grant period and were eligible for closeout. Our previous work found that reporting on the status of grant closeouts in annual performance reports, such as agency PARs, can raise the visibility of the problem within fede"
4187,"ral agencies, lead to improvements in grant closeouts, and reduce undisbursed balances. These reports enable the president, Congress, and the American people to assess agencies’ accomplishments for each fiscal year by comparing agencies’ actual performance against their annual performance goals, summarizing the findings of program evaluations completed during the year, and describing the actions needed to address any unmet goals, among other things. OMB responded at the time that it supported the intent of "
4188,"our recommendations to strengthen grants management by explicitly requiring federal agencies to track and report the amount of undisbursed grant funding remaining in expired grant accounts and that it believed agencies should design processes with strong internal controls to promote effective funds management for all types of obligations. OMB’s comments did not indicate a commitment to implement our recommendations. OMB stated that, during its regular review, it would consider revising the grant management "
4189,"guidance in Circulars No. A-102 and No. A-110 to include such instructions. As of December 2011, these Circulars, as well as No. A-11, Preparation, Submission and Execution of the Budget, and No. A-136, Financial Reporting Requirements, do not include any guidance or instructions to agencies on tracking or reporting on undisbursed balances in grants eligible for closeout in agencies’ performance reports. Section 537 of the Commerce, Justice, Science, and Related Agencies Appropriations Act of 2010 required "
4190,"that the Director of OMB instruct departments, agencies, and other entities receiving funds under the act to track undisbursed balances in expired grant accounts. The legislation specifically required that OMB instruct affected agencies to report on the following information: 1. details on future action the department, agency, or instrumentality will take to resolve undisbursed balances in expired grant accounts, 2. the method that the department, agency, or instrumentality uses to track undisbursed balance"
4191,"s in expired grant accounts, 3. identification of undisbursed balances in expired grant accounts that may be returned to the Treasury of the United States, and 4. in the preceding 3 fiscal years, details on the total number of expired grant accounts with undisbursed balances (on the first day of each fiscal year) for the department, agency, or instrumentality and the total finances that have not been obligated to a specific project remaining in the accounts. These legislative reporting requirements were sim"
4192,"ilar to what we recommended in 2008. Subsequently, the same reporting requirements were carried forward for fiscal year 2011 by the Full-Year Continuing Appropriations Act, 2011 and for fiscal year 2012 by Section 536 of the Commerce, Justice, Science, and Related Agencies Appropriations Act, 2012, affecting select agencies 2012 PAR and AFR submissions due in November 2012. In 2010 and 2011, as required by these laws OMB issued implementing instructions to affected federal agencies’ financial officers and b"
4193,"udget officers. Four agencies—the Department of Commerce (DOC), DOJ, National Aeronautics and Space Administration (NASA), and National Science Foundation (NSF)—provided responses in their annual performance reports. However, in its instructions, OMB equated “expired grant accounts” with expired appropriation accounts. Specifically, OMB’s guidance referenced the definition of expired appropriations found in Circular No. A-11 in defining expired grant accounts as “including budget authority that is no longer"
4194," available for new obligations but is still available for disbursement.” The performance period for active grant agreements can last multiple years during which time authorized disbursements may be made from expired appropriation accounts. Under OMB’s definition, agencies were instructed to report all undisbursed funding in expired appropriation accounts which could include active grant accounts as well as grant accounts eligible for closeout. In contrast, in this and other reports, we defined expired grant"
4195," accounts as accounts that remain open after the specified grant end date, or expiration date, and are eligible for close out. government has obligated by entering into a grant agreement but that should no longer be disbursed to grantees because the period of availability to the grantee has ended. See GAO-08-432 and GAO, Federal Grants: Improvements Needed in Oversight and Accountability Processes, GAO-11-773T (Washington, D.C.: June 23, 2011). appropriations in the agency’s two research-related appropriati"
4196,"ons accounts. The amount reported included funds available for disbursement on only active grant agreements. Similarly, officials from DOJ and NASA also confirmed to us that the number they reported in their 2010 performance reports represented balances in expired appropriations accounts and not the amount of funding that remained in grant accounts eligible for close out. Furthermore, according to DOJ officials, most DOJ grants, with the exception of grants funded through the American Recovery and Reinvestm"
4197,"ent Act (Recovery Act), are funded with no-year appropriations that do not enter into an expired phase and therefore fall outside the scope of OMB’s guidance. Agency officials told us that the purpose of gathering information on grants funded with expired appropriations was unclear. Federal agencies are generally required to include detailed information on the overall budgetary resources made available to the agency, including amounts in expired appropriation accounts, as well as the status of those resourc"
4198,"es at the end of the fiscal year. Agency officials said that the information on undisbursed balances reported in their PAR or AFR was derived at least in part from these publicly available budgetary reports and is generally readily available; however, information on undisbursed balances in grant accounts that have reached their end date and are eligible for closeout is generally not publicly available or otherwise provided to OMB and Congress. OMB issued largely identical instructions to select agencies for"
4199," reporting on undisbursed balances in expired grant accounts in their 2011 performance reports. While NASA and NSF took different approaches in reporting compared to the prior year, DOJ reported on the amount of undisbursed funding in expired appropriations. DOC reported undisbursed balances, but could not confirm whether all of its grant- making bureaus reported expired appropriations or grant accounts. NASA officials said that the number reported in their 2011 PAR represented the amount of undisbursed bal"
4200,"ances in grant accounts that have reached their end date and are eligible for closeout. Based on this understanding of the guidance, NASA reported in its 2011 PAR that in 2009 there were about 1,650 expired grants with $18 million in undisbursed balances. In comparison, when reporting on amounts in expired appropriations in their previous year’s PAR, NASA reported over 2,100 expired grants with $58 million in undisbursed balances for 2009. In its 2011 PAR, NSF reported on neither the amount of grants funded"
4201," with expired appropriations nor on the amount of undisbursed balances in grant accounts that have reached their end date and are eligible for closeout. Instead, NSF reported the amount of funding that was deobligated as a result of successfully closing out grants. For example, NSF reported that in fiscal year 2011, the agency closed out a total of 18,648 grants. As a result, $35,204,328 in undisbursed balances were deobligated and retained for adjustments to existing obligations and an additional $5,610,54"
4202,"6 was deobligated and returned to Treasury.illustrates how closing out grants allows an agency to redirect unspent funds or return the funds to Treasury as appropriate. It does not, however, provide information on the number of grants past their grant end date or the balances remaining in these grant accounts. In our review of CFO Act agencies’ annual performance reports for fiscal years 2009 to 2011, we found that systematic, agencywide information on undisbursed balances in grant accounts eligible for clo"
4203,"seout is largely lacking in part because OMB guidance does not provide explicit instructions to agencies to track undisbursed balances for grants that are eligible for close out. Other than the four agencies receiving explicit instructions from OMB and the information reported by independent auditors, we found only one federal agency—the Environmental Protection Agency (EPA)—reported agencywide information on the timeliness of grant closeout. EPA developed an agencywide performance metric—the percentage of "
4204,"eligible grants closed out—in part as a response to our prior findings that the agency had a large backlog of grants in need of closeout.out 99.5 percent of eligible grants from 2009 and earlier and 93.4 percent In its 2011 AFR, EPA reported that it closed of grants that expired in the prior fiscal year. As part of our prior work we concluded that while EPA’s performance measure did not assess compliance since it did not reflect the 180-day closeout standard, the measure was a valuable tool for determining "
4205,"if grants were ultimately closed. EPA does not provide information in its AFR on the amount of undisbursed funds that remain in expired grants. While we have noted progress in EPA’s recovery of funds from expired grants in our prior work, we have also observed that EPA’s budget justification documents do not describe the amount of deobligated funding available for new obligations; such information could be useful to Congress because the availability of these funds could partially offset the need for new fun"
4206,"ding. We found that information on timely grant close out in other agencies’ performance reports was limited to sections of the performance reports prepared by independent auditors, where two agencies’ auditors raised concerns related to timely grant closeout. Our analysis shows that there has been an improvement in closing out expired grant accounts with undisbursed balances in PMS since our 2008 report. Undisbursed balances in these accounts declined from roughly $1 billion at the end December 2006 to a l"
4207,"ittle more than $794 million at the end of September 2011, despite a significant increase in annual grant disbursements through PMS during this time. However, more work needs to be done to further improve the timeliness of grant closeout and reduce undisbursed balances. In our 2008 report, we found that agencies can improve their grant closeout process when they direct their attention to the issue and make timely grant closeout a high priority. Since this time, HHS has increased attention on grant closeout,"
4208, and both the agency and its independent auditor have reported that progress has been made toward addressing the agency’s existing backlog of grant accounts in PMS eligible for closeout. The dormant account report developed by Treasury offers further encouragement by raising agencies’ awareness of undisbursed balances in inactive grant accounts in the ASAP system. We have found that agencies can raise the internal and external visibility of the issue of undisbursed balances and improve performance by report
4209,"ing on undisbursed balances in grants that are eligible for closeout in agencies annual performance reports. However, the number of agencies that have voluntarily provided this information in their performance reports is limited. We therefore reiterate our previous recommendation, not yet implemented, that OMB should instruct all executive departments and independent agencies to report on the status and resolution of the undisbursed funding in grants that have reached the grant end date in their annual perf"
4210,"ormance reports, the actions taken to resolve the undisbursed funding, and the outcomes associated with these actions. OMB’s implementation of Section 537 of the Commerce, Justice, Science, and Related Agencies Appropriations Act of 2010 and subsequent legislation creates a framework for such reporting. However, interviews with agency officials and variations in agencies’ responses to OMB’s instructions indicate that additional clarification is needed, particularly to the definition of “expired grant accoun"
4211,"ts,” if this information is to be effectively used by agency management, OMB, and Congress to address the backlog of grants in need of closeout. The definition included in guidance issued by OMB equates “expired grant accounts” with grants funded with expired appropriations and therefore includes active grant agreements still in the implementation phase for which the agency would have valid reasons to make future disbursements. By instead focusing on undisbursed balances obligated to grant agreements that h"
4212,"ave reached the end of their period of performance and are eligible for closeout, OMB could better direct agency management focus toward a subset of grants in need of more immediate attention. OMB could also better direct agency management’s focus by putting an emphasis on grants that have not been closed out several years past their expiration date. As time passes, these funds become more susceptible to improper spending or accounting as monitoring diminishes over time. OMB’s guidance currently does not ad"
4213,dress grants with no undisbursed balances remaining. The presence of tens of thousands of expired grant accounts in PMS with no undisbursed funds remaining raises concerns that these accounts are not receiving sufficient attention. Reducing the number of accounts with zero balances remaining would help ensure that administrative and financial closeout—the final point of accountability for these grants—is being completed. It would also minimize the amount agencies pay in potential fees for maintaining these 
4214,"accounts, which can accumulate over time. In addition to the previous recommendation reiterated above, we recommend that the Director, OMB, take the following three actions: Revise the definition of “undisbursed balances in expired grant accounts” in future guidance issued to agencies, including those required to report under Section 536 of the Commerce, Justice, Science, and Related Agencies Consolidated Appropriations Act, 2012, to focus on undisbursed balances obligated to grant agreements that have reac"
4215,"hed the grant end date and are eligible for closeout, as described in this report. Instruct agencies with undisbursed balances still obligated to grants several years past their grant end date to develop and implement strategies to quickly and efficiently take action to close out these grants and return unspent funds to the Treasury when appropriate. Instruct agencies with expired grant accounts in federal payment systems with no undisbursed balances remaining to develop and implement procedures to annually"
4216," identify and close out these accounts to ensure that all closeout requirements have been met and to minimize any potential fees for accounts with no balances. We provided a draft of this report to the Administrator of the National Aeronautics and Space Administration; the Attorney General; the Director of the National Science Foundation; the Acting Director of the Office of Management and Budget; and the Secretaries of Commerce, Health and Human Services, and Treasury. OMB staff provided the following comm"
4217,"ents via e-mail: “OMB is in general agreement with GAO’s recommendation in regards to providing better guidance for agencies in the management and closeout of expired grants with undisbursed balances. We are in the process of reviewing and streamlining our grant policy guidance to the agencies and will consider these recommendations.” The Chief Financial Officer and Assistant Secretary for Administration at DOC and the Assistant Secretary for Legislation at HHS responded with written comments, which we have"
4218," reprinted in appendixes IV and V. Staff at the other agencies provided technical or clarifying comments, which we incorporated as appropriate, or had no comments. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Administrator of the National Aeronautics and Space Administration; the Attorney General; the Director of the National Science Foundation; the A"
4219,"cting Director of the Office of Management and Budget; and the Secretaries of Commerce, Health and Human Services, and Treasury. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you have any questions about this report, please contact Stanley J. Czerwinski at (202) 512-6806 or czerwinskis@gao.gov or Beryl H. Davis at (202) 512-2623 or davisbh@gao.gov. Contact points for our Offices of Congressional "
4220,"Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VI. Our objectives for this report were to evaluate: (1) the amount of undisbursed funding remaining in expired grant accounts including the amounts that have remained unspent for 5 years or more and for 10 years or more, (2) issues raised by GAO and federal inspectors general (IG) related to timely grant closeout by federal agencies, and (3) what actions the Office of Management"
4221," and Budget (OMB) and agencies have taken to track undisbursed balances in grants eligible for closeout. To address the first objective, we analyzed data from two federal payment systems: the Payment Management System (PMS) administered by Department of Health and Human Services’ (HHS) Program Support Center (PSC) and the Automated Standard Application for Payments (ASAP) system administered jointly by the Department of the Treasury (Treasury) and the Federal Reserve Bank of Richmond. Federal payment system"
4222,"s facilitate the transfer of cash payments from federal awarding agencies to grantees. Some agencies make grant payments directly to grantees using their own proprietary payment systems, while others enter into arrangements with payment systems that serve multiple agencies to make payments on their behalf. The PMS and ASAP systems were selected for review based on the following criteria: 1. These payment systems provide payment services to other federal departments and entities. In 2011, offices from 13 fed"
4223,"eral departments and other federal entities used PMS for making grant disbursements, and offices from 9 federal departments and other federal entities used ASAP for grant disbursements. See appendixes II and III for a full list of federal entities that use PMS and ASAP for payment services. 2. These payment systems account for a significant percentage of civilian federal grant disbursements. Based on fiscal year 2010 data, the most recently available at the time of our selection, PMS made about $411 billion"
4224," in grant disbursements, or 68 percent of all civilian federal grants disbursements in fiscal year 2010, and ASAP made payments of an additional $45 billion in grant disbursements, or 7 percent of all civilian federal grant disbursements in that year. In 2011, PMS and ASAP disbursed $415 billion and $62 billion in federal grant funding, respectively, or 79 percent of all civilian federal grant disbursements in fiscal year 2011. PMS is a centralized grant payment and cash management system, operated by HHS’s"
4225," Program Support Center (PSC) in the Division of Payment Management (DPM). According to DPM, the main purpose of PMS is to serve as the fiscal intermediary between awarding agencies and the recipients of grants and contracts. Its main objectives are to expedite the flow of cash between the federal government and recipients, transmit recipient disbursement data back to the awarding agencies, and manage cash flow advances to grant recipients. PSC personnel operate PMS, making payments to grant recipients, mai"
4226,"ntaining user/recipient liaison, and reporting disbursement data to awarding agencies. Awarding agencies’ responsibilities include entry of authorization data into PMS, program and grant monitoring, grant closeout, and reconciliation of their accounting records to PMS information. Awarding agencies pay PSC a service fee for maintaining accounts and executing payments through PMS. PMS continues to charge agency customers a servicing fee until an account is closed. To update our previous analysis of undisburs"
4227,"ed balances in expired grant accounts and provide a degree of comparability, we replicated the methodology used in our 2008 report. Namely, to determine the amount of undisbursed balances in expired grant accounts, we analyzed PMS data from closeout reports PSC makes available to PMS customers each quarter. These closeout reports list all expired grant accounts that, according to the data system, have not completed all of their closeout procedures. An account is considered expired in PMS if (1) the grant en"
4228,"d date is more than 3 months old and (2) the latest date of disbursement was at least 9 months old. PMS does not close a grant account until instructed to do so by the awarding agency. For each grant account, the report includes such information as the identification number, the amount of funding authorized for the grant, the amount disbursed, and the beginning and end dates for the grant. The grant end date is a mandatory field completed by the awarding agency. PSC provided us with the PMS quarterly closeo"
4229,"ut report for the end of fiscal year 2011 (September 30, 2011). PSC appended to the closeout data an additional field showing the applicable number from the Catalog of Federal Domestic Assistance (CFDA) for each grant account. We used the CFDA number provided by PSC to help determine which accounts to exclude from our analysis. The purpose of these exclusions was to avoid including accounts that would distort the calculation of undisbursed funds in expired PMS grant accounts and to provide comparability wit"
4230,"h our previous findings. Our criteria for excluding accounts were consistent with We excluded a total of 115 the methodology we used in our 2008 report.grant programs—both HHS and non-HHS—based on the following: We excluded accounts from our analysis that did not have a defined end date. The purpose of the PMS closeout report is to alert awarding agencies of accounts in PMS that remain open after their posted end date. If a grant does not have a defined end date, such as the Temporary Assistance for Needy F"
4231,"amilies, then HHS staff consider the PMS closeout report merely as a reminder to the awarding agency of the open account and that PMS continues to charge fees on this open account. We excluded expired accounts associated with the following HHS block grant programs: Community Mental Health Services Block Grant, Preventive Health and Health Services Block Grant, Substance Abuse and Preventive Treatment Block Grant, Maternal and Child Health Services Block Grant, Social Services Block Grant, Low Income Housing"
4232," Energy Assistance Block Grant, and Community Services Block Grant. An independent audit of PMS stated that (1) the funds for these block grants continued to be available to the grantees until the obligation/expenditure period expired, and (2) traditional financial reporting requirements do not apply to these programs. We excluded grant accounts with a negative undisbursed balance, meaning that total payments to the grantee exceed the authorized amount. According to PSC officials, an overadvancement on a PM"
4233,"S account can occur if the awarding agency reduces a grant’s authorization limit below the amount already paid to the grantee because the awarding agency determines that the grant recipient is entitled to a lesser amount than the agency originally authorized. Agencies use their accounting systems to send authorization transactions to PMS. If an agency’s authorization transaction will create an overadvanced account in PMS, the transaction is sent to an exception file for review. The agency must override the "
4234,"exception to transmit an authorization transaction that causes an overadvanced account. According to officials from PSC, agencies will do so (1) if they want PSC to initiate a collection action to recover the overadvanced amount or (2) for grantees with multiple grant accounts in PMS that are “pooled,” to redistribute charges to open grant accounts to correct the overadvanced grant. We excluded accounts that were excluded in our 2008 analysis because the CFDA number and program description had been deleted "
4235,"from the Catalog before 2000 (the last Catalog entry would have been in 1999) or we could not find any information on the CFDA number either in CFDA or in the CFDA Historical Index, which provides the history of all CFDA numbers. We excluded accounts if we could not associate them with a grant program. For instance, we found some PMS accounts that, based on the most recent CFDA, were for nongrants. We included expired accounts that were associated with grants or cooperative agreements that had a time limit "
4236,"for spending the funds. We also included accounts for letters of credit. According to PSC officials, almost all accounts in PMS are grants or cooperative agreements with the exception of a few letters of credit. The recipient of a letter of credit may not be required to meet the same performance reporting requirements as the recipient of a grant, but, as with grants, they are required to meet certain reporting requirements, such as submitting a Federal Financial Report (SF-425). Letters of credit, according"
4237," to PSC officials, also have end dates in PMS comparable to grants and follow the same the same closeout procedures in PMS. PSC informed us that it would not be able to exclude letters of credit from the data they provide us. For reporting purposes, we separated data into two sets of expired grant accounts: (1) one set consisted of expired accounts for which all of the funds made available had been disbursed and (2) a second set of accounts that included expired accounts with a positive undisbursed balance."
4238," To obtain an estimate of the total amount of fees paid for maintaining accounts with no undisbursed balances remaining, we requested data from PSC for all accounts that appear on the year-end fiscal 2011 closeout report (i.e., as of September 30, 2011) with a unique accounting status symbol indicating that no undisbursed balances remained and that the awarding agency only needed to submit the final closeout code to PSC to finalize grant closeout. According to data provided by PSC, PMS users were charged a "
4239,"total of roughly $173,000 per month to maintain more than 28,000 expired grant accounts with no undisbursed balances remaining listed on the year-end closeout report. Roughly $137,000 of this was charged to HHS operating divisions. The closeout report provided by PSC does not provide information on when the authorized funds in these accounts were fully disbursed. However, more than 9,000 of these grants were more than 3 years past their end date. For illustrative purposes, we multiplied the monthly fees for"
4240," these accounts by 12 to obtain a rough approximation of what the total annual fees charged for these accounts would be assuming that all accounts with no undisbursed balances remaining balance as of September 30, 2011, had a zero dollar balance for the entire fiscal year. To test the reliability of PMS closeout data, we (1) reviewed existing documentation related to PMS, including the most recent audit of the design and operating effectiveness of the system’s controls, (2) interviewed officials responsible"
4241," for administration of the database on data entry and editing procedures and the production of closeout reports, and (3) conducted electronic testing for obvious errors in completeness and accuracy. An independent auditor assessed internal controls for PMS in 2011 and reported that, with one exception, the controls were suitably designed to provide reasonable assurance the control objectives would be achieved if the controls operated effectively. We discussed with HHS officials data entry and editing proced"
4242,"ures, the production of closeout reports, and any known limitations associated with the data. According to HHS officials, no-cost extensions that extend the grant period without changing the authorized amount of funding may not be reflected in PMS data. As a result, PMS closeout reports may include grants that have received an extension and are therefore not eligible for closeout. No obvious errors in completeness and accuracy were identified during electronic testing. After conducting these assessment step"
4243,"s, we found that the PMS closeout data were sufficiently reliable for the purposes of this report. ASAP is an electronic payment system implemented jointly by the Department of the Treasury’s (Treasury) Financial Management Service (FMS) and the Federal Reserve Bank of Richmond. ASAP allows grantee organizations receiving federal funds to draw from accounts preauthorized by federal agencies. In addition to grants, ASAP is also used to make payments to financial agents that are performing financial services "
4244,"for FMS and other federal agencies. For example, ASAP can be used for reimbursing financial institutions for payments made by federal agencies through debit cards. Agencies establish and maintain accounts in ASAP to facilitate the flow of funds to organizations. Unlike PMS grant accounts, which represent an individual grant agreement between a federal agency and grantee, accounts in ASAP can represent multiple grant agreements between an awarding agency and a grantee. Individual grant agreements within thes"
4245,"e accounts may have reached their grant end date, while others may not have. Therefore, the ASAP system cannot be used to determine which individual grants are eligible for closeout. FMS officials began issuing “dormant account reports” to all ASAP users in 2009 as a response, Treasury officials told us, to the findings in our 2008 report that using federal payment systems to track undisbursed balances in grant accounts can help reduce unused funding. Dormant account reports provide information on all inact"
4246,"ive ASAP accounts, including accounts for nongrant programs. For the purposes of this report, our focus was on accounts for grant programs only. The first dormant account report focused only on undisbursed balances in accounts where the grantee had not drawn down funds for a prolonged period of time. However, the criteria used by FMS for generating dormant account reports have evolved over time to improve the usability of the reports. For the dormant account report provided to us for the end of fiscal year "
4247,"2011, accounts with undisbursed balances were included if: (1) the grantee had not drawn down funds for at least 2 years, and (2) the awarding agency had made no changes to the authorized amount of funding available for at least 2 years. For each grant account, the report includes information such as the identification number, the account balance, the cumulative amount of funding authorized to the grantee, and the date of the last payment request. The grant account end date is an optional field completed by"
4248," the awarding agency. FMS did not include accounts with no balance remaining on this report, but has encouraged agencies to close these accounts if they are no longer active. FMS does not charge users for these accounts or for other payment system services provided by the ASAP system and instead receives appropriations to cover the cost of its operations. According to FMS officials, dormant account reports are generally provided twice a year, allowing agencies to track progress on addressing inactive accoun"
4249,"ts. The first report lists all of the dormant accounts as of a specific date, and the second report shows agencies’ progress toward addressing dormant accounts included on the first report. For this report, we reviewed the most recently available dormant account report for the end of fiscal year 2011. This report listed all ASAP accounts that have not had any activity (i.e., no payment requests and no funding added or removed) since September 30, 2009. To test the reliability of ASAP dormant account report "
4250,"data, we: (1) reviewed existing documentation related to the ASAP system, (2) interviewed officials responsible for administration of the database on data entry and editing procedures and the production of dormant account reports, and (3) conducted electronic testing for obvious errors in completeness and accuracy. We discussed with FMS officials internal control testing and other quality review procedures for the ASAP system as well as dormant account reports. We also discussed missing data in certain fiel"
4251,"ds on the dormant account report identified during electronic testing to ensure that omissions did not indicate potential errors. After conducting these assessment steps, we found that the data from dormant account reports were sufficiently reliable for the purposes of this report. To address our second objective, we collected and reviewed audit reports issued by GAO from September 2007 to May 2011 and by the offices of inspectors general at the 24 Chief Financial Officers Act (CFO Act) agencies from Januar"
4252,"y 2008 to June 2011, which since the issuance of our 2008 report, had focused on undisbursed funds in expired accounts. We reviewed IG reports from the 24 CFO Act agencies in order to provide coverage of the major grant-making agencies and because this approach updated the review we performed as part of the work on our 2008 report, which included IG reports issued between 2000 and 2006. Based on our review for this report, we identified IG reports on HHS, Departments of Energy and Homeland Security, and the"
4253," Environmental Protection Agency with findings of weaknesses related to undisbursed grant balance, or grant closeout. We then interviewed IG officials at these four agencies to discuss their findings and any plans to conduct future audits on undisbursed grant funds. We also interviewed IG officials from four additional agencies—the Department of Commerce (DOC), Department of Justice (DOJ), National Aeronautics and Space Administration (NASA), and National Science Foundation (NSF)—where agency management had"
4254," reported on undisbursed balances in expired grant accounts in the agencies’ 2010 and 2011 annual performance reports, as described below. Finally, we followed up with each of the IG Offices at the remaining 16 CFO Act agencies via e-mail to ensure we had obtained any relevant reports and to determine if they had any plans to conduct future audits related to undisbursed grant funds, or grant closeouts. As a result of this follow up, we identified two additional IG reports related to timely grant closeout at"
4255," the Departments of Agriculture and Labor. To analyze actions agencies have taken to track undisbursed balances in expired accounts, we reviewed annual performance reports for all 24 agencies required to issue audited financial statements under the CFO Act from fiscal years 2009 to 2011. The 24 CFO Act agencies were responsible for the vast majority—more than the 95 percent—of grant programs identified in the CFDA database as of June 2, 2011. We performed a keyword search to determine if the agency, its off"
4256,"ice of inspector general, or the independent auditor had reported on undisbursed balances in expired grant accounts or the timely closeout of grant accounts. We also reviewed the Performance and Accountability (PAR) and Agency Financial Reports (AFR) of four entities receiving funds under the Commerce, Justice, Science, and Related Agencies Act provision of P.L.111-117 for compliance with relevant reporting requirements in Section 537. To address our third objective, we reviewed relevant OMB guidance and re"
4257,"gulations from federal grant-making agencies. Specifically, we reviewed the OMB Circulars No. A-102, Grants and Cooperative Agreements with State and Local Governments, and No. A-110, Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations. Each federal agency that awards and administers grants and cooperative agreements that are subject to the guidance in Circulars A-102 and A-110 is responsible for issuing reg"
4258,"ulations that are consistent with the circulars, unless different provisions are required by federal statute or are approved by OMB. We reviewed regulations from federal grant-making agencies that have codified governmentwide grants requirements, as identified on OMB’s website, to determine (1) the length of time prescribed for closing out federal grants and (2) the length of time federal grantees are required to retain records related to grant awards. To identify federal governmentwide guidance related to "
4259,"federal agency performance reporting, we reviewed OMB Circular No. A-11, Preparation, Submission and Execution of the Budget and Circular No. A-136, Financial Reporting Requirements. We also reviewed two memoranda related to tracking undisbursed balances in expired grant accounts issued by OMB in October 2010 and August 2011 to select agencies receiving funding under the Commerce, Justice, Science, and Related Agencies appropriations act, as required by law. OMB to discuss the purpose and scope of their gui"
4260,"dance and officials at the four agencies that reported undisbursed balances in expired grant accounts in 2010 and 2011 annual performance reports—DOC, DOJ, NASA, and NSF—to discuss their implementation of OMB’s instructions. Pub. L. No. 111-117 and Pub. L. No. 112-10. Appendix II: Federal Agencies Using the Payment Management System (PMS) for Grant Payments (as of June 2011) Appendix III: Federal Agencies Using the Automated Standard Application for Payments (ASAP) System for Grant Payments (as of June 2011"
4261,") In addition to the individuals named above, Phyllis L. Anderson, Assistant Director, Thomas M. James, Assistant Director, Thomas J. McCabe, Analyst-in-Charge, and Andrew Y. Ching, Travis P. Hill, Jennifer Leone, Omari A. Norman, Susan Ragland, Cynthia M. Saunders, and Michael Springer made major contributions to this report."
4262,"Farming is an inherently risky enterprise. In conducting their operations, farmers are exposed to both production and price risks. Crop insurance is one method farmers have of protecting themselves against these risks. Over the years, the federal government has played an active role in helping to mitigate the effects of these risks on farm income by promoting the use of crop insurance. Federal crop insurance began on an experimental basis in 1938, after private insurance companies were unable to establish a"
4263," financially viable crop insurance business. The federal crop insurance program is designed to protect farmers from financial losses caused by events such as droughts, floods, hurricanes, and other natural disasters as well as losses resulting from a drop in crop prices. The Federal Crop Insurance Corporation (FCIC), an agency within USDA, was created to administer the federal crop insurance program. Originally, crop insurance was offered to farmers directly through FCIC. However, in 1980, Congress enacted "
4264,"legislation that expanded the program and, for the first time, directed that crop insurance—to the maximum extent possible—be offered through private insurance companies, which would sell, service, and share in the risk of federal crop insurance policies. In 1996, Congress created an independent office called RMA to supervise FCIC operations and to administer and oversee the federal crop insurance program. Federal crop insurance offers farmers various types of insurance coverage to protect against crop loss"
4265," and revenue loss. Multiperil crop insurance is designed to minimize risk against crop losses due to nature—such as hail, drought, and insects—and to help protect farmers against loss of production below a predetermined yield, which is calculated using the farmer’s actual production history. Buy-up insurance, the predominant form of coverage, provides protection at different levels, ranging from 50 to 85 percent of production. Catastrophic insurance provides farmers with protection against extreme crop loss"
4266,"es. Revenue insurance, a newer crop insurance product, provides protection against losses in revenue associated with low crop market prices in addition to protecting against crop loss. RMA, through FCIC, pays a portion of farmers’ premiums for multiperil and revenue insurance, and it pays the total premium for catastrophic insurance. However, farmers still must pay an administrative fee for catastrophic insurance. RMA determines the amount of premium for each type of insurance policy by crop. RMA, through F"
4267,"CIC, contracts with private insurance companies who then sell these policies to farmers. Companies sell crop insurance to farmers through agents. An agent, a person licensed by the state in which the agent does business to sell crop insurance, is employed by or contracts with a company to sell and service eligible crop insurance policies. While most companies pay their agents a commission to sell and service crop insurance policies, some companies pay agents a salary. American Growers paid its agents a comm"
4268,"ission. RMA establishes the terms and conditions to be used by private insurance companies selling and servicing crop insurance policies to farmers through a contract made with the companies called the SRA. The SRA is a cooperative financial assistance agreement between RMA, through FCIC, and the private crop insurance companies to deliver federal crop insurance under the authority of the Federal Crop Insurance Act. Under the SRA, FCIC reinsures or subsidizes a portion of the losses and pays the insurance c"
4269,"ompanies an administrative fee or expense reimbursement—a preestablished percentage of premiums—to reimburse the companies for the administrative and operating expenses of selling and servicing crop insurance policies, including the expenses associated with adjusting claims. While the reimbursement rate is set at a level to cover the companies’ costs of selling and servicing crop insurance policies, the companies have no obligation to spend their payment on expenses related to crop insurance, and they may s"
4270,"pend more than they receive from FCIC. The current reimbursement rates, set by statute, are based on recommendations in our 1997 report of the costs associated with selling and servicing crop insurance policies. However, RMA does not have a process for regularly reviewing and updating these rates. RMA is currently conducting a limited review of companies’ expenses to validate the costs of selling and servicing federally reinsured crop insurance policies. RMA, through FCIC, is the reinsurer for a portion of "
4271,"all policies covered by the federal crop insurance program. Reinsurance is sometimes referred to as insurance for insurance companies. It is a method of dividing the risk among several insurance companies through cooperative arrangements that specify ways in which the companies will share risks. Reinsurance serves to limit liability on specific risks, increase the volume of insurance policies that may be written, and help companies stabilize their business in the face of wide market swings in the insurance "
4272,"industry. As the reinsurer, RMA shares the risks associated with crop insurance policies with companies that sell federal crop insurance. However, if a crop insurance company is unable to fulfill its obligations to any federal crop insurance policyholder, RMA, as the ultimate guarantor for losses, assumes all obligations for unpaid losses on these policies. Reinsurance is also available through private reinsurance companies. Crop insurance companies must maintain certain surplus levels to issue crop insuran"
4273,"ce policies. However, they may increase their capacity to write policies and may further reduce their risk of losses by purchasing reinsurance from private reinsurance companies on the risk not already covered by FCIC. American Growers was originally established in 1946 as Old Homestead Hail Insurance Company. The company went through several reorganizations and name changes between 1946 and 1989. In 1989, the company became American Growers Insurance Company, operating as a subsidiary of the Redland Group,"
4274," an Iowa-based insurance holding company. Acceptance Insurance Companies Inc., (Acceptance)—a publicly owned holding company that sold specialty property and casualty insurance—acquired American Growers in 1993. As a wholly owned subsidiary of Acceptance, American Growers was primarily responsible for selling and servicing federal crop insurance policies and shared the same general management as the parent organization. Another wholly owned subsidiary of Acceptance, American Agrisurance Inc., served as the "
4275,"marketing arm for American Growers. American Growers’ failure was the result of a series of company decisions that reduced the company’s surplus, making it vulnerable to collapse when widespread drought erased anticipated profits in 2002. The company’s decisions were part of an overall management strategy to increase the scope and size of American Growers’ crop insurance business. The company’s surplus declined due to losses and other costs from mistakes made when introducing a new crop insurance product, d"
4276,"ecisions to pay higher than average agent commissions, and the purchase of a competitor’s business. Additionally, the company’s operating expenses were about 1 1/3 times its reimbursement from RMA. In other words, American Growers was spending $130 for every $100 it was receiving from RMA to pay for selling and servicing crop insurance. American Growers planned to use profits from policy premiums to pay for the expenses not covered by RMA’s reimbursement. When these gains did not materialize due to widespre"
4277,"ad drought, the company’s surplus dropped below statutory minimums, prompting NDOI to take control of the company. First, the company introduced a new crop insurance product, but mistakes associated with the sale of this product resulted in significant losses in the company’s surplus. In 1997, the company chose to market a new crop insurance product, Crop Revenue Coverage Plus (CRC Plus), which was a supplement to federal crop insurance, but which was not reinsured by RMA. In 1999, American Growers expanded"
4278," the sale of this product into rice, a crop with which it had little experience. When the company realized it had mis-priced the product for rice and withdrew the product, farmers who had planned on using CRC Plus sued the company. Financial losses, legal settlements, and other costs related to CRC Plus caused significant losses in the company’s financial surplus. Appendix II provides further details on the losses associated with CRC Plus. Second, American Growers chose to spend more than RMA reimbursed it "
4279,"for selling and servicing crop insurance, in part, because the company chose to pay above-average agent commissions in order to attract more agents to sell for the company. As part of its effort to expand operations, the company in 2000 to 2002, paid agent commissions about 12 percent higher, on average, than those offered by other crop insurance companies. In addition to paying agent commission rates above the average of other companies in the industry, American Growers offered agent sales incentives, such"
4280," as trips to resort locations, and funded other expenses not required to sell and service federal crop insurance. These expenses, among others, created operating costs that were 11 percent greater than the average operating costs of other companies selling crop insurance, and these expenses exceeded the reimbursement RMA provided companies. Appendix III provides additional details of the high operating costs associated with agent commissions and other expenses. Third, the company purchased the crop business"
4281," of a competitor, which increased its expenses. In 2001, American Growers attempted to expand its share of the crop insurance market by purchasing assets from another company, including that company’s book of crop insurance business. Because American Growers was unable to achieve the operational efficiencies it had anticipated, this acquisition resulted in additional operating costs and expenses that were higher than the reimbursement that RMA provided companies to cover the sale and service of crop insuran"
4282,"ce. Appendix IV provides additional details on the operating expenses incurred from the purchase of a competitor’s crop insurance business. Finally, the company relied on large underwriting gains to pay for its expenses, rather than RMA’s reimbursement. When these gains did not materialize due to widespread drought in 2002, the company’s surplus dropped to a level that prompted NDOI to take control of the company. In its 2002 operating budget, American Growers projected profits in excess of its 10-year aver"
4283,"age and relied on these anticipated profits to cover the company’s operating expenses and to further its growth. The company’s profit projections were based, in part, on retaining a higher percentage of the risk for the policies it sold than in past years. By retaining a higher percentage of the risk on the policies, American Growers could increase its profits if claims were low. Conversely, the company increased its exposure to loss if claims were high. However, profits did not materialize as the result of"
4284," widespread drought, which caused overall federal crop insurance program losses to increase from $3 billion in 2001 to $4 billion in 2002. When American Growers’ expenses and losses dropped the company’s surplus below statutory minimums, NDOI declared the company to be in a hazardous financial condition and took control of the company—first placing the company under supervision in November 2002 and then in rehabilitation in December 2002. Appendix V provides additional details on the decline in American Gro"
4285,"wers’ surplus. At the time of American Growers’ failure, RMA’s financial oversight processes were inadequate to identify the full extent of financial weaknesses of insurance companies participating in the federal crop insurance program. RMA’s actual oversight procedures focused primarily on whether a company had sufficient surplus to pay claims based on its past performance, rather than the overall financial health and outlook of the company. In addition, RMA did not generally share information or coordinat"
4286,"e with state regulators on the financial condition of companies participating in the federal crop insurance program. Although RMA reviewed companies’ operational plans and selected financial data, such as annual financial statements, in the case of American Growers, RMA was unaware that the company was projecting underwriting gains in excess of historic averages to pay for its operating expenses. The company’s failure to achieve these gains resulted in a substantial reduction in its surplus and its subseque"
4287,"nt financial failure. In the case of American Growers, RMA and NDOI did not begin cooperating on overseeing the company until it had been placed into supervision in November 2002. In 2002, when American Growers failed, data provided to RMA by the companies participating in the federal crop insurance program provided an overall picture of company operations and complied with RMA’s regulations. However, the information provided was typically 6 to 18 months old; and, according to an RMA official, the agency’s "
4288,"oversight focused primarily on whether a company had financial resources to pay claims on crop insurance policies and not on the overall financial health of the company. RMA’s approach to financial oversight stemmed, in part, from the fact that the companies participating in the program are private and are licensed and regulated by state insurance departments. State insurance departments are responsible for monitoring the overall financial condition of companies chartered and licensed to operate in their st"
4289,"ate. In addition, some of the companies selling crop insurance are affiliated with holding companies or other related companies, which RMA does not review for financial soundness. Since American Growers’ failure, RMA has begun requiring federal crop insurance companies to provide additional financial data to help the agency determine if companies are adequately financed to perform their obligations under their SRAs. One of RMA’s primary responsibilities is to ensure the integrity and stability of the crop i"
4290,"nsurance program, in part, by monitoring insurance companies’ compliance with program criteria such as submitting statutory statements required by state regulators and meeting certain financial ratios, as defined in federal regulations. To ensure that the companies participating in the federal crop insurance program sell and service insurance policies in a sound and prudent manner, the Federal Crop Insurance Act requires crop insurance companies to bear a sufficient share of any potential policy loss. Title"
4291," 7, Code of Federal Regulations, chapter IV, contains the general regulations applicable to administering the federal crop insurance program. The SRA between RMA and participating crop insurance companies establishes the terms and conditions under which RMA will provide subsidy and reinsurance on crop insurance policies sold or reinsured by insurance companies. These terms and conditions state, in part, that companies must provide RMA with accurate and detailed data, including their (1) annual plan of opera"
4292,"tion, (2) financial statements filed with the applicable state insurance regulator, and (3) any other information determined necessary for RMA to evaluate the financial condition of the company. When approving a company to participate in the crop insurance program, RMA analyzes it according to 16 financial ratios set forth in RMA regulations. Combined, these 16 ratios are intended to provide RMA a reasonable set of parameters for measuring insurance companies’ financial health, albeit generally from a histo"
4293,"rical perspective. The 16 financial ratios include such things as (1) change in net writings, (2) 2-year overall operating ratio, (3) change in surplus, and (4) liabilities to liquid assets. Ten of the 16 ratios specifically refer to changes related to companies’ surplus—the uncommitted funds used to cover policy claims. When a company fails more than 4 of the 16 financial ratios, RMA requires the company to submit an explanation for the deviation and its plans to correct the situation. If the explanation a"
4294,"ppears reasonable, RMA approves the company to sell and service crop insurance for the next crop year. In August 2001, RMA notified American Growers that the company had 6 ratios, based on its December 2000 financial statement, that fell outside acceptable ranges, including its 2-year overall operating ratio, change in surplus, and 2-year change in surplus. Table 1 shows the 6 ratio requirements and American Growers’ ratio for each of the 6 ratios it failed. According to an RMA memorandum dated October 2001"
4295,", American Growers reported that most of its unacceptable ratios were due primarily to underwriting losses related to its multiperil crop insurance that produced unfavorable results due to drought conditions in 2000, particularly in Nebraska and Iowa, and the impact of the federally subsidized reimbursement not covering the company’s expenses. Additionally, American Growers cited the cost of the class-action lawsuit relating to its CRC Plus product as a contributing factor. Finally, American Growers explain"
4296,"ed that the expansion of its crop operations through the purchase of a competitor’s crop insurance business was expected to provide efficiencies that would reduce expenses and help improve the company’s profitability in the future. Based on American Growers’ explanations, RMA determined that the company’s 2002 SRA should be approved. RMA did not believe that the adverse developments that American Growers had experienced were significant enough to move the company close to insolvency. RMA’s decision was part"
4297,"ially based on anticipated improvements in overall performance resulting from American Growers’ acquisition of another company’s assets and the potential for achieving greater economies of scale. Furthermore, while American Growers failed more than 4 of the 16 financial ratios, it was not the only company with such results. Of the 18 companies participating in the federal crop insurance program in 2002, other companies had a higher number of failed ratios than American Growers, though most had fewer. Specif"
4298,"ically, of the other 17 companies, 3 companies had 7 or more failed ratios, 1 had 6—the same number as American Growers, and 13 companies had 4 or fewer failed ratios. In March 2002, American Growers had 5 ratios, based on its December 2001 financial statement, that fell outside acceptable ranges, including change in net writings, 2-year overall operating ratio, and liabilities to liquid assets. Table 2 shows the 5 ratio requirements and American Growers’ ratio for each of the 5 ratios it failed. American G"
4299,"rowers cited its acquisition of its competitor’s crop insurance business, the adverse development of its CRC Plus settlement, and the delay in its reinsurance payments due from RMA as the primary reasons for failing these ratios. Based on the company’s explanation of why it had failed the 5 ratios, in June 2002—5 months before American Growers’ financial failure—RMA determined that American Growers met the standards for approval to sell and service crop insurance policies for 2003. In 2002, as in 2001, alth"
4300,"ough American Growers failed to meet more than 4 ratios, as required by the SRA, its performance was not unlike some other companies. Of the 19 companies participating in the crop insurance program in 2003, 2 companies had 8 or more failed ratios, 2 had 5—the same number as American Growers, and 14 companies had 4 or fewer failed ratios. Although RMA routinely reviewed the financial documents required under the SRA, we found the agency’s financial oversight procedures inadequate to fully assess American Gro"
4301,"wers’ financial condition. RMA reviewed the company’s surplus and reinsurance arrangements and approved the company to write policies for the 2003 crop year, based on this analysis. However, RMA was unaware that American Growers was projecting profits in excess of historic averages to pay for its operating expenses and that its failure to achieve these profits would mean that the company’s surplus would be inadequate to absorb resulting operating losses and could result in the financial failure of the compa"
4302,"ny. One reason RMA was unable to identify deficiencies in American Growers’ finances was because, following the agency’s emphasis on companies’ compliance with program criteria, RMA only reviewed a company’s historical financial information and its ability to pay claims on the basis of the company’s past surplus and its private reinsurance agreements. For example, RMA’s decision to approve companies to participate in the federal crop insurance program for 2002 (July 2001 – June 2002) was based on the compan"
4303,"y’s financial information as of December 31, 2000. Further, while RMA required companies to submit an operation plan showing projected policy sales, RMA did not require a company to provide operating budget projections for the upcoming year. As a result, RMA’s approval decisions were generally based on a company’s past financial performance rather than a forward-looking perspective of a company’s financial health. Without knowing the details of a company’s projected operating budget including its acquisitio"
4304,"n plans and the financial conditions of affiliated, parent, or subsidiary companies, RMA did not have a complete picture of the company’s financial condition. Thus, RMA was unable to adequately identify or take action to lessen any risks that may have been developing in companies with deteriorating profits, as was the case in American Growers. We believe that this lack of information impaired RMA’s decision-making process; therefore, the agency was forced to make decisions based on incomplete, narrowly focu"
4305,"sed, and dated information. Subsequent to the financial failure of American Growers, RMA took several steps to improve its oversight and analysis of the financial condition of companies currently participating in the federal crop insurance program. For example, in 2003, RMA started requesting more comprehensive budget and cash flow information from participating companies, which provides the agency a more forward-looking perspective of the companies’ financial health. Specifically, RMA will require insuranc"
4306,"e companies to provide their estimated underwriting gains or losses for the coming year; copies of all risk-based capital reports; and a signed statement identifying any potential threats to the company’s ability to meet its obligations for current and future reinsurance years, along with the possible financial ramification of such obligations. In addition, RMA is revising the SRA in its efforts to address some of the shortcomings of the current SRA. Although RMA officials said the agency plans to continue "
4307,"requesting more comprehensive information from crop insurance companies and had developed a financial analysis plan, as we concluded our review, the agency did not have formal written policies and procedures in place incorporating these changes. In a November 2003 memorandum to RMA’s administrator, USDA’s Office of Inspector General provided general comments and suggestions for RMA’s consideration in its renegotiation of the current SRA. Some of the suggestions to improve the SRA included requiring companie"
4308,"s to provide (1) “revenue and expense forecast budget data for the forthcoming year as a part of the plan of operations approval process, including agents’ commission rates and salary and other compensation for top company officials,” (2) “information relating to any planned acquisition of other crop insurance companies,” and (3) “the financial roles that will be played by parent/subsidiary companies in the crop insurance operations.” RMA did not routinely coordinate with state regulators regarding the fina"
4309,"ncial condition of companies participating in the federal crop insurance program. RMA’s contact with state regulators was ad hoc and primarily limited to episodes during the introduction of new crop products or company acquisitions. RMA did not discuss the financial status of companies with regulators, but it would have been prevented from doing so because it lacked an agreement with state insurance regulators regarding the sharing of confidential financial and examination records. Companies selling and ser"
4310,"vicing crop insurance under the federal crop insurance program are subject to the regulations of the state where the company is chartered as well as federal regulations. According to NAIC, a state regulators’ primary responsibilities are to protect the public interest; promote competitive markets; facilitate the fair and equitable treatment of insurance consumers; promote the reliability, solvency, and financial solidity of insurance institutions; and enforce state regulation of insurance. State regulators,"
4311," among other things, require companies to file periodic information regarding their financial condition, including the adequacy of their surplus to cover claim losses, and the solvency of the company. Prior to the failure of American Growers, RMA did not routinely coordinate with state regulators regarding companies’ financial condition. Also, RMA did not have a written policy or information-sharing agreements that would allow state insurance regulators to share sensitive financial information about crop in"
4312,"surance companies with the agency. According to several state regulators, RMA did not routinely share information or otherwise coordinate with state regulators to determine the financial health of a company. According to another state regulator, RMA and the state have talked when a company was introducing a new crop insurance product; however, the regulator could not remember sharing information with RMA about the financial operations of companies participating in the federal crop insurance program. Further"
4313,"more, the state regulators with whom we spoke said that any policy promoting coordination would be of limited value unless the states and RMA established a written agreement allowing the state regulators to share confidential business information with RMA. RMA’s lack of an agreement for sharing information with NDOI prevented the state from disclosing sensitive business information on American Growers. NDOI officials identified financial and management weaknesses directly or indirectly affecting American Gr"
4314,"owers during its periodic reviews as early as 2000. Beginning in 2001, and continuing through August 2002, NDOI was internally discussing the possibility of conducting a targeted examination of Acceptance, including its subsidiary—American Growers. However, in September 2002, due to other priorities and resource constraints, NDOI decided to postpone an on-site examination of the company until 2003. RMA called the state insurance regulator in May 2002, and again in September 2002, asking whether there were a"
4315,"ny special inquiries or actions pending by the state regarding American Growers and whether American Growers was listed on the state’s list of companies at risk. NDOI acknowledged to RMA that it had asked American Growers to provide additional information regarding its first quarterly submission for 2002; however, NDOI explained that this was not unusual because a number of other companies also had outstanding inquiries. NDOI explained that most of its information is considered public and could be furnished"
4316," to RMA if requested. However, NDOI’s work products, including its list of companies most at risk, company examination reports, and associated work papers were considered confidential. As a result, NDOI required that a confidentiality agreement be signed before they could share the information. On September 20, 2002, NDOI began drafting a confidentiality agreement so it could share information about American Growers with RMA. However, this agreement was not completed before American Growers’ failure. Since "
4317,"the failure of American Growers, RMA has begun working with NAIC on draft language for confidentiality agreements that would allow state regulatory agencies to share confidential business information with RMA. However, at the conclusion of our review, no written confidentiality agreements had been formalized. RMA worked with NDOI to effectively manage the failure of American Growers by ensuring that policyholder claims were paid and crop insurance coverage was not disrupted. However, servicing the company’s"
4318," crop insurance policies cost RMA more than $40 million for such things as paying agent commissions and staff salaries. Further, RMA lacked a written policy that clearly defined its relationship to state actions in handling company insolvencies. While NDOI accommodated RMA’s interests by not immediately liquidating American Growers’ assets so that policyholders could be served, without a written agreement in place, other actions such as liquidation could have limited RMA’s flexibility to protect policyholde"
4319,"rs and maintain stability in the federal crop insurance program. RMA effectively protected American Growers’ policyholders after the company’s failure by ensuring that farmers’ claims were paid and that their crop insurance coverage was not disrupted. After NDOI obtained an order of supervision, NDOI and RMA signed a memorandum of understanding that specified that American Growers, under NDOI appointed management, would pay claims and service policies with American Growers’ funds. RMA signed an amendment to"
4320," American Growers’ 1998 SRA and agreed to reimburse the company for continued expenses associated with paying or servicing crop insurance claims when American Growers’ available cash accounts—about $35 million—dropped to $10 million or below. RMA began day-to-day oversight of American Growers in conjunction with NDOI at the company’s Council Bluffs, Iowa, offices on January 6, 2003. The purpose of the oversight was, among other things, to ensure the timely payment of claims, the timely collection of premium"
4321,"s, the efficient transfer of 2003 business to other insurance companies, and the review and approval of the company’s employee retention plan and payments to creditors. RMA worked with NDOI to keep American Growers in rehabilitation rather than liquidate the company because RMA was concerned that if NDOI chose to liquidate the company RMA may not have a mechanism to expeditiously pay claims and transfer American Growers’ policies to other insurance providers. Continuity of coverage is critical to policyhold"
4322,"ers because they must provide proof of insurance coverage in order to secure loans and obtain credit to plant the next year’s crops. Policyholders may become ineligible for crop insurance for 1 year if their coverage is terminated. RMA was concerned that if American Growers was liquidated, policyholders would not be paid for their losses and their coverage would lapse, making them ineligible for continued crop insurance coverage. While the SRA provides that RMA could take control of American Growers’ crop i"
4323,"nsurance policies, it did not have an effective way to service these policies. On December 18, 2002, RMA issued procedures for transferring existing policies written under American Growers to other insurance providers approved under the federal crop insurance program. Under these procedures, American Growers was to notify its agents that all of its policies must be placed with another insurance provider. The agents had the primary responsibility to transfer the policies. By April 2003, RMA transferred or as"
4324,"signed a total of 349,185 policies—all which were eligible—to other companies in the federal crop insurance program reflecting about $576.4 million in premiums. Any American Growers’ policy that was not transferred voluntarily to a new insurance provider was assigned by RMA on a random basis to a provider that was currently writing insurance in the applicable state. Less than 8 percent of the policies had to be assigned to other insurance providers because the policy or agent had not acted on them, or becau"
4325,"se paperwork errors interfered with their transfer. For the fall and spring crop seasons combined, agents or policyholders transferred about 323,000 policies, and RMA assigned about 26,500 policies. RMA worked in conjunction with NDOI and remaining American Growers’ staff to ensure that 52,681 claims totaling about $410 million were paid. About $400 million of these claims were paid by March 2003. The claims that were filed resulted from policyholder losses from the 1999 through 2003 crop seasons—primarily "
4326,"the 2002 crop season. A month-by-month presentation of this information is presented in appendix VI. The cost of servicing American Growers’ crop insurance policies, which included the administrative and operating costs of paying claims and transferring policies, totaled about $40.5 million as of March 2004 (see table 3). These costs included agent commissions, office space leases and rental equipment, payroll for remaining American Growers’ staff, severance pay, and other expenses. Six former American Grow"
4327,"ers’ employees remained on-site to respond to information requests associated with paid claims and transferred policies, to process remaining claims, and to produce end-of-year financial statements. RMA would like to recoup some of these costs by (1) obtaining revenues that could be derived from the liquidation of American Growers’ assets by NDOI, if that should occur, and (2) requesting that NDOI provide RMA with any portion of the company’s cash reserves—totaling about $7 million as of February 2004—that "
4328,"may remain before the company is liquidated. However, according to NDOI, RMA’s standing as a creditor in the case of liquidation is unclear, and RMA does not know to what extent, if any, it can recoup its costs from these financial sources. At the time of American Growers’ failure, RMA did not have a written policy defining its financial roles and responsibilities in relationship to state actions in the event of an insurance provider insolvency. While the SRA provides that RMA may take control of the polici"
4329,"es of an insolvent insurance company to maintain service to policyholders and ensure the integrity of the federal crop insurance program, state regulators’ decisions may constrain RMA’s ability to efficiently protect policyholders. In the case of American Growers, an RMA official reported that NDOI made it clear that it had no choice, given the weakened financial condition of the company, but to liquidate American Growers unless RMA funded the company until all the policies had been serviced. If the state h"
4330,"ad liquidated the company, it would have sold all the company’s property and assets, creditors may have initiated legal actions over the existing assets (including premiums owed by policyholders), and there was the possibility of a freeze on the payment of any claims. Furthermore, liquidation would have left RMA with a number of crop policies to service, with no way of servicing them. RMA decided that the best course of action was to reach an agreement with NDOI to stave off liquidation by reimbursing NDOI "
4331,"for all costs associated with the servicing of policies until all 2002 policies had been serviced and until all producers had found new insurance providers for the 2003 crop year. Fortunately, NDOI accommodated RMA’s interests by allowing RMA to fund the operation of the company long enough to pay farmers’ claims and transfer policies. However, other actions available to the state could have increased RMA’s costs or limited RMA’s flexibility in protecting policyholders. When an insurance provider becomes in"
4332,"solvent, the SRA provides that RMA will gain control of its federally funded crop insurance policies and any premiums associated with those policies. However, as the case of American Growers demonstrates, RMA is not prepared to assume such responsibility. RMA was concerned, among other things, that it lacked sufficient staff and other capabilities, such as data management systems, to effectively service policyholders. RMA could have employed a contractor to service policyholders, but doing so could have bee"
4333,"n costly and may not have resulted in the timely payment of claims. Furthermore, according to RMA, they were unable to identify a company to contract with to service the policies and related claims. Thus, according to RMA, while RMA has the authority in the event of insolvency to service policyholders by taking control of companies’ policies, it is unprepared to act on this authority. RMA is further dependent on state regulators to make decisions that will allow the agency to act in the most efficient manne"
4334,"r to protect policyholders and maintain stability in the federal crop insurance program. Prior to American Growers’ insolvency, RMA had not reached an agreement with NDOI that addressed RMA’s interests in the case of insolvency including the state’s financial responsibilities. RMA argues that while it does not have a written policy to address insolvencies, it does have flexibility to assess the situation when it occurs and use the most efficient way to ensure that policyholders do not face a service disrupt"
4335,"ion. While the lack of a written policy and agreements may allow greater flexibility, the absence of specific framework may also result in state regulator decisions detrimental to RMA and the federal crop insurance program. A policy describing state and RMA authorities and responsibilities when a state decides to act against an insolvent company would provide RMA some assurance that the federal government’s interests are protected. The failure of American Growers, at the time, the largest participant in the"
4336," federal crop insurance program was caused by the cumulative effect of company decisions over several years, and triggered by a drought that forced the company to severely deplete its surplus to cover operating expenses. Reviewing the causes underlying American Growers’ failure and RMA’s actions provides a valuable opportunity to identify shortcomings in the financial oversight of companies participating in the federal crop insurance program and reforms necessary to strengthen RMA’s oversight and RMA’s abil"
4337,"ity to respond to an insurance provider insolvency. The failure of American Growers demonstrates that companies relying on anticipated underwriting gains to cover operational expenses may face financial difficulties similar to American Growers. More specifically, it suggests that companies must find ways to achieve operating efficiencies so that their expenses do not exceed the administrative and operational expense reimbursement provided by RMA to cover expenses for the sale and service of federal crop ins"
4338,"urance policies. Further, the failure of American Growers highlights the need to improve RMA’s financial oversight of companies participating in the federal crop insurance program. Clearly, RMA’s oversight procedures at the time of the failure were inadequate to ensure that companies met applicable financial requirements for participation in the program. Specifically, the failure of American Growers highlights the need for improved financial and operational reviews, and improved coordination with state insu"
4339,"rance regulators. If adequate financial oversight procedures had been in place prior to the failure of American Growers, the company’s weakened financial condition may have been detected in time to allow for corrective actions and thereby reduced costs to taxpayers. While RMA has conducted additional oversight of companies and has initiated greater contact with state regulators after the failure of American Growers, RMA has not formalized these procedures. RMA responded to the failure of American Growers in"
4340," an effective manner that ensured continued coverage for farmers and stability in the crop insurance program. Further, RMA demonstrated that the federal crop insurance program functioned as intended by ensuring that policyholders were protected. However, the failure of American Growers highlights the need for RMA to consider developing written policies to ensure that it takes the most effective and efficient actions in the event of future insolvencies in the federal crop insurance program. As demonstrated b"
4341,"y the failure of American Growers, RMA is vulnerable to state insurance regulators’ actions when a company fails. State regulators are vested with the authority to determine what supervisory action to take in response to the financial failure of an insurance company. While NDOI accommodated RMA’s interests by allowing RMA to fund the operation of the company long enough to pay farmers’ claims, other actions available to the state, including liquidation, could have increased RMA’s costs or limited RMA’s flex"
4342,"ibility in protecting policyholders. Better coordination with state regulators, regarding respective authorities and responsibilities in the event of future insurance provider insolvencies, is necessary to ensure that RMA’s interests are protected. To improve RMA’s financial oversight of companies participating in the federal crop insurance program and its ability to effectively address future insolvencies, we recommend that the Secretary of Agriculture direct RMA to take the following three actions: (1) De"
4343,"velop written policies to improve financial and operational reviews used to monitor the financial condition of companies to include analyses of projected expenses, projected underwriting gains, relevant financial operations of holding companies, and financial data on planned acquisitions. (2) Develop written agreements with state insurance regulators to improve coordination and cooperation in overseeing the financial condition of companies selling crop insurance, including the sharing of examination results"
4344," and supporting work papers. (3) Develop a written policy clarifying RMA's authority as it relates to federal/state actions and responsibilities when a state regulator decides to place a company under supervision or rehabilitation, or to liquidate the company. We provided USDA with a draft of this report for its review and comment. We received written comments from the Administrator of USDA’s RMA. RMA agreed with our recommendations and stated that it is (1) formalizing the improvements in oversight that we"
4345," recommended in the new SRA, (2) developing written agreements with state insurance regulators and the National Association of Insurance Commissioners (NAIC) to improve data sharing and oversight, and (3) clarifying RMA’s authority as it relates to federal/state actions when a state takes action against a crop insurance company in its draft SRA and in discussions with state regulators and the NAIC. When completed, RMA’s initiatives to implement the recommendations in this report will improve its ability to "
4346,"evaluate companies overall financial health and to earlier detect weaknesses in companies’ financial condition. However, to the extent that RMA cannot obtain enhanced disclosure and accountability through proposed changes to the SRA, it should implement our recommendation by modifying its regulations or other written policies. Finally, RMA’s increased cooperation and coordination with state insurance regulators will likely strengthen oversight by both federal and state regulators and facilitate problem reso"
4347,"lution should a company fail in the future. RMA also provided technical corrections, which we have incorporated into the report as appropriate. RMA's written comments are presented in appendix IX. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of the report until 30 days from its issue date. At that time we will send copies of this report to appropriate congressional committees; the Secretary of Agriculture; the Director, Office of Management"
4348," and Budget; and other interested parties. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. At the request of the Chairman and Ranking Minority Member of the House Committee on Agriculture and the Chairman and Ranking Minority member of the House Subcommittee on General Farm Commodities and Risk Management, we reviewed USDA’s actions regarding American Growers Insurance Company (American Growers) and their impact on the federal crop insurance program. Specific"
4349,"ally, we agreed to determine (1) what key factors led to the failure of American Growers, (2) whether Risk Management Agency (RMA) procedures were adequate for monitoring crop insurance companies’ financial condition, and (3) how effectively and efficientlyRMA handled the dissolution of American Growers. In addition, we were asked to determine what factors led to RMA determinations affecting a proposed sale of American Growers’ assets to Rain and Hail LLC (Rain and Hail) and RMA’s decision to guarantee that"
4350," all American Growers’ agent commissions be paid. Information related to the Rain and Hail proposal is provided in appendix VII. Information on USDA’s decisions to guarantee agent commissions is provided in appendix VIII. To determine the key factors leading to the failure of American Growers, we analyzed company documents and financial statements, including annual and quarterly statements for 1999 through 2002. We compared American Growers’ expense data with expense data for other companies participating i"
4351,"n the program. For this analysis, we computed the average expense ratios of companies participating in the crop insurance program, excluding the expense data from American Growers. Due to the timing of American Growers’ failure, it did not submit an expense report to RMA for 2002. To capture the extent of the financial problems that American Growers experienced in 2002 in comparison with other companies, we worked closely with staff who remained at American Growers while it was in rehabilitation to create a"
4352,"n expense report for 2002. We also interviewed American Growers’ management; the Nebraska Department of Insurance (NDOI) appointed rehabilitator for American Growers and other key staff; industry groups, such as the National Association of Insurance Commissioners (NAIC); and representatives from other crop insurance companies, including key Rain and Hail personnel, to gain an industry perspective on the failure of American Growers’ and RMA’s actions. We also contacted the National Association of Crop Insura"
4353,"nce Agents; however, they did not grant our requests for an interview. To adjust for the general effects of inflation over time, we used the chain-weighted gross domestic product price index to express dollar amounts in inflation- adjusted 2003 dollars. To evaluate RMA’s oversight procedures we interviewed RMA staff in Washington, D.C. and Kansas City, Missouri, offices. We reviewed the guidance that RMA uses to monitor companies’ compliance with the federal crop insurance program, including relevant laws; "
4354,"the Code of Federal Regulations, title 7, part 400; and agency guidance, including RMA’s Crop Insurance Handbook for 2002 and the current Standard Reinsurance Agreement (SRA), to verify that monitoring procedures were met. We also reviewed RMA’s files relating to the oversight of American Growers and approval of its SRA. To determine the effectiveness of RMA’s dissolution of American Growers, we examined RMA’s decision-making process and the costs associated with running American Growers’ operations after i"
4355,"ts failure to ensure that federal crop insurance policies were serviced. We reviewed American Growers’ financial statements and other documents. We used semistructured interviews to obtain the views of the Nebraska state commissioner; American Growers’ management; representatives from other crop insurance companies, including key Rain and Hail personnel; RMA staff; NAIC officials; and, industry groups on the failure of American Growers and on issues related to RMA’s handling of the dissolution. Specifically"
4356,", we obtained our information from the officials by asking 10 structured questions in a uniform order within an interview that included additional unstructured, probing follow-up questions that were interjected at the discretion of the interviewer. We also used structured interviews to obtain the views of insurance commissioners on the failure of American Growers and on issues related to sharing confidential business information with RMA. In this case, we asked an additional three structured questions and f"
4357,"ollowed up with additional unstructured questions as needed. We selected insurance commissioners in 10 states where there was at least one 2004 SRA holder, according to RMA data. These states were Connecticut, Indiana, Illinois, Iowa, Kansas, Minnesota, New York, Ohio, Pennsylvania, and Texas. We met with RMA officials in February 2004 to discuss our findings and tentative recommendations. We conducted our review from July 2003 through May 2004 in accordance with generally accepted government auditing stand"
4358,"ards. As part of an overall strategy to increase the company’s market share of the crop insurance industry, in 1997, American Growers developed and marketed a crop insurance product—Crop Revenue Coverage Plus (CRC Plus)—that was a supplement to federally reinsured crop insurance, but it was not subsidized or reinsured by the federal government. The product was a supplement to Crop Revenue Coverage (CRC), an insurance product that protected farmers against crop loss and low crop prices in the event of a low "
4359,"price, a low yield, or any combination of the two. CRC Plus allowed farmers to obtain supplemental coverage for their crops, in essence providing a higher level of coverage in the event of losses. American Growers initially marketed CRC Plus in only two states and covered grain, corn, sorghum, and soybean crops. In 1999, when the company extended CRC Plus to rice, a crop with which American Growers had limited actuarial experience, the company mistakenly priced the product too low. It then promoted the prod"
4360,"uct heavily and did not adequately anticipate the demand for the product. When it priced CRC Plus for rice, American Growers made a mathematical error—caused by the misplacement of a decimal point—that resulted in the insurance being sold for a lower price than it should have been. The low price for the policy, coupled with uncertainty in the market price of rice that year, resulted in a greater demand for the product than the company had anticipated. When American Growers realized that the demand for the p"
4361,"roduct and associated losses would be greater than the company’s surplus could handle, especially considering its low price, American Growers announced it would no longer accept applications at the price originally listed, effectively withdrawing the product from the market. However, farmers had already made decisions about what crop insurance they would purchase, based upon their belief that they could obtain the new product offered by American Growers. The withdrawal of the product was untimely and made i"
4362,"t difficult for some farmers to find adequate insurance. As a result, Congress acted to extend the filing deadline for other types of federally reinsured crop insurance so that farmers adversely affected by American Growers’ actions could obtain adequate insurance for their crops. Finally, some farmers sued American Growers, while RMA and six states examined American Growers’ actions. The litigation by farmers and regulatory actions resulted in more than $13 million in fines and settlements levied against A"
4363,"merican Growers in addition to losses of $6 million. The fines, costs from litigation, and increased service costs resulting from the new insurance product reduced American Growers’ surplus. As a result, American Growers’ surplus dropped from $76 million in 1998, to $60 million in 2000, a 21 percent decline over 2 years. This decline in American Growers’ surplus occurred at the same time the company increased the amount of insurance premium it wrote, from $271 million in 1998 to $307 million in 2000, an inc"
4364,"rease of 13 percent. To lessen the impact of losses associated with the CRC Plus policies, American Growers accepted a $20 million loan in the form of a surplus note from an affiliate company to strengthen its surplus. American Growers also acquired commercial reinsurance coverage to pay for losses related to CRC Plus. This reinsurance coverage committed the company to future payments of more than $60 million through 2006. American Growers’ reported that operating expenses were higher than the average repor"
4365,"ted expenses of other companies participating in the federal crop insurance program, primarily due to American Growers’ efforts to attract agents by paying them higher than average commissions and other actions designed to expand its business. From 2000 to 2002, average commissions for American Growers’ agents were 12 percent higher than commissions for agents working for other companies. American Growers paid commissions that averaged about $17 for each $100 premium it sold while other companies’ agent com"
4366,missions averaged $15 for each $100 of premium. Agents are companies’ principal representatives to farmers. Farmers purchase crop insurance through agents who can write premium for any company selling crop insurance. Farmers generally develop relationships with specific agents and rely on agents for advice and service. Successful agents write more policies and may write policies with lower loss ratios. Agents typically receive as a commission a percentage of every dollar of premium in crop insurance sold to
4367," farmers. Some agents choose to write policies for certain companies based on commissions paid them by the company and on how well the company services the agents’ clients. Higher commission rates are not the only factor attracting an agent to a company, but rates do play an important role. In an effort to increase its market share by recruiting more agents to sell crop insurance, American Growers paid higher agent commissions than other companies participating in the program. American Growers also funded s"
4368,"ome expenses not directly related to the sale and service of federally funded crop insurance, such as trips to resort locations. These expenses, among others, created operating costs that were greater than the average operating expenses of other companies in the industry. Overall, American Growers’ expenses, as a percentage of premium sold, were about 11 percent higher than the average expenses of the other companies. In other words, American Growers had expenses of about $30 for every $100 of premium it so"
4369,"ld while other companies had expenses of about $27 for every $100 of premium sold. Salaries at American Growers averaged 15 percent higher than at other companies. In addition, American Growers spent twice the rate as other companies on advertising; and American Growers’ expenses for equipment, including computer equipment, was twice that of other companies. In addition to the fact that American Growers’ expenses, as a percent of premium sold, were higher than those of other companies, American Growers’ exp"
4370,"enses were also higher than the amount of RMA’s reimbursement to the company. RMA provides companies a reimbursement to cover their expenses related to the sale and service of crop insurance. This reimbursement is a preestablished percentage of premiums to reimburse companies for the expenses associated with selling and servicing federal crop insurance. The reimbursement rate is set at a level to cover the companies’ costs to sell and service crop insurance policies. These costs include agent commissions, s"
4371,"taff and office expenses required to process policies and claims, and loss adjusting expenses. In 1998, Congress reduced the amount of reimbursement from a cap of 27 cents per dollar of premium a company sells to 24.5 cents per dollar of premium. This reduction occurred after our 1997 report revealed that companies were basing their request for higher reimbursement rates on numerous expenses that were not directly related to the sale and service of crop insurance, such as trips to resorts, noncompete clause"
4372,"s associated with company mergers, and company profit-sharing arrangements. Under the current reimbursement arrangement, companies have no obligation to spend their payment on expenses related to crop insurance; they may spend the payment in any way they choose. We found that American Growers spent more than its reimbursement by paying above average-rates for agent commissions, marketing efforts, and other items not directly related to the sale and service of federal crop policies, such as tickets to sporti"
4373,"ng events and trips to resorts for agents. On June 6, 2001, Acceptance Insurance Companies Inc., (Acceptance) and its subsidiaries, including American Growers, acquired the crop insurance business of IGF Insurance Company (IGF) from Symons International Group, Inc. Acceptance and its subsidiaries raised funds for this purchase by selling most of its noncrop insurance subsidiaries between September 1999 and July 2001, as part of a larger business strategy to focus on and expand American Growers’ crop insuran"
4374,"ce business. American Growers, through its parent corporation Acceptance, acquired most of IGF’s book of crop insurance policies, in addition to obtaining leased office space, company cars, and related staff to service these policies. A senior manager at American Growers said that the company’s strategy was to achieve operational efficiencies by combining the operations of the two companies. However, he said that this goal was not achieved as quickly as the company had planned. For example, American Growers"
4375," had planned on combining the companies’ two computer systems; but it was unable to successfully do so, requiring it to keep two staffs of information technology specialists. After the acquisition, American Growers grew from the company with the third largest volume of premium sold to being the largest. However, this growth also came with higher costs. American Growers’ expenses increased 63 percent, from 2000 to 2001, the years before and after the purchase of IGF. In 2000, American Growers had about $117 "
4376,"million in expenses, but its expenses increased to $191 million in 2001. While the amount of premium American Growers wrote increased, from about $291 million in 2000 to $450 million in 2001, a 54 percent increase, the amount of surplus the company kept only increased from $57 million in 2000 to $75 million in 2001, a 31 percent increase. In 2002, American Growers wrote nearly $632 million in premiums, but without adding to the $75 million reserve. American Growers’ high expenses led them to spend more than"
4377," RMA was reimbursing it for the sale and service of crop insurance. In 2001, for every $100 RMA provided American Growers to sell and service crop insurance, the company was spending $130. To pay for its expenses in excess of RMA’s reimbursement, American Growers planned on making underwriting profits from the sale of crop insurance. When setting its budget for 2002, American Growers predicted it would receive an 18 percent underwriting gain from policies it serviced under the federally reinsured crop progr"
4378,"am. However, American Growers’ 10-year history of underwriting gains in the program was only 16 percent. American Growers based its 2002 budget on achieving over $86 million in underwriting gains that year. The company’s profit projections were based, in part, on retaining a higher percentage of the risk for the policies it sold than in past years. By retaining a higher percentage of the risk on policies, American Growers could increase its profits if claims were low. Conversely, the company increased its e"
4379,"xposure to loss if claims were high. However, widespread drought impacted the company’s ability to achieve these gains. In June 2002, more than one-third of the contiguous U.S. was in severe to extreme drought. Total losses for the crop insurance program increased 33 percent from 2001. In 2001, total losses to the program were over $3 billion. In 2002, total losses increased to over $4 billion. For the category of policies for which American Growers retained a higher level of risk, the loss ratio in 2002 wa"
4380,"s about 40 percent higher than in 2001, resulting in the payment of $114 in claims for every $100 it received in premiums for those policies. When the underwriting gains American Growers had predicted did not materialize, losses and expenses depleted the company’s surplus. As a result, NDOI, which regulates insurance companies domiciled in that state, declared that the company was operating in a hazardous financial condition and placed the company in supervision, and later rehabilitation. On November 22, 20"
4381,"02, NDOI took steps to protect American Growers’ policyholders by issuing a state order of supervision. NDOI ordered the supervision because the company’s surplus declined from about $75 million for the year ending December 31, 2001, to about $11 million as of September 2002. According to the order, the decline in American Growers’ surplus—in excess of 50 percent within a 9-month period—rendered the company financially hazardous to the public and its policyholders. Under the order of supervision, American G"
4382,"rowers could not sell any new insurance policies or conduct business beyond those that are routine in the day-to-day operations of its business, without the approval of the supervisor appointed by NDOI. On December 20, 2002, NDOI obtained a court order that placed American Growers into rehabilitation under the auspices of NDOI. Under rehabilitation, NDOI appointed a rehabilitator who took control of American Growers to oversee the orderly termination of the company’s business and to allow for an orderly tra"
4383,"nsfer of policies to other companies. The NDOI-appointed rehabilitator assumed the responsibilities of the board of directors and officers and took control of the day-to-day management of the company. RMA worked in conjunction with NDOI and remaining American Growers’ staff to ensure that claims were paid (see table 4). The claims that were filed resulted from policyholder losses from the 1999 through 2003 crop seasons—primarily the 2002 crop season. After NDOI took control of American Growers, the company "
4384,"had about $35 million in cash. These funds were used, in part, to pay American Growers’ staff and support staff operating under the auspices of NDOI to pay policyholder claims. When American Growers’ cash reserves were reduced to $10 million, RMA reimbursed NDOI for additional costs of $40.5 million to operate the company. When RMA began reimbursing NDOI in February 2003, the vast majority of policyholder claims had been paid (see Fig. 1). About $317 million, or 77 percent, of the approximately $410 million"
4385," in claims were paid by the end of January 2003. According to an RMA official, while the costs of reimbursing American Growers’ operations may appear excessive, relative to the amount of claims paid, the claims that had been paid before February 2003, were those that could be expeditiously handled. The claims that remained to be paid—beginning in February 2003—were those that required follow-up to determine the accuracy of reported information, were difficult to process due to missing information, or had ot"
4386,"her problems. Additionally, although claims had been paid and policies transferred, staff were still needed to process the transfer of policy-related paperwork to other companies and resolve lingering issues, such as claims with missing information. Prior to NDOI’s declaration of its hazardous financial condition, American Growers was working to strengthen its financial condition by selling its insurance business to another insurance provider. In September 2002, as losses associated with that year’s extensi"
4387,"ve drought began to materialize, American Growers realized that the company’s operating expenses and crop losses were outpacing its income and surplus and advised NDOI and RMA accordingly. To improve its financial condition, American Growers attempted to sell its crop insurance business to another insurance company. On November 18, 2002, American Growers’ parent company, Acceptance, signed a nonbinding letter of intent setting forth preliminary terms for the company to sell portions of its crop insurance bu"
4388,"siness to Rain and Hail LLC (Rain and Hail) for over $20 million pending regulatory approval. Rain and Hail asked RMA for authority to transfer American Growers’ policies without having to cancel each policy and rewrite them under its own name—a concession that would have facilitated the bulk transfer of the policies. In the past, RMA had allowed this type of transfer only if the acquiring company agreed to (1) accept all the policies previously underwritten by the company being purchased and (2) assume all"
4389," past liability for those policies. According to RMA, Rain and Hail did not want to assume any past liabilities for the policies and wanted to retain the right to select agents and policyholders with whom it wished to contract. According to RMA, Rain and Hail’s intention was to not accept past liabilities regarding disputed claims, compliance issues, litigation or regulatory issues associated with American Growers’ policies and ultimately to acquire only about one-third of American Growers’ business. In a l"
4390,"etter dated November 25, 2002, RMA rejected Rain and Hail’s request for exemptions from RMA rules regarding the bulk transfer of policies. The agency was concerned that waiving the existing rules regarding potential liabilities and future policy placement would not protect the interests of policyholders and taxpayers or the integrity of the federal crop insurance program. RMA was concerned that if it approved the sale of American Growers’ policies to Rain and Hail, it could have left a significant number of"
4391," policyholders without insurance. It also may have left a disproportionate number of poor performing policies for other insurance providers to assume. Since reinsured companies are required to accept all policyholders that apply for insurance regardless of their loss history, RMA was concerned that its decision would be unfair to other insurance providers and that any future denial of similar exemptions to other companies would be challenged as arbitrary and capricious. As a result, RMA informed Rain and Ha"
4392,"il that it could not grant the exemptions it requested. Accordingly, Rain and Hail announced that it was withdrawing its offer to purchase American Growers’ business. When we discussed this issue with Rain and Hail, it concurred that its company was unwilling to accept the past liabilities associated with American Growers’ policies, but denied it was not willing to accept all of American Growers’ policyholders. Senior managers at Rain and Hail said their company was unwilling to accept the past liabilities "
4393,"associated with American Growers’ policies because they did not have adequate time to assess the extent of any such liabilities and the financial implications for Rain and Hail. However, these managers said that Rain and Hail was willing to accept any farmer who wanted a policy from the company, but they stated that the company wanted to retain the right to select which agents it would use to sell and service crop insurance policies. Whether the sale of American Growers’ policies to Rain and Hail could have"
4394," saved taxpayers all or some of the costs of the dissolution if the proposed sale had been completed is unclear. A Rain and Hail representative stated that the sale would have provided a cash infusion that could have prevented the failure of American Growers. An Acceptance representative stated that the sale might have allowed American Growers to pay remaining claims without having to come under control of NDOI. However, depending on the details, even with the cash infusion from the sale of assets to Rain a"
4395,"nd Hail, the company may still have been found to be in a financially hazardous condition. After consultation with NDOI, RMA agreed to pay American Growers’ agent commissions in full, despite the fact that they were paid higher than industry averages. RMA believed several factors, any one of which could have resulted in the disruption of policyholders’ coverage, warranted paying agent commissions in full. First, RMA agreed to pay agent commissions in full, in part, because NDOI’s position was that as long a"
4396,"s American Growers was under the rehabilitation order instead of in liquidation, the company’s contracts were valid, enforceable legal obligations that had to be paid. Second, RMA was concerned that some agents may have refused to continue to service policyholders if they knew they would not get paid for their work, and RMA needed agents’ cooperation in ensuring the timely collection of premiums and transfer of policies to other crop insurance companies. Third, RMA was concerned that some agents, particular"
4397,"ly small agents, could go out of business if not paid their commissions and would therefore be unable to service claims or transfer policies. Finally, RMA was concerned that some agents may have deducted their commissions from policyholder premiums, which could have made it more difficult for RMA to determine which policyholders had paid the premiums on their policies. While RMA could have potentially achieved cost savings of about $800,000 by not paying some of American Growers’ agents’ commissions—the por"
4398,"tion of their $7.6 million in commissions that exceeded industry averages—agents’ response to such a decision could have also disrupted service to policyholders and caused RMA to incur additional costs. Industry opinion varied on whether RMA should have paid agent commissions in full. According to the former chief executive officer of American Growers, high commissions paid to agents contributed to American Growers’ and other companies’ financial troubles. One company executive expressed concerns that RMA’s"
4399," actions might make it more difficult for companies that are holding the line on agent commissions to continue to hold commissions at a reasonable level. Another representative was concerned that agents were going to work for the company that paid the highest commissions, regardless of the company’s financial health, because RMA had shown that agents would receive their commission regardless of the company’s status. However, one crop insurance company representative was concerned about the consequences of n"
4400,"ot paying agent commissions, particularly since the agents were not directly responsible for the company’s failure. Representatives also stated that RMA was correct in paying agent commissions to ensure agent cooperation, to not drive smaller agents into bankruptcy, and to maintain the integrity of the federal crop insurance program. Finally, RMA’s actions in paying full agent commissions could have implications for the future of the federal crop insurance program, but it is unclear how future company and a"
4401,"gent practices may be affected by RMA’s decisions. RMA’s actions could suggest that it might provide similar financial support in the event of future insolvencies, regardless of company and agent practices. For example, RMA’s actions could have set a precedent for high agent commissions, a key factor in the failure of American Growers, which could, in turn, be a factor in other insolvencies. However, RMA has stated that it plans to consider each new situation on a case-by- case basis and that agents and com"
4402,"panies should not expect the same treatment as in the case of American Growers. RMA said that a managing general agent had recently gone out of business and that RMA had not stepped in to provide relief to agents. The following are GAO’s comments on the Risk Management Agency’s letter dated April 28, 2004. 1. Per RMA’s suggestion, we have provided additional details in this report noting that NDOI placed American Growers under supervision on November 22, 2002, and later placed the company under rehabilitati"
4403,"on on December 20, 2002. RMA suggests that the state’s initial action impacted its flexibility in working with the state and the company. As we note in our conclusions, better coordination with state regulators regarding respective authorities and responsibilities in the event of future insurance provider insolvencies is necessary to ensure that RMA’s interests are protected. 2. We revised the report to note that some agents are paid a salary rather than receiving commissions on the premiums from policies s"
4404,"old. American Growers’ agents received commissions, as do most agents who sell and service crop insurance. 3. At the time of our review, we noted written procedures based on regulations for the yearly review and approval of SRA holders and applicants. However, as noted in this report, these procedures were insufficient to assess the overall financial health of a company. To the extent that the final SRA does not fully address oversight weaknesses identified in our report, RMA should take action to modify it"
4405,"s regulations or other written policies. 4. RMA on-site financial and operational reviews do not appear to focus on the overall financial health of a company, but rather on internal controls. However, as a minimum, RMA should coordinate these reviews with state regulators who periodically review company operations. In addition to the individuals named above, David W. Bennett, John W. Delicath, Tyra DiPalma-Vigil, Jean McSween, and Bruce Skud made key contributions to this report. The General Accounting Offi"
4406,"ce, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its co"
4407,"re values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list o"
4408,"f newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading."
4409,"Three agencies share responsibility for enforcing ERISA: the Department of Labor (EBSA), the Department of the Treasury’s Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC). EBSA enforces fiduciary standards for plan fiduciaries of privately sponsored employee benefit plans to ensure that plans are operated in the best interests of plan participants. EBSA also enforces reporting and disclosure requirements covering the type and extent of information provided to the federal g"
4410,"overnment and plan participants, and seeks to ensure that specific transactions prohibited by ERISA are not conducted by plans. Under Title I of ERISA, EBSA conducts investigations of plans and seeks appropriate remedies to correct violations of the law, including litigation when necessary. IRS enforces the Internal Revenue Code (IRC) and provisions that must be met which give pension plans tax-qualified status, including participation, vesting, and funding requirements. The IRS also audits plans to ensure "
4411,"compliance and can levy tax penalties or revoke the tax-qualified status of a plan as appropriate. PBGC, under Title IV of ERISA, provides insurance for participants and beneficiaries of certain types of tax-qualified pension plans, called defined benefit plans, that terminate with insufficient assets to pay promised benefits. Recent terminations of large, underfunded plans have threatened the long-term solvency of PBGC. As a result, we placed PBGC’s single-employer insurance program on our high-risk list o"
4412,"f programs needing further attention and congressional action. ERISA and the IRC require plan administrators to file annual reports concerning, among other things, the financial condition and operation of plans. EBSA, IRS, and PBGC jointly developed the Form 5500 so that plan administrators can satisfy this annual reporting requirement. Additionally, ERISA and the IRC provide for the assessment or imposition of penalties for plan sponsors not submitting the required information when due. About one-fifth of "
4413,"Americans’ retirement wealth is invested in mutual funds, which are regulated by the Securities and Exchange Commission (SEC), primarily under the Investment Company Act of 1940. The primary mission of the SEC is to protect investors, including pension plan participants investing in securities markets, and maintain the integrity of the securities markets through extensive disclosure, enforcement, and education. In addition, some pension plans use investment managers to oversee plan assets, and these manager"
4414,"s may be subject to other securities laws. EBSA’s enforcement strategy is a multifaceted approach of targeted plan investigations supplemented by providing education to plan participants and plan sponsors. EBSA allows its regions the flexibility to tailor their investigations to address the unique issues in their regions, within a framework established by EBSA’s Office of Enforcement. The regional offices then have a significant degree of autonomy in developing and carrying out investigations using a mixtur"
4415,"e of approaches and techniques they deem most appropriate. Participant leads are still the major source of investigations. To supplement their investigations, the regions conduct outreach activities to educate both plan participants and sponsors. The purpose of these efforts is to gain participants’ help in identifying potential violations and to educate sponsors in properly managing their plans and avoiding violations. The regions also process applications for the Voluntary Fiduciary Correction Program (VF"
4416,"CP) through which plan officials can voluntarily report and correct some violations without penalty. EBSA attempts to maximize the effectiveness of its enforcement efforts to detect and correct ERISA violations by targeting specific cases for review. In doing so, the Office of Enforcement provides assistance to the regional offices in the form of broad program policy guidance, program oversight, and technical support. The regional offices then focus their investigative workloads to address the needs specifi"
4417,"c to their region. Investigative staff also have some responsibility for selecting cases. The Office of Enforcement identifies national priorities—areas critical to the well-being of employee benefit plan participants and beneficiaries nationwide—in which all regions must target a portion of their investigative efforts. Currently, EBSA’s national priorities involve, among other things, investigating defined contribution pension plan and health plan fraud. Officials in the Office of Enforcement said that nat"
4418,"ional priorities are periodically re-evaluated and are changed to reflect trends in the area of pensions and other benefits. On the basis of its national investigative priorities, the Office of Enforcement has established a number of national projects. Currently, there are five national projects pertaining to a variety of issues including employee contributions to defined contribution plans, employee stock ownership plans (ESOP), and health plan fraud. EBSA’s increasing emphasis on defined contribution pens"
4419,"ion plans reflects the rapid growth of this segment of the pension plan universe. In fiscal year 2004, EBSA had monetary results of over $31 million and obtained 10 criminal indictments under its employee contributions project. EBSA’s most recent national enforcement project involves investigating violations pertaining to ESOPs, such as the incorrect valuation of employer securities and the failure to provide participants with the specific benefits required or allowed under ESOPs, such as voting rights, the"
4420," ability to diversify their account balances at certain times, and the right to sell their shares of stock. Likewise, more attention is being given to health plan fraud, such as fraudulent multiple employer welfare arrangements (MEWAs). In this instance, EBSA’s emphasis is on abusive and fraudulent MEWAs created by promoters that attempt to evade state insurance regulations and sell the promise of inexpensive health benefit insurance but typically default on their benefit obligations. EBSA regional offices "
4421,"determine the focus of their investigative workloads based on their evaluation of the employee benefit plans in their jurisdiction and guidance from the Office of Enforcement. For example, each region is expected to conduct investigations that cover their entire geographic jurisdiction and attain a balance among the different types and sizes of plans investigated. In addition, each regional office is expected to dedicate some percentage of its staff resources to national and to regional projects—those devel"
4422,"oped within their own region that focus on local concerns. In developing regional projects, each regional office uses its knowledge of the unique activities and types of plans in its jurisdiction. For example, a region that has a heavy banking industry concentration may develop a project aimed at a particular type of transaction commonly performed by banks. We previously reported that the regional offices spend an average of about 40 percent of their investigative time conducting investigations in support o"
4423,f national projects and almost 25 percentage of their investigative time on regional projects. EBSA officials said that their most effective source of leads on violations of ERISA is from complaints from plan participants. Case openings also originate from news articles or other publications on a particular industry or company as well as tips from colleagues in other enforcement agencies. Computer searches and targeting of Form 5500 information on specific types of plans account for only 25 percent of case 
4424,"openings. In 1994, we reported that EBSA had done little to test the effectiveness of the computerized targeting runs it was using to select cases. Since then, EBSA has scaled down both the number of computerized runs available to staff and its reliance on these runs as a means of selecting cases. Investigative staff are also responsible for identifying a portion of their cases on their own to complete their workloads and address other potentially vulnerable areas. As shown in figure 1, EBSA’s investigative"
4425," process generally follows a pattern of selecting, developing, resolving, and reviewing cases. EBSA officials told us that they open about 4,000 investigations into actual and potential violations of ERISA annually. According to EBSA, its primary goal in resolving a case is to ensure that a plan’s assets, and therefore its participants and beneficiaries, are protected. EBSA’s decision to litigate a case is made jointly with the Department of Labor’s Regional Solicitors’ Offices. Although EBSA settles most c"
4426,"ases without going to court, both the agency and the Solicitor’s Office recognize the need to litigate some cases for their deterrent effect on other providers. As part of its enforcement program, EBSA also detects and investigates criminal violations of ERISA. From fiscal years 2000 through 2004, criminal investigations resulted in an average of 54 cases closed with convictions or guilty pleas annually. Part of EBSA’s enforcement strategy includes routinely publicizing the results of its litigation efforts"
4427," in both the civil and criminal areas as a deterrent factor. To further leverage its enforcement resources, EBSA provides education to plan participants, sponsors, and service providers and allows the voluntary self-correction of certain transactions without penalty. EBSA’s education program for plan participants aims to increase their knowledge of their rights and benefits under ERISA. For example, EBSA anticipates that educating participants will establish an environment in which individuals can help prot"
4428,"ect their own benefits by recognizing potential problems and notifying EBSA when issues arise. The agency also conducts outreach to plan sponsors and service providers about their ongoing fiduciary responsibilities and obligations under ERISA. At the national level, EBSA’s Office of Participant Assistance develops, implements, and evaluates agency-wide participant assistance and outreach programs. It also provides policies and guidance to other EBSA national and regional offices involved in outreach activit"
4429,"ies. EBSA’s nationwide education campaigns include a fiduciary education campaign, launched in May 2004, to educate plan sponsors and service providers about their fiduciary responsibilities under ERISA. This campaign also includes educational material on understanding fees and selecting an auditor. EBSA’s regional offices also assist in implementing national education initiatives and conduct their own outreach to address local concerns. The regional offices’ benefit advisers provide written and telephone r"
4430,"esponses to participants. Benefit advisers and investigative staff also speak at conferences and seminars sponsored by trade and professional groups and participate in outreach and educational efforts in conjunction with other federal or state agencies. At the national level, several EBSA offices direct specialized outreach activities. As with EBSA’s participant-directed outreach activities, its efforts to educate plan sponsors and service providers also rely upon Office of Enforcement staff and the regiona"
4431,"l offices for implementation. For example, these staff make presentations to employer groups and service provider organizations about their ERISA obligations and any new requirements under the law, such as reporting and disclosure provisions. To supplement its investigative programs, EBSA is promoting the self- disclosure and self-correction of possible ERISA violations by plan officials through its Voluntary Fiduciary Correction Program. The purpose of the VFCP is to protect the financial security of worke"
4432,"rs by encouraging plan officials to identify and correct ERISA violations on their own. Specifically, the VFCP allows plan officials to identify and correct 18 transactions, such as delinquent participant contributions and participant loan repayments to pension plans. Under the VFCP, plan officials follow a process whereby they (1) correct the violation using EBSA’s written guidance; (2) restore any losses or profits to the plan; (3) notify participants and beneficiaries of the correction; and (4) file a VF"
4433,"CP application, which includes evidence of the corrected transaction, with the EBSA regional office in whose jurisdiction it resides. If the regional office determines that the plan has met the program’s terms, it will issue a “no action” letter to the applicant and will not initiate a civil investigation of the violation, which could have resulted in a penalty being assessed against the plan. EBSA has taken steps to address many of the recommendations we have made over a number of years to improve its enfo"
4434,"rcement program, including assessing the level and types of noncompliance with ERISA, improving sharing of best investigative practices, and developing a human capital strategy to better respond changes in its workforce. EBSA reported a significant increase in enforcement results for fiscal year 2004, including $3.1 billion in total monetary results and closing nearly 4,400 investigations, with nearly 70 percent of those cases resulting in corrections of ERISA violations. Despite this progress, EBSA continu"
4435,"es to face a number of significant challenges to its enforcement program, including the lack of timely and reliable plan information, restrictive statutory requirements that limit its ability to assess certain penalties, and the need to better coordinate enforcement strategies with the SEC. EBSA has taken a number of steps, including addressing recommendations from our prior reports that have improved its enforcement efforts across a number of areas. For example, EBSA has continued to refine its enforcement"
4436," strategy to meet changing priorities and provided additional flexibility to its regional office to target areas of investigations. More recently, EBSA implemented a series of recommendations from our 2002 enforcement report that helped it strategically manage its enforcement program, including conducting studies to determine the level of and type of noncompliance with ERISA and developing a Human Capital Strategic Management Plan (see table 1). EBSA has reported a substantial increase in results from its e"
4437,"nforcement efforts since our last review. For fiscal year 2004, EBSA closed 4,399 civil investigations and reported $3.1 billion in total results, including $2.53 billion in prohibited transactions corrected and plan assets protected, up from $566 million in fiscal year 2002. Likewise, the percentage of civil investigations closed with results rose from 58 percent to 69 percent. Also, applications received for the VFCP increased from 55 in fiscal year 2002 to 474 in 2004. EBSA has been able to achieve such "
4438,"results with relatively small recent increases in staff. Full-time equivalent (FTE) authorized staff levels increased from 850 in fiscal year 2001 to 887 FTEs in fiscal year 2005. The President’s budget for fiscal year 2006 requests no additional FTEs. Previously, we and others have reported that ERISA enforcement was hindered by incomplete, inaccurate, and untimely plan data. We recently reported that the lack of timely and complete of Form 5500 data affects EBSA’s use of the information for enforcement pu"
4439,"rposes, such as computer targeting and identifying troubled plans. EBSA uses Form 5500 information as a compliance tool to identify actual and potential violations of ERISA. Although EBSA has access to Form 5500 information sooner than the general public, the agency is affected by the statutory filing deadlines, which can be up to 285 days after plan year end, and long processing times for paper filings submitted to the ERISA Filing Acceptance System. EBSA receives processed Form 5500 information on individ"
4440,"ual filings on a regular basis once a form is completely processed. However, agency officials told us that as they still have to wait for a sufficiently complete universe of plan filings from any given plan year to be processed in order to begin their compliance targeting programs. As a result, EBSA officials told us that they are currently using plan year 2002 and 2003 Form 5500 information for computer targeting. They also said that in some cases untimely Form 5500 information affects their ability to ide"
4441,"ntify financially troubled plans whose sponsors may be on the verge of going out of business and abandoning their pension plans, because these plans may no longer exist by the time that Labor receives the processed filing or is able to determine that no Form 5500 was filed by those sponsors. The Form 5500 also lacks key information that could better assist EBSA, IRS, and PBGC in monitoring plans and ensuring that they are in compliance with ERISA. EBSA, IRS and PBGC officials said that they have experienced"
4442," difficulties when relying on Form 5500 information to identify and track all plans across years. Although EBSA has a process in place to identify and track plans filing a Form 5500 from year to year, problems still arise when plans change employer identification numbers (EIN) and/or plan numbers. Identifying plans is further complicated when plan sponsors are acquired, sold, or merged. In these cases, agency officials said that there is an increased possibility of mismatching of EINs, plans, and their iden"
4443,"tifying information. As result, EBSA officials said they are unable to (1) verify if all required employers are meeting the statutory requirement to file a Form 5500 annually, (2) identity all late filers, and (3) assess and collect penalties from all plans that fail to file or are late. Likewise, PBGC officials said that must spend additional time each year trying to identify and track certain defined benefit plans so that they can conduct compliance and research activities. EBSA officials said they are co"
4444,"nsidering measures to better track and identify plans but have not reached any conclusions. Our recent report makes a number of recommendations aimed at improving the timeliness and content of Form 5500 that will likely assist EBSA’s enforcement efforts. In addition to problems with Form 5500 information, concerns remain about the quality of annual audits of plans’ financial statements by independent public accountants. For many years, we, as well as the Department of Labor’s Office of Inspector General (OI"
4445,"G), have reported that a significant number of these audits have not met ERISA requirements. For example, in 1992 we found that over a third of the 25 plan audits we reviewed had audit weaknesses so serious that their reliability and usefulness were questionable. We recommended that the Congress amend ERISA to require full-scope audits of employee benefit plans and to require plan administrators and independent public accountants to report on how effective an employee benefit plan’s internal controls are in"
4446," protecting plan assets. Although such changes were subsequently proposed, they were not enacted. In 2004, Labor’s OIG reported that although EBSA had reviewed a significant number of employee benefit plan audits and made efforts to correct substandard audits, a significant number of substandard audits remain uncorrected. Furthermore, plan auditors performing substandard work generally continue to audit employee benefit plans without being required to improve the quality of the audits. As a result, these au"
4447,"dits have not provided participants and beneficiaries the protections envisioned by Congress. Labor’s OIG recommended, among other things, that EBSA propose changes to ERISA so that EBSA has greater enforcement authority over employee benefit plan auditors. As we have previously reported, restrictive legal requirements have limited EBSA’s ability to assess penalties against fiduciaries or other persons who knowingly participate in a fiduciary breach. Unlike the SEC, which has the authority to impose a penal"
4448,"ty without first assessing and then securing monetary damages, EBSA does not have such statutory authority and must assess penalties based on damages or, more specifically, the restoration of plan assets. Under Section 502(l), ERISA provides for a mandatory penalty against (1) a fiduciary who breaches a fiduciary duty under, or commits a violation of, Part 4 of Title I of ERISA or (2) against any other person who knowingly participates in such a breach or violation. This penalty is equal to 20 percent of th"
4449,"e “applicable recovery amount,” or any settlement agreed upon by the Secretary or ordered by a court to be paid in a judicial proceeding instituted by the Secretary. However, the applicable recovery amount cannot be determined if damages have not been valued. This penalty can be assessed only against fiduciaries or knowing participants in a breach who, by court order or settlement agreement, restore plan assets. Therefore, if (1) there is no settlement agreement or court order or (2) someone other than a fi"
4450,"duciary or knowing participant returns plan assets, the penalty may not be assessed. For example, last year we reported that ERISA presented legal challenges when developing cases related to proxy voting by plan fiduciaries, particularly with regards to valuing monetary damages. As a result, because EBSA has never found a violation that resulted in monetary damages, it has never assessed a penalty or removed a fiduciary because of a proxy voting investigation. Given the restrictive legal requirements that h"
4451,"ave limited the use of penalties for violations of ERISA’s fiduciary requirements, we recommended that Congress consider amending ERISA to give the Secretary of Labor additional authority with respect to assessing monetary penalties against fiduciaries. We also recommended other changes to ERISA to better protect plan participants and increase the transparency of proxy voting practices by plan fiduciaries. Recent events such as the abusive trading practices of late trading and market timing in mutual funds "
4452,"and new revelations of conflicts of interest by pension consultants highlight the need for EBSA to better coordinate enforcement strategies with SEC. Last year we reported that SEC and EBSA had separately taken steps to address abusive trading practices in mutual funds. At the time we issued our report, SEC had taken a number of actions to address the abuses including: charging some fund companies with defrauding investors by not enforcing their stated policies on market timing, fining some institutions hun"
4453,"dreds of millions of dollars (some of this money was to be returned to long-term shareholders who lost money due to abusive practices), permanently barring some individuals from future work with investment companies, and proposing new regulations addressing late trading and market timing. Separate from SEC activities, EBSA began investigating possible fiduciary violations at some large investment companies, including those that sponsor mutual funds, and violations by plan fiduciaries. EBSA also issued guida"
4454,"nce suggesting that plan fiduciaries review their relationships with mutual funds and other investment companies to ensure they are meeting their responsibilities of acting reasonably, prudently, and solely in the interest of plan participants. Although SEC’s proposed regulations on late trading and market timing could have more adversely affected some plan participants than other mutual fund investors, EBSA was not involved in drafting the regulations because it does not regulate mutual funds. In another e"
4455,"xample of how EBSA and SEC enforcement responsibilities can intersect, SEC recently found that potential conflicts of interest may affect the objectivity of advice pension consultants are providing to their pension plan clients. The report also raised important issues for plan fiduciaries who often rely on the advice of pension consultants in operating their plans. Recently, EBSA and SEC issued tips to help plan fiduciaries evaluate the objectivity of advice and recommendations provided by pension consultan"
4456,"ts. Americans face numerous challenges to securing their economic security in retirement, including the long-term fiscal challenges facing Social Security; the uncertainty of promised pension benefits; and the potential volatility of the investments held in their defined contributions plans. Given these concerns, it is important that employees’ benefits are adequately protected. EBSA is a relatively small agency facing the daunting challenge of protecting over $4 trillion in assets of pension and welfare be"
4457,"nefits for millions of Americans. Over the years, EBSA has taken steps to strengthen its enforcement program and leverage its limited resources. These actions have helped better position EBSA to more effectively enforce ERISA. EBSA, however, continues to face a number of significant challenges to its enforcement program. Foremost, despite improvements in the timeliness and content of the Form 5500, information currently collected does not permit EBSA and the other ERISA regulatory agencies to be in the best"
4458," position to ensure compliance with federal laws and assess the financial condition of private pension plans. Given the ever-changing complexities of employee benefit plans and how rapidly the financial condition of pension plans can deteriorate, it is imperative that policymakers, regulators, plan participants, and others have more timely and accurate Form 5500 information. In addition, there is a legitimate question as to whether information currently collected on the Form 5500 can be used as an effective"
4459," enforcement tool by EBSA or whether different information might be needed. Without the right information on plans in a timely manner, EBSA will continue to have to rely on participant complaints as a primary source of investigations rather than being able to proactively identify and target problems areas. Second, in some instances, EBSA’s enforcement efforts continue to be hindered by ERISA, the very law it is charged with enforcing. For example, because of restrictive legal requirements, EBSA continues to"
4460," be hindered in assessing penalties against fiduciaries or others who knowingly participate in a fiduciary breach. Congress may want to amend ERISA to address such limits on EBSA’s enforcement authority. Finally, the significant changes that have occurred in pension plans, the growing complexity of financial transactions of such plans, and the increasing role of mutual funds and other investment vehicles in retirement savings plans require enhanced coordination of enforcement efforts with SEC. Furthermore, "
4461,"such changes raise the fundamental question of whether Congress should modify the current ERISA enforcement framework. For example, it is important to consider whether the current division of oversight responsibilities across several agencies is the best way to ensure effective enforcement or whether some type of consolidation or reallocation of responsibilities and resources could result in more effective and efficient ERISA enforcement. We look forward to working with Congress on such crucial issues. Mr. "
4462,"Chairman, this concludes my statement. I would be happy to respond to any questions you or other members of the committee may have. For further information, please contact me at (202) 512-7215. Other individuals making key contributions to this testimony included Joseph Applebaum, Kimberley Granger, Raun Lazier, George Scott, and Roger Thomas. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without fu"
4463,"rther permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately."
4464,"The Congress passed the Communications Satellite Act of 1962 to promote the creation of a global satellite communications system. As a result of this legislation, the United States joined with 84 other nations in establishing the International Telecommunications Satellite Organization—more commonly known as INTELSAT—roughly 10 years later. Each member nation designated a single telecommunications company to represent its country in the management and financing of INTELSAT. These companies were called signat"
4465,"ories to INTELSAT, and were typically government- owned telecommunications companies, such as France Telecom, that provided satellite communications services as well as other domestic communications services. Unlike any of the other nations that originally formed INTELSAT, the United States designated a private company, Comsat Corporation, to serve as its signatory to INTELSAT. During the 1970s and early 1980s, INTELSAT was the only wholesale provider of certain types of global satellite communications serv"
4466,"ices such as international telephone calls and relay of television signals internationally. By the mid-1980s, however, the United States began encouraging the development of commercial satellite communications systems that would compete with INTELSAT. In 1988, PanAmSat was the first commercial company to begin launching satellites in an effort to develop a global satellite system. Within a decade after PanAmSat first entered the market, INTELSAT faced global satellite competitors. Moreover, intermodal compe"
4467,"tition emerged during the 1980s and 1990s as fiber optic networks were widely deployed on the ground and underwater to provide international communications services. As competition to INTELSAT grew, there was considerable criticism from commercial satellite companies because they believed that INTELSAT enjoyed advantages stemming from its intergovernmental status that made it difficult for other companies to compete in the market. In particular, these companies noted that INTELSAT enjoyed immunity from lega"
4468,"l liability and was often not taxed in the various countries that it served. By the mid-1990s, competitors began to argue that for the satellite marketplace to become fully competitive, INTELSAT would need to be privatized so that it would operate like any other company and no longer enjoy such advantages. At about the same time, INTELSAT recognized that privatization would be best for the company. Decision-makers within INTELSAT noted that the cumbersome nature of the intergovernmental decision-making proc"
4469,"ess left the company unable to rapidly respond to changing market conditions. In 1999, INTELSAT announced its decision to privatize and thus become a private corporation. By the late 1990s, the United States government also decided that it would be in the interests of consumers and businesses in the United States for INTELSAT to privatize. The ORBIT Act, enacted in March 2000, was designed to promote a competitive global satellite communication services market. It did so primarily by calling for INTELSAT to"
4470," be fully privatized. The ORBIT Act required, for example, that INTELSAT be transformed into a privately held, for-profit corporation with a board of directors that would be largely independent of former INTELSAT signatories. Moreover, the act required that the newly privatized Intelsat retain no privileges or other benefits from governments that had previously owned or controlled it. To ensure that this transformation occurred, the Congress imposed certain restrictions on the granting of licenses that allo"
4471,"w Intelsat to provide services within the United States. The Congress coupled the issuance of licenses granted by FCC to INTELSAT’s successful privatization under the ORBIT Act. That is, FCC was told to consider compliance with provisions of the ORBIT Act as it made decisions about licensing Intelsat’s domestic operations in the United States. Moreover, FCC was empowered to restrict any satellite operator’s provision of certain new services from the United States to any country that limited market access ex"
4472,"clusively to that satellite operator. Market access for satellite firms to non-U.S. markets was also affected by trade agreements that were negotiated during the 1990s. Specifically, the establishment of the World Trade Organization (WTO) on January 1, 1995, with its numerous binding international trade agreements formalized global efforts to open markets to the trade of services. Since that time, WTO has become the principal international forum for discussion, negotiation, and resolution of trade issues. F"
4473,"or example, the first global trade agreement that promotes countries’ open and nondiscriminatory market access to services was the General Agreement on Trade in Services (GATS), which provides a legal framework for addressing barriers to international trade and investment in services, and includes specific commitments by member countries to restrict their use of these barriers. Since adoption of a basic telecommunications services protocol by the GATS in 1998, telecommunications trade commitments have also "
4474,"been incorporated into the WTO rules. Such commitments resulted in member countries agreeing to open markets to telecommunications services, such as global satellite communications services. FCC determined that INTELSAT’s July 2001 privatization was in accordance with the ORBIT Act’s requirements and licensed the new private company to provide services within the United States. FCC’s grant of these licenses was conditioned on Intelsat holding an initial public offering (IPO) of securities by October 1, 2001"
4475,". The Congress and FCC have extended this date three times and the current deadline for the IPO is June 30, 2005. Because Intelsat has not yet completed the IPO, some competing satellite companies have stated that the privatization is not fully complete. Some parties have pointed out that there was a possibility that implementation of the ORBIT Act could have given rise to action arguably inconsistent with commitments that the United States made in international trade agreements. However, we were told that "
4476,"actual implementation avoided such outcomes and no disputes arose. On July 18, 2001, INTELSAT transferred virtually all of its financial assets and liabilities to a private company called Intelsat, Ltd., a holding company incorporated in Bermuda. Intelsat, Ltd. has several subsidiaries, including a U.S.-incorporated indirect subsidiary called Intelsat, LLC. Upon their execution of privatization, INTELSAT signatories received shares of Intelsat, Ltd. in proportion to their investment in the intergovernmental"
4477," INTELSAT. Two months before the privatization, FCC determined that INTELSAT’s privatization plan was consistent with the requirements of the ORBIT Act for a variety of reasons, including the following. Intelsat, Ltd.’s Shareholders’ Agreement provided sufficient evidence that the company would conduct an IPO, which would in part satisfy the act’s requirement that Intelsat be an independent commercial entity. Intelsat, Ltd. no longer enjoyed the legal privileges or immunities of the intergovernmental INTELS"
4478,"AT, since it was organized under Bermuda law and subject to that country’s tax and legal liability requirements. Both Intelsat, Ltd. and Intelsat, LLC are incorporated in countries that are signatories to the WTO and have laws that secure competition in telecommunications services. Intelsat, Ltd. converted into a stock corporation with a fiduciary board of directors. In particular, FCC said that the boards of directors of both Intelsat, Ltd. and Intelsat, LLC were subject to the laws of Bermuda and the Unit"
4479,"ed States, respectively, and that the laws of these countries require boards of directors to have fiduciary obligations to the company. Measures taken to ensure that a majority of the members of Intelsat, Ltd.’s board of directors were not directors, employees, officers, managers, or representatives of any signatory or former signatory of the intergovernmental INTELSAT were consistent with the requirements of the ORBIT Act. Intelsat, Ltd. and its subsidiaries had only arms-length business relationships with"
4480," certain other entities that obtained INTELSAT’s assets. In light of these findings, FCC conditionally authorized Intelsat, LLC to use its U.S. satellite licenses to provide services within the United States. However, FCC conditioned this authorization on Intelsat, Ltd.’s conducting an IPO of securities as mandated by the ORBIT Act. In December 2003, FCC noted that if Intelsat, Ltd. did not conduct an IPO by the statutory deadline, the agency would limit or deny Intelsat, LLC’s applications or requests and "
4481,"revoke the previous authorizations granting Intelsat, LLC the authority to provide satellite services in the United States. In March 2004, Intelsat, Ltd. filed a registration statement with the Securities and Exchange Commission (SEC) indicating its intention to conduct an IPO. Since that time, however, the Congress further extended the required date by which the IPO must occur. In May 2004, the Congress extended the IPO deadline to June 30, 2005, and authorized FCC to further extend that deadline to Decemb"
4482,"er 31, 2005, under certain conditions. In late May 2004, Intelsat withdrew its filing with SEC regarding its registration to conduct an IPO. On August 16, 2004, Intelsat, Ltd. announced that its Board of Directors approved the sale of the company to a consortium of four private investors; the sale requires the approval of shareholders holding 60 percent of Intelsat's outstanding shares and also regulatory approval. According to an Intelsat official, this transaction, if approved, would eliminate former sign"
4483,"atories’ ownership in Intelsat. Most companies and experts that we interviewed believe that, to date, Intelsat’s privatization has been in accordance with the ORBIT Act’s requirements, and some of these companies and experts that we interviewed believe that FCC is fulfilling its duties to ensure that the privatization is consistent with the act. These parties noted that the ORBIT Act set forth many requirements for Intelsat and that most of these requirements have been fulfilled. However, some companies and"
4484," experts believe that the IPO is a key element to complete Intelsat’s privatization. According to some parties, the IPO would further dilute signatory ownership in Intelsat, Ltd. as envisioned by the ORBIT Act, which would reduce any incentive that former signatories might have to favor Intelsat when selecting a company to provide satellite services. Table 1 compares Intelsat, Ltd.’s ownership on the day of privatization in 2001 with the ownership as of May 6, 2004. As indicated in the table, in May 2004, m"
4485,"ore than 50 percent of Intelsat, Ltd. was owned by the former signatories to the intergovernmental INTELSAT; although, as mentioned above, the recently announced purchase of Intelsat by four private investors, if approved, would eliminate former signatory ownership in Intelsat, according to an Intelsat official. We were told that there were potential inconsistencies between the ORBIT Act and obligations the United States made in international trade agreements. In particular, the ORBIT Act set requirements f"
4486,"or INTELSAT’s privatization that, if not met, could have triggered FCC’s denial of licenses that would allow a successor private company to INTELSAT to provide services in the United States once that company was incorporated under foreign law. Some stakeholders told us that, had this occurred, FCC’s actions could have been viewed as inconsistent with U.S. obligations in international trade agreements. In fact, on August 1, 2000, following the enactment of the ORBIT Act, the European Commission (EC) stated t"
4487,"hat the ORBIT Act raised a general concern regarding its compatibility with the U.S. obligations in the WTO. The EC further emphasized that if the act was going to be used against European Union (EU) interests, the EU would consider exercising its rights to file a trade dispute under the WTO. While we were told that potential inconsistencies could have arisen, INTELSAT privatized according to the ORBIT Act removing any need for FCC to act in a manner that might be inconsistent with U.S. international trade "
4488,"obligations, and no trade disputes arose. Most stakeholders we spoke with generally stated that the ORBIT Act’s requirements have not conflicted with international trade agreements during the privatizations of INTELSAT. Officials from FCC, USTR, the Department of State, as well as satellite company representatives and experts on telecommunications issues, told us that INTELSAT privatized according to the act’s requirements. Several stakeholders emphasized that trade disputes had not arisen because INTELSAT "
4489,"privatized in accordance with the ORBIT Act. As of June 2004, WTO and USTR documentation showed that no trade complaints had been filed at the WTO about the ORBIT Act and INTELSAT’s privatization. Finally, several stakeholders noted that the act had the effect of complementing international trade agreements by seeking to further open and liberalize trade in international satellite communications services. According to most stakeholders and experts we spoke with, access to non- U.S. satellite markets has gen"
4490,"erally improved during the past decade. In particular, global satellite companies appear less likely now than they were in the past to encounter government restraints or business practices that limit their ability to provide service in non-U.S. markets. All five satellite companies that we spoke with indicated that access to non-U.S. satellite markets has generally improved. Additionally, four experts that we spoke with also told us that market access has generally improved. Most stakeholders that we spoke "
4491,"with attributed the improved access in non-U.S. satellite markets to the WTO and global trade agreements and the trend towards privatization in the global telecommunications industry, rather than to the ORBIT Act. Five satellite companies and four of the experts that we spoke with said that agreements negotiated through the WTO, such as the basic telecommunications commitments, helped improve access in non-U.S. satellite markets. Additionally, two of the satellite companies and one expert told us that the t"
4492,"rend towards privatization in the telecommunications industry—such as governments privatizing state- controlled telephone companies—has helped improve market access. At the same time, many stakeholders noted that the ORBIT Act had little to no impact on improving market access. According to several stakeholders, market access was already improving when the ORBIT Act was passed. While some of those we spoke with noted that the ORBIT Act might have complemented the ongoing trends in improved market access, on"
4493,"ly one satellite company we interviewed stated that the act itself improved market access. This company noted that, by breaking the ownership link between state-owned or monopoly telecommunications companies and Intelsat, the ORBIT Act encouraged non-U.S. telecommunications companies to consider procuring services from competitive satellite companies. Some satellite companies have stated that some market access problems still exist, which they attribute to foreign government policies that limit or slow entr"
4494,"y. Some of the companies and experts we spoke with attribute any continuing preference that governments and foreign telecommunications companies may have for doing business with Intelsat to the long-standing business relationships that were forged over a period of time. While some satellite companies believe that FCC should be taking a more proactive approach toward addressing any remaining market access problems in non-U.S. markets, FCC has stated that concerns about these issues provided to them have not "
4495,"been specific enough to warrant an FCC proceeding. Additionally, FCC has stated that many concerns about market access issues would be most appropriately filed with USTR. USTR has received no complaints about access problems by satellite companies in non-U.S. markets in either their annual review of compliance with telecommunications trade agreements, or in comments solicited in the context of ongoing WTO services negotiations. Despite the general view that market access has improved, some satellite compani"
4496,es and experts expressed concerns that market access issues still exist. These companies and experts generally attributed any remaining market access problems to foreign government policies that limit or slow satellite competitors’ access to certain markets. For example: Some companies and experts we spoke with said that some countries have policies that favor domestic satellite providers over other satellite systems and that this can make it difficult for nondomestic companies to provide services in these 
4497,"countries. For example, we were told that some countries require satellite contracts to go first to any domestic satellite providers that can provide the service before other providers are considered. Some companies and one expert we spoke with said that because some countries carefully control and monitor the content that is provided within their borders, the countries’ policies may limit certain satellite companies’ access to their markets. Several companies and an expert we interviewed said that many cou"
4498,"ntries have time-consuming or costly approval processes for satellite companies. In particular, we were told that some countries have bureaucratic processes for licensing and other necessary business activities that make it time-consuming and costly for satellite companies to gain access to these markets. Some stakeholders believe that Intelsat may benefit from legacy business relationships. For approximately 30 years, INTELSAT was the dominant provider of global satellite services. Moreover, until 2001, IN"
4499,"TELSAT was an intergovernmental organization, funded and controlled through signatories—often state-controlled telecommunications companies—of the member governments. Several stakeholders noted that Intelsat may benefit from the long-term business relationships that were forged over the decades, since telecommunications companies in many countries will feel comfortable continuing to do business with Intelsat as they have for years. Additionally, two of the satellite companies noted that because some of thes"
4500,"e companies have been investors in the privatized Intelsat, there may be an incentive to favor Intelsat over other satellite competitors. One global satellite company told us that Intelsat’s market access advantages continue because of inertia—inertia that will only dissipate with time. Two stakeholders also noted that because companies—including domestic telecommunications providers as well as direct customers of satellite services—have plant and equipment as well as proprietary satellite technology in pla"
4501,"ce to receive satellite services from Intelsat, it might cost a significant amount of money for companies to replace equipment in order to use satellite services from a different satellite provider. These legacy advantages can make it more difficult for satellite companies to convince telecommunications companies to switch from Intelsat’s service to their service. However, some other companies have a different view on whether Intelsat has any preferential or exclusive market access advantages. Representativ"
4502,"es of Intelsat, Ltd. told us that Intelsat seeks market access on a transparent and nondiscriminatory basis and that Intelsat has participated with other satellite operators, through various trade organizations, to lobby governments to open their markets. Representatives of Intelsat, Ltd. also told us that former signatories of Intelsat own such small percentages of Intelsat, Ltd. that such ownership interests would not likely influence market access decisions in countries in which the government still cont"
4503,"rols the former signatory. Some companies and many of the experts that we interviewed told us that, in their view, Intelsat does not have preferential access to non-U.S. satellite markets. Further, all five satellite companies as well as several experts that we spoke with said that they have no knowledge that Intelsat in any way seeks or accepts exclusive market access arrangements or attempts to block competitors’ access to non-U.S. satellite markets. While Intelsat is the sole provider of satellite servic"
4504,"e into certain countries, we were generally told that traffic into some countries is “thin”—that is, there is not much traffic, and therefore there is little revenue potential. In such cases, global satellite companies other than Intelsat may not be interested in providing service to these countries. Thus, the lack of competition in some non-U.S. satellite markets does not necessarily indicate the presence of barriers to market access for competitive satellite companies. Some of the companies we spoke with "
4505,"believe that FCC should take a more proactive role in improving access for satellite companies in non-U.S. markets. In particular, some satellite companies and an expert we spoke with indicated that FCC has not done enough to appropriately implement the ORBIT Act because, in their view, the ORBIT Act shifted the burden to FCC to investigate and prevent access issues, rather than solely to adjudicate concerns brought before it. One satellite company said that section 648 of the ORBIT Act, which prohibits any"
4506," satellite operator from acquiring or enjoying an exclusive arrangement for service to or from the United States, provides a vehicle for FCC to investigate the status of access for satellite companies to other countries’ markets. If FCC were to find a violation of section 648, it would have the authority to withdraw or modify the relevant company’s licenses to provide services within the U.S. market. Another satellite company told us that FCC should conduct an ORBIT Act inquiry under the privatization secti"
4507,"ons of the act to address any market access issues that might arise if Intelsat has preferential market access related to any remaining advantages from its previous intergovernmental status. Certain other companies, experts, and FCC told us that nothing to date has occurred that would require additional FCC actions regarding the implementation of the ORBIT Act. FCC officials told us that they do not believe that FCC should undertake investigations of market access concerns without specific evidence of viola"
4508,"tions of section 648 of the ORBIT Act. While some comments filed with FCC in proceedings on Intelsat’s licensing and for FCC’s annual report on the ORBIT Act raise concerns about market access, FCC has stated that these filings amount only to general allegations and fall short of alleging any specific statutory violation that would form a basis sufficient to trigger an FCC enforcement action. Some companies and experts that we spoke with agreed that no evidence of a market access problem has been put forth "
4509,"that would warrant an FCC investigation under the ORBIT Act. Even the satellite companies that complained to FCC in the context of Intelsat’s licensing proceedings told us that they had not made any formal complaints of ORBIT Act violations or asked FCC to initiate a proceeding on the matter. Additionally, FCC told us that broad market access concerns are most appropriately handled by USTR through the WTO. USTR has received no complaints about access problems by satellite companies in non-U.S. markets in ei"
4510,"ther their annual review of compliance with telecommunications trade agreements, or in comments solicited in the context of ongoing WTO services negotiations. We provided a draft of this report to the Federal Communications Commission (FCC), the Department of State, the National Telecommunications and Information Administration (NTIA) of the Department of Commerce, and the United States Trade Representative (USTR) for their review and comment. FCC did not provide comments. USTR and the Department of State p"
4511,"rovided technical comments that were incorporated into the report. NTIA also provided technical comments that were incorporated into the report as appropriate and also sent formal comments in a letter, which appears in appendix II. In its formal comments, NTIA stated that they generally agree with the findings of our report and remain interested in developments regarding Intelsat’s further plans to pursue a private equity buyout. We also invited representatives from five companies to review and comment on a"
4512," draft of this report. These companies included: Intelsat, Ltd.; Lockheed Martin Corporation; PanAmSat Corporation; SES Americom Inc.; and New Skies Satellites N.V. New Skies and PanAmSat did not provide comments on the draft report. Both Lockheed Martin and Intelsat provided technical comments that we incorporated as appropriate. SES Americom provided both technical comments—which we addressed as appropriate— and substantive comments that expressed concerns about our characterization of some of the issues "
4513,"discussed in this report. The comments from SES Americom and our response are contained in appendix I. As agreed with your offices, unless you publicly release its contents earlier, we plan no further distribution of this report until 15 days after the date of this letter. At that time, we will provide copies to interested congressional committees; the Chairman, FCC; and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no char"
4514,"ge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-2834 or goldsteinm@gao.gov or Amy Abramowitz at (202) 512-2834. Major contributors to this report include Amy Abramowitz, Michael Clements, Emil Friberg, Bert Japikse, Logan Kleier, Richard Seldin, and Juan Tapia-Videla. SES Americom Inc. provided several comments on the draft report. While several were minor technical comments, which we incorporated as appropriate, some of the comments "
4515,"were of a more substantive nature. This appendix provides a summary of the substantive comments and GAO’s response to those comments. SES Americom stated that while GAO notes that several companies have stated that Intelsat’s privatization is not complete until the IPO occurs, GAO fails to note that FCC’s International Bureau has also stated this to be the case. GAO response: Our discussion of FCC’s authorization of licenses for Intelsat to operate in the U.S. makes clear that FCC provided these licenses on"
4516," a conditional basis because the required IPO had yet to occur. SES Americom states that GAO’s discussion of possible preferences countries and businesses may have for doing business with Intelsat does not fully explain why this may occur. While SES notes that GAO correctly attributes possible preferences to long term business relationships companies/countries may have with Intelsat, SES Americom believes that GAO should mention that possible preferences also arise because Intelsat’s customers have equipmen"
4517,"t suitable solely for use with Intelsat satellites. GAO response: Regarding customer equipment, we mention that companies have plant and equipment in place to receive service from Intelsat that might cost a significant amount of money to replace, which we believe adequately addresses this point. SES Americom states that GAO should preface our discussion of the required IPO with the word “equity”. GAO response: The ORBIT Act’s requirement for an IPO does not specifically state “equity IPO,” but states that I"
4518,"ntelsat must hold an “IPO of securities.” Nevertheless, in the context of Inmarsat’s required IPO, which is also required under the ORBIT Act, FCC is currently reviewing this very issue—that is, whether the IPO must be an offering of equity securities. Thus, FCC’s decision will determine how this will be interpreted. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the "
4519,"performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (ww"
4520,"w.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.”"